Another lackluster day
Closing

Although off the day’s lows, the markets could muster only small gains during the closing hours of trade and thus end the day marginally in the green. While the Sensex edged higher by around 40 points (0.3%), NSE Nifty closed with small gains of around 10 points (up 0.3%). BSE Midcap and Small cap indices traded weak today and recorded marginal declines. On the Sensex, three stocks gained for every two that ended lower.

Most Asian markets closed in the green today and Europe too is showing a fair degree of buoyancy right now. As regards the exchange rate, the rupee was seen trading at Rs 45 per dollar at the time of writing.

It was yet another lackluster ending for the markets today. The indices opened strongly in the morning and at one point, the Sensex was trading more than 100 points higher than the previous close. But rather than buying into the momentum, investors chose to take some profits off the table and this resulted in the index giving up almost all its gains and inching perilously close to the breakeven. While buying interest once again reared its head during the fag end of the day, it did not prove strong enough to breach the day’s highs and eventually, the markets closed the day with marginal gains.

Hero Honda, India's largest two-wheeler maker ended the day with a yearly high on yet another occasion. The company has been on the investor radar for quite some weeks now and has in fact seen its price go up by nearly 25% in just over a month. While the Union Budget has definitely done its bit to improve the company’s prospects by putting in more discretionary income in the hands of the consumers, there is a growing buzz that the company is planning to build a new plant that besides servicing the domestic demand would also cater to exports markets like Africa. Thus, both of these factors put together could bring about a sizeable improvement in the company’s earnings power going forward, a fact that does not seem to have lost on the investors who have rewarded the stock with some handsome gains.

Power major NTPC was amongst the key losers on both the Sensex and Nifty today. Earlier the company has announces that it is aggressively looking at international markets to source coal for its future capacity expansion. The company is targeting a generation capacity of 75,000 MW by 2017, from around 30,000 MW currently. Given this target, it plans to consume around 300 m tonne (MT) of coal by that year as compared to about 126 MT currently. As the company is facing issues with sourcing coal from the domestic market (it imports 10 MT of its annual requirements currently), and that its coal mines will start producing coal only in a few years, imports is the best alternative it has. However, given that imported coal comes at an expensive price (almost double as compared to domestic coal), the company will most likely see its fuel costs rising. Anyways, amidst all this, the primary concern is whether the company will actually be able to meet its aggressive generation capacity target for 2017, which would require it to add around 6,500 MW of new capacity annually for the next seven years. This is almost double of what it is just managing to do as of now.

Markets back at the neutral zone
01:30 pm

Although trading in the positive territory, the Indian markets shed a portion of their gains during the previous two hours of trade. The market breadth seems to remain optimistic as the overall advance to decline ratio is poised at 1.3 to 1 on the BSE. While stocks from the metal, capital goods and banking sectors are leading the pack of losers, those from the oil & gas and auto spaces continue to remain the investors’ best picks as of now.

The BSE-Sensex and the NSE-Nifty are currently trading higher by around 40 points and 5 points respectively. Stocks from the midcap and smallcap spaces are trading flat, with the BSE-Midcap marginally down and the BSE-Smallcap marginally higher. The rupee is trading at 45.47 to the US dollar.

Auto stocks are currently trading firm led by Hero Honda, Tata Motors and Ashok Leyland. Times are likely to get tougher for India’s largest passenger car manufacturer Maruti Suzuki going forward as more and more foreign players have been or are planning on launching newer models in the country. The latest entrant is small car launched by Ford, the Figo. The car has been attractively priced at about Rs 3.5 lakhs onwards (petrol version), while its diesel variant is priced at about Rs 4.5 lakhs onwards. The other cars that are likely to hit the markets or that have recently entered the Indian markets this year include Nissan March (priced at about Rs 4 lakh onwards), Volkswagen Polo (approximately Rs 4.3 lakhs), amongst others.

