A dull end to the week
Closing

The broader indices managed to crawl their way towards the dotted line during the closing hours of trade. Lack of buying activity however, did not enable them to go higher anymore as they ended the day almost flat. The BSE Midcap and Smallcap indices on the other hand, closed marginally in the red today. On the Sensex, three stocks declined for every two that edged higher.

While Asian markets closed mixed today, Europe is witnessing buoyancy across all indices currently. The rupee was trading at Rs 45.4 to the dollar at the time of writing.

India's industrial output eased marginally in January from the December 2009 levels. It recorded a growth of 16.7% on a YoY basis as against 17.6% YoY growth recorded in the month of December. Thus, for the current financial year, the growth now stands at 9.6% YoY. The industrial sector, we should say, has filled in quite well for the subpar agricultural output of the country and has played a stellar role in ensuring that India's GDP manages to grow at a decent pace. Of course, the Government's stimulus measures also played their part in propping up the industrial sector. Going forward though, some amount of slowdown is likely to take place as higher prices on account of the recent budget measures could dent demand for goods. Furthermore, the threat of RBI hiking interest rates in order to tackle the rising inflation also looms large. All in all, looks like the 16%-17% growth that we have seen in recent few months could well be a thing of the past.

FMCG behemoth HUL was the biggest loser among the Sensex stocks today. Infact, the stock is believed to have closed at a 52-week low. Investor's disinterest is due to the ongoing war brewing in the detergents space between HUL and other multinational P&G and the impact of the same on the company's financials. HUL's most recent TV ad, which is really a very bold attempt, has quite openly made a declaration that its detergent product is superior to P&G's product in the same category. In what seems to be retaliation, P&G has gone ahead and increased the grammage of its product by 25% without lowering the price. Put differently, it has started offering a very aggressive price discount of 20%. HUL, which is already facing a lot of competition in some of the other segments as well, may also have to lower the price of its product, thus putting further pressure on its profitability. Investors seemed to have already factored this in their assumptions as evident from the fall in share price today.

Sugar stocks also suffered a setback today with leading players like Renuka Sugar and Balrampur Chini feeling the maximum heat. Infact, the entire sugar pack has lost in the region of 16% during the current week. And most of the weakness has to do with the fall in sugar prices in recent times. As per reports, sugar prices have declined by around 11% as a result of the supply glut in the physical market. Furthermore, India's production estimates of 16.8 m tonnes as against the earlier projected 16 m tonnes is also likely to take some pressure off the medium term outlook. Over the long term though, unless productivity increases significantly, demand would continue to come under pressure, leading to huge volatility in prices.

Inflation moves from food to fuel
01:30 pm

Indian markets continued their downward trend in the last two hours of trade led by stocks in the realty, consumer durable and consumer goods space. However, stocks in the metal, oil & gas and auto sector continue to find favour among investors.

BSE-Sensex is trading lower by 13 points while NSE-Nifty is trading flat. BSE-Midcap Index is down by 8 points while the BSE-Smallcap index is trading 3 points above yesterday’s closing. The rupee is trading at 45.49 to the US dollar.

According to a news article, Bharti Airtel, has announced the launch of digital media exchange for integrated content delivery across multiple cinema screens, television and mobile handsets across various geographical areas. Moreover the company would cater to animators, gaming firms, media producers and banking institutions. With the 3G (third generation) telecom service expected to be launched soon in India, the company is positioning itself to leverage its presence in 3G space. While Bharti has not indicated its revenue expectation, this move is seen as the next step in telecom. With the competition getting more intense in the telecom sector this move by Bharti is seen as an effort to diversify its revenue stream.

Food inflation for the week ending 27th February came in a tad lower at 17.81% compared to 17.87% registered for the previous week. While the essential commodities continue to be expensive the rate of price increase has been falling for some time now. The declining trend would buttress the government’s claim that the prices would fall from April onwards. However, fuel inflation is spreading to other areas. RBI is of the opinion that overall inflation would hit double digits by end of March 2010 due to increase in prices of fuel.

Inflation is now broad based and spreading to other areas including manufacturing. Budgetary increases in excise duty and customs duty has led to a 6% increase in price of fuel on a weekly basis while on a yearly basis petrol prices have increased by 16.8%. While the leveling out of food prices is a positive for consumers as well as for food companies like Britannia and Nestle, rise in fuel costs is expected to spurt inflation, making a case for the RBI to tighten monetary policy.

Energy, autos keep indices afloat
11:30 am

The Indian markets pared some of their opening gains during the previous two hours of trade. Currently, selling activity from sectors like capital goods, IT, power and consumer durables are dragging the indices down. Nevertheless, oil & gas, auto, metal, healthcare and banking stocks are finding favour.

The BSE-Sensex and the NSE-Nifty are currently trading marginally higher by around 21 points and 8 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 0.2% and 0.3% respectively. The rupee is trading at 45.45 to the US dollar.

