Auto, banking lead the gains
Closing

Indian markets had a strong start to a new week today, as buying in auto and banking stocks pushed the markets higher. Realty stocks however closed in the red. On the broader BSE, two stocks gained today for every one that closed in the red.

The BSE Sensex and NSE Nifty closed with gains of around 110 points (0.6%) and 30 points (0.6%) respectively. Mid and small cap stocks followed suit. The BSE Midcap and BSE Smallcap indices closed up by 0.8% and 1.3% respectively. Among other Asian markets, China (up 0.7%), Hong Kong (up 2%), and Japan (up 2%) closed in the positive. European markets have also opened the day on a strong note.

Auto stocks were amongst the biggest gainers today. Buying interest was seen in stocks like M&M, Hero Honda, and Maruti. Gains in car manufacturers like M&M and Maruti was on the back of reports of a strong sales performance by these companies in February 2010. As per the Wall Street Journal, India's car sales touched their highest-ever monthly number in February as cheaper loans and apprehensions of price hikes in March drove purchases. Domestic car sales during the month grew by 33% YoY and 5% over the previous month i.e., January 2010. The strong performance in February comes after the even better 40% and 61% growth in car sales during the preceding two months of January 2010 and December 2009.

As per the Society of Indian Automobile Manufacturers (SIAM), a large part of this growth during February was on the back of pre-buying of cars in anticipation of a price hike post the Union Budget 2010. SIAM has also indicated that there is a lot of pent up demand in India and loans are still available at lower interest rates, which is helping sales. We also believe the same. However, seeing the indications coming out of the RBI that is fearing even higher inflation in the future, a rise in interest rates as well as costlier vehicles could affect demand in the coming months.

Energy stocks also closed in the positive today. Key gainers here included Castrol, Gujarat Gas, and GAIL. The stock of India's largest oil and gas exploration and mining company ONGC also closed with gains. Earlier today, the company had announced plans of raising US$ 10 bn over the next ten years to buy oil assets overseas to meet India's fuel demand. As a matter of fact, ONGC produces almost 25% of the crude used by India. Declining output at three-decade old domestic fields has forced the company to diversify its sources of supplies. And it has been quite aggressive in pushing for acquisition of international oil and gas assets.

Given ONGC's robust balance sheet and minimal debt on the books currently, we do not see any major problem in the company taking such a big loan on its books. This is however provided that it is able to prudently employ this capital in buying worthwhile assets that can sustain over a long period.

Investors prefer smallcaps, midcaps
01:30 pm

The Indian markets continued to trade well above the dotted line during the previous two hours of trade. Buying activity continued to remain firm with an interest being seen in stocks across sectors. Stocks from the auto, banking, healthcare and capital goods spaces are leading the pack of gainers, while those from the power and oil & gas spaces are amongst the lowest gainers.

The BSE-Sensex and the NSE-Nifty are currently trading higher by around 180 points (up 1.1%) and 55 points (up 1%) 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 1.1% and 1.5% respectively. The rupee is trading at 45.42 to the US dollar.

Auto stocks are currently trading firm led by Mahindra & Mahindra (M&M), TVS Motor, Hero Honda and Tata Motors. It is believed that auto major, M&M is in discussions with various European two-wheelers manufacturers to develop premium bikes for the Indian market. Companies such as Triumph and Moto Guzzi are supposedly some of the companies with whom M&M is in discussions with. While there is not official statement from the company, this would definitely be a very different segment for the company, considering that it has just recently entered the two-wheeler segment. M&M had recently moved into the two-wheeler space by acquiring Pune based Kinetic and has currently selected offerings in the in the mid-segment of the motorcycle market.

A handful of two-wheeler manufacturers have tied up with international brands to launch the latters’ products in India. These would be however, mainly aimed at the high end segment, where the market is fast growing and does not have a lot of players present at the moment.

