Volatility plagues Indian indices
Closing

The indices began the day on a robust note but as the day progressed profit booking at higher levels took its toll. From thereon, the indices oscillated to either side of yesterday's close. However, towards the fag end of the session, renewed buying activity ensured that the markets closed barely above the dotted line. While the BSE Sensex closed higher by around 8 points, the NSE Nifty also gained around 8 points. The midcap and small cap stocks did better to notch gains of 1% each. Gains were largely seen in oil & gas, FMCG and healthcare stocks while metals stocks were at the receiving end.

As regards global markets, Asian indices closed firm today while European indices have also opened on a strong note. The rupee was trading at Rs 45.68 to the dollar at the time of writing.

Software stocks closed mixed today. While Infosys and Tech Mahindra found favour, Wipro and TCS closed in the red. As per a leading business daily, Indian IT major Wipro has entered into a 7 year strategic agreement with the US based insurance firm Main Street America Group for software solutions. As per terms of the deal, Main Street will engage with Wipro for applications, development, maintenance and quality assurance. Wipro will supplement Main Street's IT organisation in its aim to support its present and future business needs. However, the size of the deal has not been disclosed. It must be noted that Main Street provides commercial, personal and surety insurance products to individuals, families & small businesses in 24 states of the US.

We believe that this is a positive for the company and will further enhance its revenues from its application, development and maintenance business. It must be noted that this service offering accounted for around 29% of Wipro's total revenues during 3QFY10 and grew by 3% QoQ.

As per a leading business daily, OVL (the overseas arm of ONGC) is scouting for oil and gas assets in the African continent. The countries on the radar include Sudan, Congo, Nigeria, Libya, Ghana, Angola, Egypt and Uganda. The estimated total investment in Africa for the current financial year up to January 2010 has been Rs 7.2 bn. It must be noted that OVL already has 11 projects at present in Africa, notably in Sudan, Nigeria, Libya and Egypt. Given that India imports around 70% of the oil that it consumes, Indian energy companies are increasingly looking overseas to augment their oil assets in a bid to meet the energy needs of India. The stock of ONGC closed lower today.

Tata Motors emerged as the top loser on the bourses today closing lower by 2% as investors chose to book profits in a stock which has run up considerably. No doubt, the company did well during 3QFY10 wherein sales grew by 47% YoY. Not just that, it reported a profit of Rs 6.5 bn as against a loss of Rs around 26 bn in 3QFY09. Jaguar Land Rover also did well to grow sales by 38% YoY. However, the stock of Tata Motors has run up 438% from its lows and at the current price, may not find a lot of buyers.

Profit booking takes toll
01:30 pm

Profit booking took its toll on the Indian markets as the benchmark indices witnessed selling pressure across the board during the previous two hours of trade. Currently selling activity is being witnessed in stocks from the banking, auto and consumer durable sectors. However, stocks from the realty and capital goods spaces are still seeing some interest. The overall decline to advance ratio is poised at 1.4 to 1 on the BSE.

The BSE-Sensex and the NSE-Nifty are currently trading lower by around 20 points and 10 points respectively. Stocks from the midcap and small cap spaces are however trading in the green, with the BSE-Midcap and the BSE-Smallcap indices trading higher by 0.5% and 0.8% respectively. The rupee is trading at 45.78 to the US dollar.

Cement stocks are currently trading firm led by Prism Cement, Ambuja Cement, Shree Cement and ACC. A leading business daily has reported that the cement industry is expected to see 12% YoY increase in dispatches during the month of February 2010. This would be the industry’s third consecutive double digit growth on a year on year level. There are three key factors for the same - the low base effect, strong demand from the construction industry and the commissioning of new capacities. During the preceding month, the dispatch growth stood at about 13% YoY.

The management of select cement companies expect this trend to continue during the next month as well considering that the demand for cement is strong. It must be noted that this is despite the cement prices being on a rise since the past three to four months. In addition, it is expected that the cement prices are set to get dearer on the back of the recent excise duty rollback announced in the budget. While sale volumes may continue to remain robust at present, we expect the demand to slowdown during the second half of the calendar year due to the overall slowdown in the construction industry due to the monsoons. Plus, with additional capacities set to go on stream over the next few months, they are likely to exert pressure on cement prices going forward.