Majority of the new vehicles that are being launched or are expected to be launched this year would be in the small car segment. It must be noted that more than two-thirds of the passenger vehicles sold in India form part of the small car segment. This is precisely the reason for the foreign players to tap this segment of the market. However, one should not ignore that fact that Maruti has been present in India for a long time and as such, has established a strong base in terms of both - showrooms and service centres - around the country. In addition, it also has a strong backing from its Japanese parent, Suzuki Motors.

FMCG stocks are currently trading firm led by Pidilite Industries, HUL and Godrej Consumer Products (GCPL). A leading business daily has reported that FMCG companies such as GCPL and Britannia Industries are planning on increasing prices of their products, which vary from diapers to biscuits. While GCPL is believed to increase prices on the back of the proposed hike in excise duties during the Union Budget 2010-2011, biscuit major Britannia is believed to be hiking prices on higher input costs. GCPL is believed to be hiking prices by about 2% to 10% across products (ranging from diapers to other FMCG products). It must be noted that during the recently announced budget, certain products (including diapers), which fell in the zero excise bracket earlier were brought in the excise duty product category.

Energy, FMCG & auto bouy the 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 the oil & gas, consumer durables, FMCG, realty, auto and power sectors leading the pack of gainers. Banking stocks are the only ones to be at the receiving end.

The BSE-Sensex and the NSE-Nifty are currently trading higher by around 96 points and 25 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 0.5% and 0.6% respectively. The rupee is trading at 45.46 to the US dollar.

According to a leading business daily, India's largest IT exporter TCS' big government IT project in UK is caught in political crossfire. It may be noted that recently, TCS won a £600 m (or Rs 41 bn) IT project from UK's National Employment Savings Trust. However, the major opposition political party in UK, the Conservative Party has criticized the current government for signing such an important deal too close to the general elections which are scheduled for June 2010. It has vowed to review the contract if it comes to power.

It is worth noting that this multi-year project is structured in two phases. The first phase which is due for completion in October 2010 requires TCS to commit actual resources and manpower. This phase will generate revenues around £25 m for TCS for setting up and maintaining the IT infrastructure for the project. However, the government authority that awarded this project to TCS has said that the opposition can choose to discontinue with TCS after the first phase if it deems it relevant after coming to power. While there is a lot of uncertainty about this event, losing a Rs 41 bn contract will definitely harm the company's quest to become an established player in UK's IT market. We hope that the Indian IT major which has renewed its focus on government as a business vertical is already prepared for such bottlenecks like change in leadership and delays while working with governments round the world.

The cement demand in Eastern states of India is growing at a remarkable pace. The demand for cement in this region grew by 24% in the period from April 2009 to December 2009, outpacing the national average growth of 11%. This sudden hike in the cement demand in the region has resulted in a rise in price of cement by Rs 13 per bag post the Union Budget. In contrast the price is falling in the other parts of the country on account of over capacity.

All this has attracted the focus of all the major Indian cement players towards the eastern side of India. Cement majors like ACC, Dalmia Cement, Binani Cement are making a beeline for increasing their presence in the states of West Bengal, Jharkhand, Chhattisgarh, Bihar and Orissa. While these majors are expanding their capacities in the region, they are also making strategic investments in the local players in order to secure supplies and improve profitability. It may be noted that with an installed capacity of 240 m tonnes, the Indian cement industry is second only to China in terms of growth rates. While the Indian cement industry is growing at 9-11% for the past couple of years, its Chinese counterpart is standing tall at a growth rate of 14%. We believe that incremental cement capacity in regions with undersupply will aid the cement majors in maintaining their growth rates going forward.

Markets begin on a strong note
09:30 am

The Indian markets have started today's session on a strong note. The benchmark indices opened above the breakeven mark, fell into the negative territory but have bounced back strongly since then. Other key Asian markets are trading in the red with South Korea (down 0.4%) leading the pack of losers. The US markets closed higher by 0.1% yesterday.