Auto ancillary stocks are currently trading firm led by Bharat Forge, Exide Industries and SKF India. A few months ago, auto component manufacturers would have not expected the auto manufacturers (OEMs) to record robust sales volumes that are being witnessed at present. As such, the auto ancillary companies did not go about expanding capacities. However, a leading business daily has reported that in addition to the tyre shortage that the industry is seeing at present (as tyre manufacturers are diverting a large section of volumes to the replacement market), the OEMs are also seeing a shortage in supplies of many other automobile components. These components include alloy wheels, various engine components, electronic feed and machined components. As per industry experts, it is believed that it would take about six months for the components sector to be able to bridge these supply gaps.

Apart from a pickup in capacities, auto component manufacturers are also looking at price rises on the back of an improved demand scenario in addition to the overall increase in input costs. At the same time, the auto components manufacturers also need to deal with cheap imports from other Asian nations. While the government has imposed a high antidumping duty on tyre imports, the same has not been done for the other components. Auto ancillary majors, however, are believed to have committed huge amounts of investments towards ramping up capacities.

Realty, auto & pharma aid indices
11:30 am

The Indian markets continued to trade on a strong note during the previous two hours of trade. Currently, buying activity is being witnessed across all sectors with stocks from realty, auto, healthcare, capital goods, oil & gas and metal sectors leading the pack of gainers.

The BSE-Sensex and the NSE-Nifty are currently trading higher by around 155 points and 46 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 1.2% and 1.5% respectively. The rupee is trading at 45.48 to the US dollar.

Hero Honda is among the top gainers on BSE today. As per a leading business daily, in order to tap the expanding rural auto market in India, Hero Honda is planning to setup its fourth plant in the country. Though the exact plan for the new plant is yet to be disclosed, it is estimated that the plant will have a daily capacity of 2,000 units and will be funded by internal accruals.

It may be noted that the company aims to raise its share from the Indian rural market to 50% of its overall sales in next couple of years from the current levels of 40%. For this purpose it has added significantly to its network of dealer and service centers, set up health care initiatives and services to guide rural people in getting driving licenses. Apart from rural focus, the company is also eyeing opportunities of expansions in the export segment. The exports accounts for a mere 2.2% of its annual sales where the markets are Sri Lanka, Bangladesh and Columbia. The company now aims to start exporting its motor-cycles to African markets as well. We believe that given the under penetration that exists in the domestic markets, the market leader in the motor cycle segment will stand to benefit more through its rural focus. Government’s emphasis on improving road infrastructure will further augment its growth.

According to a leading business daily, India’s largest telecom company Bharti Airtel is planning to roll out 200-250 new applications every month through its mobile application store, Airtel App Central. It is said to be working with a number of local and foreign mobile phone application developers in order to increase the number of applications hosted in its store.

It may be noted that Airtel App Central which was launched last month only already has around 1,400 applications across 25 different categories like business, games, books, entertainment and social networking. It is estimated that within one month of its launch, the company’s application store has become India’s largest mobile application store, overtaking global leaders like Nokia, BlackBerry and Apple. After the successful launch in India, the company plans to launch such application centers in Sri Lanka and Bangladesh as well. We believe that company’s strategy of strengthening its value-added services portfolio ahead of time will help it combat the pressures of price wars and declining average revenues per user (ARPUs) faced by the entire telecom industry.

Markets begin on a strong note
09:30 am

The Indian markets have started today's session on an extremely strong note. The benchmark indices opened above the breakeven mark and have managed to hold on to their gains since then. Other key Asian markets are trading in the green with Hong Kong (up 1.9%) leading the pack of gainers. The US markets closed higher by 1.2% last Friday.

Currently in India, heavyweights from the BSE-Sensex are trading strong with auto and construction stocks attracting buying interest. The BSE-Sensex is trading higher by around 145 points, while the NSE-Nifty is up by about 45 points. Buying is also being witnessed among mid and small cap stocks as the BSE-Midcap and BSE-Smallcap indices are trading higher by 1% and 1.2% respectively. The rupee is trading at 45.45 to the US dollar.