Engineering stocks are currently trading firm led by Suzlon Energy, ABB, Punj Lloyd and Thermax. It was recently reported that the Australian Government introduced measures to improve the operations of the country’s Renewable Energy Target (RET). This would be a positive development for wind energy major Suzlon Energy, which is believed to have welcomed this announcement as it believes that this would build confidence among investors and enable investments in the clean energy market in Australia. Suzlon is the world largest wind turbine maker with over 50% market share, and is likely to benefit with increased order coming in the future. It may be noted that the company earned nearly 16% of its revenues from the Australian & New Zealand markets last year. This region is the company’s second largest revenue contributor (region wise), after the US.

Realty, capital goods buoy markets
11:30 am

Despite paring some of the opening gains, the Indian markets continued to trade on a strong note during the previous two hours of trade. Currently, buying activity is being witnessed across sectors with stocks from realty, capital goods, telecom, metal and consumer durables sectors leading the pack of gainers.

The BSE-Sensex and the NSE-Nifty are currently trading higher by around 85 points and 27 points respectively. Stocks from the midcap and small cap spaces are trading in the green, with the BSE-Midcap and the BSE-Smallcap indices trading higher by 1.0% and 1.3% respectively. The rupee is trading at 45.80 to the US dollar.

As per a leading business daily, India’s second largest software exporter Infosys has hinted that it is betting big on newer transaction based business models. The company plans to generate one-third of its revenues through pay-per-use type of revenue models in the next couple of years. It may be noted that pay-per-use model is beneficial to the customers as they require lower capital expenditure on IT infrastructure. Instead of paying fixed up-front cost for owning an IT system, the clients can pay only when they use the services. This model becomes less profitable for the IT vendors initially as they need to bear the fixed cost. Nevertheless, the model generates long-term visible revenue streams for the IT vendors who can offer their services to multiple clients. They also need not have huge resources bound to serving one client.

It may be noted that Infosys, has already started serving around 4 customers using newer delivery models and derives nearly 5% of its revenues from such services currently. We believe that focusing on newer non-linear business models is a positive way to succeed in the new business landscape after recession. Like Infosys, other IT majors like TCS, Wipro and HCL Technologies are also tweaking their business strategy to adjust with the trends.

As per a leading business daily, Indian public sector oil companies have huge investment plans lined up. They are expected to invest over Rs 775 bn as an attempt to add 44.2 m tones of refining capacity by 2012. According to the Union Minister for Petroleum and Natural Gas, India Oil Corporation (IOCL) will be investing around Rs 298 bn in building a new refinery having 15 m tones annual production capacity in Orissa. Similarly BPCL and HPCL will be investing Rs 114 bn and Rs 189 bn respectively in order to put up 6 m tones and 9 m tones capacities in the near future. Following suit, Mangalore Refinery will be ramping up its refining capacity from 11.8 m tones to 15 m tones with an investment of Rs 124 bn.

It may be noted that these capacity expansions along with few others are estimated to raise India’s oil refining capacity to 153.8 m tones by 2012 from the current levels of 109.6 m tones. While we believe that boosting capacity ahead of demand may be prudent for down-stream oil companies, the lingering concern about government regulations on pricing continue to haunt them. Till a sustained reduction in the crude oil prices is observed, the prospects of the oil marketing companies largely hinge on ad hoc government policies. The Union Budget 2010 has not adopted the recommendations of the Kirit Parikh committee on fuel pricing and has in fact rolled back some of the excise and customs cuts given last year.

Markets up on Asian cues
09:30 am

The Indian markets have started today's session on a strong note. The benchmark indices opened above the breakeven mark and have managed to surge further into the positive territory since then. Other key Asian markets are trading in the green with Japan (up 2.1%) leading the pack of gainers. The US markets closed higher by 0.5% yesterday.

