Autos dent the markets
Closing

Rising material costs, fears of interest rate hike, and now a recall from a leading manufacturer has dealt a blow to auto stocks that led the losers’ list in today’s trade. Stocks from the oil and gas space also closed amongst the biggest losers today. However, gains were seen in realty and metal stocks, which brought some respite to the overall sentiment.

The BSE Sensex and NSE Nifty closed with gains of around 50 points (0.3%) and 20 points (0.4%) respectively. Mid and small cap stocks however closed in the red. The BSE Midcap and BSE Smallcap indices closed down by 0.6% and 0.9% respectively. On the broader BSE, just one stock gained today for every two that closed in the red.

Among other key Asian markets, while China (down 0.7%) and Japan (down 0.5%) closed in the red, Hong Kong (up 1.2%) and Singapore (up 0.9%) were among the gainers. European markets have also opened today on a mixed note.

Auto stocks were amongst the worst performers today. Major losses were seen in Bajaj Auto and Maruti. Selling in Maruti, India’s largest passenger carmaker was on the back of reports that the company is sort of recalling around one lakh A-Stars for replacing their fuel gaskets. This follows reports of anomalies in the fuel tank of the said cars. In fact, the A-Star is part of Maruti’s ‘global’ car lineup and is also being exported.

IT stocks closed mixed today. While gains were seen in Patni Computers, Wipro, and TCS, selling pressure marked trading in Tech Mahindra and HCL Tech. Earlier, a leading business daily had reported that Indian IT companies are looking at several US$ 1 bn of outsourcing contracts coming their way in 2010. And not just from the international front, some of the large scale contracts are expected to come from domestic businesses as well, including a few from the power sector alone. IT companies are looking at industries like banking & finance, retail, entertainment, and manufacturing as generating many of such large international contracts over the next few quarters.

We see this as part of the long-term offshoring story that India is. With the value proposition for offshoring remaining as strong as ever, a prolonged economic slowdown worldwide will force more companies to lower their costs to remain competitive. One big way they can do so is by offshoring their non-core functions to Indian IT vendors.

Banking stocks also closed mixed today. ICICI Bank and Yes Bank were amongst the leading gainers. On the other hand, stocks that lost out included Indian Bank and Indusind Bank. Gains in ICICI Bank seemingly followed reports that the bank has set a target of growing its advances by 15% YoY during the coming fiscal year (FY11). As reported, ICICI Bank is already seeing lending picking up in the home and auto loans segments. It sees the trend continuing in FY11 as well, as the broader Indian economy shows improved signs of recovery. However, we believe that banks like ICICI Bank will have to weather some pain in the short to medium term. This is given that interest rates are expected to rise on the back of rising inflation. This might act as a dampener for new loans, as interest costs for retail and corporate borrowers will rise.

Investors shun auto stocks
01:30 pm

Though trading in the positive, the Indian markets witnessed some volatility as alternate bouts of buying and selling were witnessed during the previous two hours of trade. The overall market sentiment is negative as the decline to advance ratio is poised at 2 to 1 on the BSE. While stocks from the banking, healthcare and metal spaces are seeing some interests, those from the auto and FMCG spaces are witnessing selling pressure.

The BSE-Sensex and the NSE-Nifty are currently trading higher by around 50 points and 15 points respectively. Stocks from the midcap and smallcap spaces are however, trading in the red, with the BSE-Midcap and the BSE-Smallcap indices down by about 0.4% and 0.6% respectively. The rupee is trading at 46.08 to the US dollar.

FMCG stocks are currently trading firm led by Tata Coffee, Nestle, Britannia and ITC. The pressure on the stock of Nestle is witnessed today on the back of its below expectation financial performance during the latest quarter. While the company reported a strong topline growth of 24% YoY during the quarter, net profits fell by about 7% YoY. This dismal performance at the bottomline level was on account of poor operating numbers. The company's operating margins dropped by 4.5% YoY and stood at 14.7% during the quarter ending December 2009. This was on the back of higher raw material prices, increase in advertisement expenditure and staff costs. However, it seems as the company has taken measures to improve its operational performance going forward.

