Volatility impacts Indian indices
Closing

It was a highly volatile trading session on the bourses today. While markets traded in the red in the morning session, strong buying activity in the ensuing hours pushed the indices above the dotted line. Since then they oscillated to either side of yesterday's close before closing marginally into the red. While the BSE Sensex closed lower by around 2 points, the NSE Nifty lost around 8 points. Midcap and small cap stocks were not spared either as they lost around 1% each. Losses were largely seen in capital goods and banking stocks.

As regards global markets, Asian indices closed mixed today while European indices have opened on a weak note. The rupee was trading at Rs 45.64 to the dollar at the time of writing.

Engineering stocks closed weak today and the major losers here included Suzlon, ABB, Voltas and L&T. As per a leading business daily, engineering major L&T has bagged a Rs 20.4 bn order from the state run Mangalore Petrochemicals. The latter is a unit of ONGC. The scope of the contract includes setting up a new complex which will manufacture aromatic products like paraxylene and benzene at the Mangalore Special Economic Zone in Karnataka. The project is likely to be the country's single largest paraxylene unit and is expected to be ready for commissioning by December 2012. While this is a positive for L&T and will enable it to enhance sales in the long term, execution is the key. Infact, the company's overall sales were impacted in 3QFY10 as execution of various projects went through rough patches during the quarter leading to consequent delays.

As per reports, Ranbaxy has entered into a patent settlement agreement with the Japanese company Takeda Pharmaceuticals for the latter's anti-diabetic drug 'Actos' in the US. 'Actos' generated sales to the tune of US$ 3.4 bn for the twelve months ended December 2009. Under terms of the agreement, Ranbaxy has certainty in the launch of its generic equivalent formulation of 'Actos' on August 17, 2012, or earlier under certain circumstances. This is a positive for Ranbaxy as there is certainty with respect to the revenues that it garners for its Para IV filings. This has been amply demonstrated by the settlements that it has reached for the blockbuster drugs 'Imitrex', 'Valtrex', 'Flomax' and 'Lipitor'. At the same time, the company needs to resolve its issues with the US FDA soon if it wants to enjoy the full benefits of the exclusivity window for these products. The stock closed 1% higher.

The WPI numbers for February are out and they do not paint a rosy picture. India's wholesale inflation rose 9.89% in February from a year earlier largely fuelled by firm food prices. However, the chief economic advisor in the Finance Ministry is of the view that the rise in inflation is likely to continue for another month after which it should start toning down. The food articles index rose an annual 17.79% in February, while the manufacturing products index in the WPI rose an annual 7.42% in the same month. This certainly puts pressure on the RBI to raise interest rates. Therefore, all eyes will be on the central bank when it meets for its policy in April.

Investors favour IT, FMCG
01:30 pm

Increased buying activity led the Indian indices to cut their losses and move above the dotted line during the previous two hours of trade. The market breadth remains positive as the overall advance to decline ratio is poised at 1.7 to 1 on the BSE. Stocks from the IT and FMCG spaces are amongst the top gainers, while those from the capital goods and banking spaces are amongst the top losers.

The BSE-Sensex and the NSE-Nifty are trading flat. While the former is trading marginally higher, the latter is trading marginally lower. The BSE-Midcap and BSE-Smallcap are trading lower by about 0.7% and 0.5% respectively. The rupee is trading at 45.56 to the dollar.

FMCG stocks are currently trading firm led by HUL, Godrej Consumer Products and Nirma. As per a press release by Godrej Consumer Products (GCPL), the company has entered into an agreement to acquire 'Tura', a company based in Nigeria. The company, which caters to the Nigerian and West African markets, is a manufacturer and distributor of a wide range of products including soaps, moisturizing lotion and skin toning cream. GCPL is looking at this acquisition as means to get a foothold in the fast growing Nigerian and West African markets. GCPL intends to leverage the distribution platform of Tura to introduce Kinky, Rapidol and Godrej brands in Africa. While no financial details of this deal are available as of now, it may be noted that GCPL had recently taken the approval of its board to raise up to Rs 30 bn for inorganic growth. We believe that this acquisition is part of GCPL’s larger strategy to tap developing markets. However, we would be cautious on the company until further details of this deal are available.