According to a leading business daily, India’s largest private sector lender ICICI Bank has decided to withdraw its aggressive lifetime free credit cards scheme. As per the new business strategy, the bank will charge some annual fee from new credit card customers. It may be noted that the bank introduced the lifetime free cards scheme in 2005 in order to aggressively win market share. Other banks followed suit and waived fees from their credit cards. However, the financial recession resulted in huge credit card NPAs (Non-performing assets) as customers defaulted on their credit card payments. The percentage of NPAs increased drastically from around 5-8% in FY08 to as high as 20% in FY09.

Nevertheless, it appears that banks have learnt their lesson. ICICI Bank as well as its public sector peer SBI have stopped dolling out credit cards for free. Banks have started focusing on premium segments which have lower propensity to default as compared to the mass segment. We believe that this is a prudent move for ICICI Bank whose gross NPAs in absolute terms have nearly doubled in the past 12 months.

Mahindra Satyam has informed BSE that it has signed a new four year offshoring contract with KMD, one of the largest IT company in Denmark. This deal worth US$ 48 m (Rs 2.18 bn) requires Mahindra Satyam to provide services such as application development, testing and application support particularly in SAP domain. It may be noted that this is an extension of a previous contract which was due to expire this year. Mahindra Satyam despite its maligned reputation on account of huge financial scam has been selected for this project on back of its outstanding competencies in the area and the quality of work it already delivered to the client. We believe that while matters like financial transparency and ongoing law-suits still becloud Mahindra Satyam’s future, its capabilities as a global software service provider may continue to fetch the company more business.

Markets up on Asian cues
09:30 am

The Indian markets have started today's session on a positive 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 Japan (up 0.4%) leading the pack of gainers. The US markets closed higher by 0.4% yesterday.

Currently in India, heavyweights from the BSE-Sensex are trading strong with auto and banking stocks attracting investors' interest. The BSE-Sensex is trading higher by around 41 points, while the NSE-Nifty is up by about 10 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 0.4% and 0.6% respectively. The rupee is trading at 45.5 to the US dollar.

Auto stocks have opened the day on a strong note. Gainers here include Eicher Motor and TVS Motor. As per a leading business daily, M&M is planning to pick up a majority stake in International Cars and Motor (ICM), which makes the Rhino brand of SUVs. The SUV range was designed in collaboration with MG Rover, UK and with engines sourced from Isuzu, Japan. ICM has an installed capacity to manufacture 24,000 units a year. It is part of the Delhi based Sonalika Group which holds 70% in the company. The balance is held by private equity players. In our view, the deal makes sense for M&M as Rhino is a ready product that needs better marketing and distribution. Moreover, ICM's factory in Himachal Pradesh is entitled to a 10 year holiday from excise and income tax. However, the key issue for M&M will be valuation. In fact, talks between the company and the Sonalika group have been on for a few months but are stuck on the question of valuation.

Banking stocks have opened the day on a positive note. Gainers here include Allahabad Bank and Dena Bank. As per a leading business daily, the government has asked all public sector banks (PSBs) to follow a reservation policy for SC STs at all officers' categories. They have to promote at least 15% SC and 7.5% ST candidates from the level of probationary officer to general manager. The rule comes after the Madras High Court asked five PSBs to implement reservations. These PSBs include Canara Bank, UCO Bank and Union Bank of India. In our view, although there is a case for affirmative action for the marginalised sections of society, this decision will increase the manpower woes of PSBs. Banks are facing a talent crunch at the senior levels due to retirements. In fact, banks have already approached the Supreme Court looking for a stay order against the High Court ruling.

India wants this commodity for itself
Pre-Open

China is perhaps the single most important country today when it comes to the steel industry. It is one of the largest producers of iron ore in the world. But its steel making capacity has reached such huge proportions that it still needs to import iron ore in very large quantities. Normally, iron ore is supplied under long term contracts. But the quantity of Chinese imports is so large that there simply isn't that much supply available under long term contracts. As a result, a spot market for iron ore has evolved.

One of the key suppliers in this spot market is India. Now, it does seem ironical that India should be exporting iron ore at a time when it is really trying to ramp up its steel production. Unfortunately, it is true because India's steelmaking capacity has not grown as fast as it should have. But the situation seems to be changing of late.

As per a leading business daily, India's share of iron ore imports by China fell to 17% 2009, down from 20% in 2008. There are a slew of brownfield and green field steel projects lined up in India. As a result, the demand for iron ore from within India is growing. Plus there is also the fact that the Indian government has imposed export taxes on iron ore. In fact, as shown in the chart below, the Australian Bureau of Agricultural and Resource Economics (ABARE) predicts that India's export of iron ore will keep declining while China's imports will keep increasing.

Source: ABARE

Another important reason India's iron ore exports could decline is because the government is likely to increase taxes on exports as Iron ore prices rise. And the prices are rising. One tonne of iron ore costs about US$ 130 today. That's more than a two fold increase in the last year.

In our opinion, greater consumption of Indian ore within India is a welcome trend. Converting iron into steel adds more value, which can then be exported at better prices. Of course, we are more likely to consume the steel domestically rather than export it. After all, steel is used in industries like infrastructure, housing, automobiles and consumer durables. All of these are likely to witness strong growth in the days ahead.