A leading business daily has reported that Nestle has upped the prices of some of its key products over the past few weeks. Prices of various products such as chocolates, milk products, and dairy whiteners have been increased by about 5% to 20%. It should be noted that the Indian consumers are very price point sensitive. Hence, this move needs to be closely monitored as this may signal the start of price increases across the board by FMCG companies to combat rising food prices.

Auto stocks are currently trading weak led by Ashok Leyland, TVS Motors, Maruti Suzuki and Bajaj Auto. A leading business daily has reported that commercial vehicle manufacturers such as Tata Motors and Ashok Leyland are likely to face some pressure in the coming months. This is on the back of the government imposing a stiff anti-dumping duty (making tyres costlier by about Rs 3,000 to Rs 4,000 per pair) on imported tyres. It may be noted that due to the tyre demand-supply mismatch in India as well as cheaper rates of imported tyres, leading original equipment manufacturers (OEMs) have been sourcing their tyre requirements through imports. Also, a business daily had recently reported that commercial vehicles manufacturers had cut down production on the back of shortage of radial tyres in India. Now, to add to this woe, the OEMs are likely to see some pressure on costs, unless they resort to passing on the higher costs to their customers. The same may not be such an easy task.

Small and midcaps fail to cheer
11:30 am

The Indian markets remained extremely choppy witnessing alternate bouts of buying and selling activity during the previous two hours of trade. Nevertheless the Sensex managed to break into the positive on account of buying activity in the sectors like realty, banking, metal, telcom and healthcare. However, stocks from consumer durables, auto, FMCG and capital goods sectors are failing to garner investors' interest.

The BSE-Sensex and the NSE-Nifty are currently trading higher by around 35 points and 10 points respectively. Stocks from the midcap and small cap spaces are trading in the red, with the BSE-Midcap and the BSE-Smallcap indices trading marginally lower by 0.1% and 0.3% respectively. The rupee is trading at 46.10 to the US dollar.

Godrej Consumer Products' household insecticide division, Godrej Sara Lee is planning to remodel its distribution system in order to strengthen its relationship with the retailers. It might be noted that this company is a joint venture (49:51) between Godrej Group and Sara Lee Corp of the US. The revamping of distribution is being done as an attempt to appropriately place its products across modern and traditional retail formats. The company will follow a segmented channel format wherein it will breakdown its retail points into different categories like cosmetic stores, specialty outlets, shoe marts and rural space channel. It is also planning to revamp its IT infrastructure so as to gain access to real-time data on inventory and sales.

It may be noted that the company has become a market leader in the Indian insecticide market, with a lion's share of 33%, aided by its renowned brands like Hit and Good Knight. It is worth noting that Godrej group is attempting to buy the remaining 51% stake in the joint venture. However, Sara Lee is talking to a number of players to sell this business. Godrej Sara Lee contributed 23.3% of the top line and 23% of the bottom line for Godrej Consumer Products during 3QFY10. We believe that an increase in distribution network will help the company is gaining from the recovery in FMCG spending which is expected to kick in once the Rabi crops come. Along with its peers from the FMCG sector, Godrej Consumer Products is trading in the negative currently.

L&T Infotech, the IT business of engineering major L&T is planning to enter the BPO business as an attempt to make its IT portfolio more broad-based. This move is expected to enable the company provide customers with a full gamut of IT services from basic application development and testing to back-office business processing. It is formulating strategy about the focus segment for BPO as well as appropriate delivery locations. It might also take the inorganic path to enter into the segment. It may be noted that in the past, IT majors like Wipro and IBM ventured into the BPO business through their acquisition of Spectramind and Daksh BPO services respectively. However, we believe that as the BPO industry has now entered into a mature phase, such acquisition driven strategy might not be as successful as it was in the past. Nevertheless, adding BPO capability to its offerings will help L&T Infotech in gaining more business from existing customers. The stock of L&T is trading in the red currently.

Markets start on a weak note
09:30 am

The Indian markets have started today's session on a weak note. The benchmark indices opened below the breakeven mark and have struggled to enter into positive territory despite upward movements since then. Other key Asian markets are trading in the red with China (down 1.7%) leading the pack of losers. The US markets closed lower by 0.2% yesterday.