Energy stocks have opened the day on a positive note. Gainers here include Gujarat Gas and Indraprastha Gas. As per a leading business daily, natural gas transmission major Gail has commissioned its first wind farm in Gujarat. The 4.5 MW plant in Sinoi, Kutch will go on stream by April this year. The company plans to enter the power generation space through conventional and non-conventional energy sources. In fact, it plans to set up two natural gas-based power plants in Usar, Maharastra and Bettiah, Bihar. In our opinion, Gail's foray into power generation is driven by a desire to diversify its business as well as avail government benefits such as tax incentives available to projects based on renewable energy.

Auto stocks have opened the day on a positive note. Gainers here include Hero Honda and Tata Motors. As per a leading business daily, Suzuki Motor Corp has increased its stake in Maruti Suzuki by 0.8% to 55%. It may be noted that companies are allowed to make creeping acquisitions of up to 5% a year. However, any increase beyond 55% will require Suzuki to make an open offer for another 20%. Given that the Japanese auto giant has raised its stake right up to the permitted threshold, in our opinion it raises the question of whether it seeks full control over India's largest carmaker. There is ample motive for doing so. The Indian auto market outshines its troubled global counterparts. Maruti Suzuki contributes nearly 80% of Suzuki's profits. Interestingly, German auto giant Volkswagen has recently picked up a 20% stake in the Japanese group. Hence, the increase in stake in Maruti Suzuki could be part of a larger strategic plan between Volkswagen and Suzuki Motor.

What to do in such confusing times?
Pre-Open

Global stocks markets had a strong last week. Even Indian markets performed well in this first full week after the Union Budget 2010. As we look forward to the next few weeks, the markets will be driven largely by expectations from the March quarter results that will flow in from the second week on April. By the way it seems as of now, most investors will be expecting a continued improvement in India Inc's profitability driven by higher sales and lower costs.

The benefits of the government's fiscal stimulus have already been seen in improvement in performance of some sectors like automobile and real estate. Now the biggest point of concern for these sectors is the complete withdrawal of stimulus measures that can otherwise spawn high inflation in the economy. The recent Economic Survey had anyways warned about the food price inflation to spill over to other sections of the economy. A delay in withdrawal of stimulus can make this a reality sooner rather than later. But then an early withdrawal of stimulus can dent the economic recovery that is still in its early stages. Therefore, there is confusion all around whether an early stimulus withdrawal will be good or bad for the economy.

That's the Indian story, which is still sane as compared to world standards. Coming to the US, there is no doubt that an early withdrawal of stimulus will really hurt their economy. This is considering that the broader US economy remains weak if one were to go by their unemployment numbers. In light of this, some like the former Fed chief Paul Volker believe that this is not the time to take aggressive tightening action, either fiscally or monetary. The belief there is that the US economy still requires a lot of time to come to terms with a recovery. So it will be unwise for policymakers to unwind the stimulus that has helped the world's largest economy to survive what many had believed to be a repeat of the Great Depression of the 1930s.

Anyways, Indian or global, one place that has been the biggest beneficiary of the cheap money floating all around, is stockmarkets. And more so in the emerging nations of Asia. Indian markets are a clear case in point. Of course, India was amongst the least impacted nations from the crisis that hit the world in 2008. But the impact was still there. Companies here also had to cut back on their investments as demand stalled and profits went for a toss. Then, some that had made aggressive global acquisitions and had taken rapid growth strides during the heady times of 2007, were left with devastated balance sheets.

Even as we stand today, lot of these companies are still facing balance sheet issues. Their sales have yet to revive and profits owing to massive cost cutting merely seem a mirage. But see their stock prices! Some have multiplied 5 times since March 2009. Some even more! Even when one is to look at the broader markets, valuations do not look cheap anymore. In fact, there are more overvalued stocks in the market than ones that can be called 'fairly valued'. Forget about the category of ‘undervalued' stocks as these have become very difficult to identify.

In such times, it is important for you - the investor - to be very careful in your stock selection. Buying stocks because everyone else around you is buying, can be highly risky. While you can still search and find some good long term opportunities even as of now, always remember to double check the background of such companies and their promoters, and their past financial performance. Stocks that might appear cheap might not necessarily be bought. These have to be studied very carefully before an investment decision is made.