Currently in India, heavyweights from the BSE-Sensex are trading strong with construction and financial stocks attracting investors' interest. The BSE-Sensex is trading higher by around 117 points, while the NSE-Nifty is up by about 35 points. Buying interest is also being witnessed among mid and small cap stocks as the BSE-Midcap and BSE-Smallcap indices are trading higher by 0.9% and 1.1% respectively. The rupee is trading at 45.78 to the US dollar.

Textile stocks have opened the day on a positive note. Gainers here include Alok Industries and Raymond. As per a leading business daily, Raymond is initiating a restructuring exercise that will try to extend the reach of the flagship brand and pull out some of the non performing ones. The company will phase out the affordable segment brand Notting Hill from tier-I and tier-II cities although it will still be available in the smaller centers. In our view, Raymond's new strategy for its brands stems from its efforts to reduce the debt on its books. The company is cutting cost, unlocking its real estate assets in Mumbai and trimming down its portfolio of brands to pay off its debt. The brand realignment is also intended to sharpen the positioning of the Raymond brand.

Engineering stocks have opened the day on a positive note. Gainers here include Ashok Leyland and TVS Motor. As per a leading business daily, auto major Ashok Leyland will invest Rs 30 bn in the next three years on various expansion projects. The outlay will go towards product development as well as projects such as the light commercial vehicles joint venture with Nissan and construction equipment joint venture with John Deere. It may be noted that the company had earlier scaled down its capital expenditure plans to Rs 20 bn due to the economic slowdown. This development does not come as a surprise in our view as the demand for commercial vehicles tracks very closely with overall economic growth. In fact, the company has recently announced a 140% YoY increase in unit sales for the month of February, 2010.

Feeding the white elephant
Pre-Open

We have all heard of the proverbial white elephant. The animal takes a fortune to maintain. But it earns precious little in return. Anyone looking at it is amazed by its size. What an asset it must be, they think. But only the owner knows how difficult it is to maintain this asset.

India's state owned oil marketing companies (OMCs) are our very own white elephants. They have unmatched physical assets-in-place. Refineries, pipelines and a vast distribution network. But they incur losses every single day that they operate. On the one hand, their inputs costs keep rising with higher crude oil prices. On the other hand, the government forces them to price their final output - auto and cooking fuels- at subsidised rates. As a result, from a shareholder's perspective, all that the wonderful assets succeed in doing is destroy wealth.

In such a situation, shareholders must greet any addition to the white elephant with sadness and not joy. In other words, as long as fuels are being subsidised , any capital expenditure done by the OMCs should bring a frown on the face of the shareholders. Now, would be a good time to start. As per the petroleum minister, the OMCs will invest over Rs 775 bn in adding 44.2 m tonnes of refining capacity by 2012. Indian Oil Corp will invest Rs 298 bn in building a new refinery at Paradip, Orissa with an annual production capacity of 15 m tonnes. BPCL's joint venture will invest Rs 114 bn in a 6 m tonnes unit at Bina, Madhya Pradesh. HPCL will spend Rs 189 bn in building a 9 m tonnes refinery at Bhatinda, Punjab.

There are several brownfield expansions lined up too. Mangalore Refinery will invest Rs 124 bn in expanding its 11.8 m tonnes refinery to 15 m tonnes. Indian Oil's Haldia refinery will be expanded by 1.5 m tonnes to 7.5 m tonnes at a cost of Rs 29 bn and its Panipat unit will be expanded by 3 m tonnes to 15 m tonnes at a cost of Rs 10 bn. HPCL will expand its 5.5 m tonnes Mumbai refinery to 7.9 m tonnes at a cost of Rs 3 bn and its 7.5 m tonnes Vizag unit to 10 m tonnes at a cost of Rs 3 bn. Chennai petro will invest Rs 5 bn in expanding its 9.5 m tonnes Manali unit to 11.1 m tonnes.

So, the OMCs will be doing far more business in the future than they do now. As long as the government intervention in fuel pricing continues, more business equal to more losses. In other words, as the white elephant grows larger, it will place an even greater burden on its owners. At some point the government will have to wake up, bite the bullet and usher in reforms in the petroleum sector. And bring in genuine deregulation of fuel prices.