Currently in India, heavyweights from the BSE-Sensex are trading a mixed bag with auto and FMCG stocks attracting investors' interest. However, select software stocks are in the red. The BSE-Sensex is trading higher by around 39 points, while the NSE-Nifty is up by about 9 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 0.3% and 0.4% respectively. The rupee is trading at 45.52 to the US dollar.

FMCG stocks have opened the day on a positive note. Gainers here include Lakshmi Energy and Tata Tea. As per a leading business daily, FMCG major Nestle India is considering launching its weight management programme Jenny Craig in India. The programme consists of coaching by personal consultants and pre-packaged meals that cost about US$ 100 per week. It is popular in the US. In our opinion, this development indicates Nestle India's desire to participate in the Indian growth story. However, an expensive product like Jenny Craig is likely to find takers only in the metropolitan centers. Moreover, the company will have to work in building the infrastructure to deliver services in India from the scratch. So far, it has concentrated on its packaged foods and confectionery business and is among the most profitable FMCG operations in India.

Energy stocks have opened the day on a positive note. Gainers here include Indraprastha Gas and Gujarat Gas. As per a leading business daily, India's largest oil marketing company Indian Oil plans to sell shares to raise funds. In fact, the petroleum secretary has approached the disinvestment secretary with the proposal which is likely to be evaluated in the coming fiscal year. If the company gets the nod, it will also provide the government a window to offload some of its stake. But the key question remains whether the government will free the pricing of petroleum products. Unless it does, Indian Oil and its fellow oil marketing companies - BPCL and HPCL will continue to incur losses. Ironically, the success of any public issue will depend on its intention to free prices.

No free lunches in Indian banking
Pre-Open

In a country of a billion people, where only 4 out of 10 individuals have a bank account, banking is certainly a very lucrative business. Not only this, the cost of funds (low cost deposits) is less than half the cheapest lending rate. However, given the conservative nature of the RBI, very few non banking companies in India are allowed to raise public deposits. As per the central bank, only 336 out of 12,740 non banking companies in India raise public deposits. Thus, the Budget proposal to allow bank licenses to NBFCs came as a windfall gain to the latter. Investors too rewarded them with share prices of select NBFCs seeing nearly 10% escalation in a week.

What seems to have been forgotten is the intent behind the bank license move. As also the cost attached to the same. The Finance Ministry's intention, as stated in the Budget , is to broaden the geographical reach of India's banking sector. Also additional bank licenses will bring with them the prudential norms that the new entrants will find rather difficult to follow. These include maintaining cash reserve ratio (CRR, reserve with the RBI) at 5.75% of deposits and statutory liquidity ratio (SLR, investment in GSecs) at 25% of deposits. Although NBFCs mostly access costlier short-term funds at expensive rates through commercial papers, the compliance with banking norms will not be very easy either. For instance it took IDBI Bank a good 4 years to comply with these norms after converting itself into a full-fledged bank. Notwithstanding its NPA legacy, the bank is yet to show a respectable NIM (net interest margin).

For the NBFCs, the proposition has several other drawbacks. As non-banking entities, they do not have to write off bad loans until they are 180 days overdue, compared with 90 days for banks. To open a new branch, they only have to inform the RBI while banks have to apply to it for every new branch license.

Further, the RBI is concerned about the ownership structure of privately held banks. The central bank mandates that no single entity can hold more than 10% of a bank. A steep hurdle, given that a majority of the listed NBFCs in India are owned by industrial conglomerates or have large controlling shareholders. Plus, the biggest motive for the RBI is to encourage rural banking. A company applying for banking license will have to sell a convincing case of its commitment to service the lowest strata of the society.

Companies like Future Capital Holdings whose stock has jumped 17% amid the speculation of receiving a banking license may lure investors to cash in on the short term gains. But all that we can say here is caveat emptor - buyer beware! While the possibility of the company receiving a banking license cannot be ruled out, there is certainly no assurance of higher profitability.