Currently in India, heavyweights from the NSE-Nifty are trading a mixed bag with pharma and banking stocks attracting investors' interest. However, select auto and energy stocks are in the red. The BSE-Sensex is trading lower by around 21 points, while the NSE-Nifty is down by about 11 points. Selling interest is also being witnessed among mid and small cap stocks as the BSE-Midcap and BSE-Smallcap indices are trading lower by 0.3% and 0.4% respectively. The rupee is trading at 46.14 to the US dollar.

Energy stocks have opened the day on a mixed note. Gainers here include Petronet LNG and HPCL. However, Reliance Industries (RIL) is in the red. As per a leading business daily, RIL has sweetened its offer to buy bankrupt petrochemicals maker LyondellBasell (LB). It has raised the bid made in November last year by US$ 1 bn to US$ 14.5 bn. It may be noted that LB's own restructuring plan has valued itself at US$ 15.5 bn. Hence RIL still needs to persuade LB's creditors, who plan to take control of the company in exchange for forgiving debt of around US$18 bn. As of now, RIL plans to pick up a minority stake in LB with super-voting power which will give it management control. It may be noted that RIL has recently raised at least US$ 2 bn towards its acquisition war chest. In our view, RIL's petrochemicals operations will gain from LB's high end plastics technology. However, paying too steep a price is likely to undo all such benefits.

Food stocks have opened the day on a negative note. Losers here include Nestle and GSK Consumer. The battle for India's instant noodles market is heating up. Recently, GSK Consumer and HUL have launched their brands in a market long dominated by Nestle's Maggi. As per a leading business daily, ITC has joined the fray. It plans to launch noodles under the 'Sunfeast' brand name. The Sunfeast brand is currently used for selling biscuits and pasta. The company has reportedly set up a manufacturing facility in Maharashtra. It may be noted that Maggi commands nearly 70% share of the Rs 10 bn Indian instant noodle market. While the new entrants are strong FMCG players themselves, in our view it will take a great deal to unseat Nestle in the market given its steady efforts to build its brand over the decades.

'Realty' biting the dust
Pre-Open

The Indian markets have taken some beating over the past few weeks. After scaling the highs of almost 18,000 in early January, the Sensex has fallen by around 9% till date. Current concerns are more global in nature. With European economies falling apart and the US situation becoming grim, global markets are staring at uncertain times in the short to medium term. And in being largely dependent on foreign inflows, Indian markets are dutifully toeing whatever's happening to global markets.

Amidst all this, there is one sector in India that is underpinned by domestic concerns of demand and supply. We are talking about real estate. Despite being at the forefront of benefiting from the government's stimulus measures, Indian realty companies still face an uncertain future. Lack of substantial demand to take care of the large supply of expensive residential and commercial properties seem to be their biggest worries these days.

One big reason the demand has not really seen a revival for realty companies is the RBI's diktat to banks to assign higher risk-weight to their real estate lendings. The RBI had cracked the whip on loans to these companies in October 2009 when it mandated higher provisioning requirement for advances to the commercial real estate sector.

And then it's the matter of persistently high prices that has scared buyers away from the market. Some blame this on the nexus between builders and brokers, who have been hoarding properties to push up their prices. And not just the RBI, other industry experts like Deepak Parekh of HDFC have also come down heavily against this behavior of real estate companies and their cohorts.

You see, Mr. Parekh is no outsider to the grave pricing issues faced by property buyers in India. In fact, he has been very vocal in the past about the greedy nature of realty companies. Whether it is the issue of overpricing, or the misnomer of 'super-built up' area as against the simple concept of 'carpet area', he has been against it all.

So overall, the real estate story is currently being characterised by high pricing and subsequently lacklustre demand. And then, what with the RBI looking to raise interest rates to counter the rising inflation, and realty companies see another devil round the corner.

The impact of all this is being seen on real estate stock prices. The BSE-Realty index has for instance dropped by almost 35% from its highs touched in October 2009. Apart from the fundamental issues as mentioned above, investors in realty stocks now have to contend with a slew of realty IPOs that are about to hit the market. These will lead to another kind of oversupply for realty companies – oversupply of too many realty stocks looking for less number of investors!

Overall, we maintain our belief that quality and affordable homes are still out of reach of average buyers in most Indian cities. And if greedy real estate companies, instead of getting punished for their misdemeanors, continue to get rescued by banks, they will not change their stripes in a hurry and will continue to bid up home prices.