Engineering stocks are currently trading weak led by Praj Industries, Punj Lloyd and Suzlon. A leading business daily has reported that engineering and construction major Punj Lloyd is expecting orders to the tune of Rs 30 bn from the oil and gas sector in the next financial year. These would be from both the domestic and international markets. The company, however, expects 50% of the orders from ONGC. It must be noted that Punj Lloyd’s order backlog at the end of the last year stood at about Rs 235 bn, which is nearly 2 times its FY09 consolidated revenues.

In addition, the company recently also launched a vessel, which is capable of laying pipelines at a water-depth of 150 metres. It is believed that this vessel is the only Indian vessel which is capable of laying pipelines at such depth. The company’s management is also expecting more than 200 km of pipe laying work from ONGC in FY11, for which it would start bidding in the near future. Last year, this segment (oil drilling) contributed to nearly 12% of Punj Lloyd’s revenues.

Infosys' non-linear plans
11:30 am

The Indian markets ventured deeper into the negative territory during the previous two hours of trade on account of profit booking activity across sectors. Currently, stocks from the realty, banking, capital goods and auto sectors are dragging the markets lower, while stocks from the FMCG, IT and telecom sectors are trading higher.

The BSE-Sensex and the NSE-Nifty are trading lower, shedding around 85 points and 25 points respectively. The BSE-Midcap and BSE-Smallcap are trading deep in red, lower by around 1.02% and 0.61% respectively. The rupee is trading at 45.58 to the dollar.

According to a leading business daily, state-owned energy major ONGC has earmarked a sum of US$ 20 bn to invest in foreign assets over the next 10 years. It may be noted that the company has already invested around US$ 10 bn across the globe with few of its large investments in Russia, Kazakhstan, Sudan and Nigeria. Sakhalin in Russia is the company's largest investment of US$ 5 bn. Encouraged by the satisfying returns earned by its foreign investments, the company plans to continue buying assets abroad.

ONGC believes that India's energy demand is slated to increase exponentially going forward. The company aims to aggressively plan for this future spurt in demand. India which inhabits about 17% of the world's population, possess only 0.5% of global hydrocarbon reserves. We believe this mandates oil & gas upstream companies to scout for foreign assets. During 3QFY10, ONGC's volumes declined as it faced difficulties in maintaining the levels of production from its ageing fields.

As per a leading business daily, Indian IT major Infosys, is going big on its IP (Intellectual Property) led growth plans. The company is collaborating with some of its clients for co-creating IT products and platforms in seven new growth areas which the company identified recently. Like its peers in the IT industry, the company has been growing by leaps and bounds in the past. However, this growth came from an ever increasing employee base. This new business model is critical for the company's non-linear growth strategy.

Through the non-linear model, the company will be able to reuse its IPs across clients after a pre-decided period of exclusivity. Moreover as the initial development expense will be shared, it will require lower investments. Infosys aims to generate around one-third of its revenues from the high-margin non-linear business model in the next 5 years. It may be noted that the company generates only 5% of its topline from such engagements as of now. Despite its dominance in the IT outsourcing space, it has only 4 patents to its credit with a little over 200 awaiting approval. We believe that this strategy of focusing on non-people intensive, IP-led growth will go a long way in aiding Infosys' future growth.

Weak start to the week
09:30 am

The Indian markets have started today's session on a weak note. The benchmark indices opened near the breakeven mark, fell thereafter and have not managed cut their losses since then. Other key Asian markets are trading in the red with China (down 1.2%) leading the pack of losers. The US markets closed higher by 0.1% last Friday.

Currently in India, heavyweights from the BSE-Sensex are trading weak with banking stocks attracting investors' interest. However, select metal stocks are in the green. The BSE-Sensex is trading lower by around 62 points, while the NSE-Nifty is down by about 16 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 0.4% and 0.2% respectively. The rupee is trading at 45.59 to the US dollar.

Auto stocks have opened the day on a negative note. Losers here include Ashok Leyland and Escorts. As per a leading business daily, Tata Motors plans to increase the sourcing of vehicle parts from low-cost countries for its luxury brands Jaguar Land Rover (JLR). Almost a third of the components used could be sourced from India, China and Eastern Europe within the next 12 months. It may be noted that the company used to source about 15% of its components from low cost countries about a year back. Of late that figure has risen to 20%. These measures are a part of the company's aggressive cost reduction plan for its luxury car brands. Given that the company has taken expensive debt recently, it makes sense that it is trying to make its operations as competitive as possible. Countries like India have low cost skilled labour and cheaper raw material which give a 30% to 40% cost advantage on component prices.

Cement stocks have opened the day on a negative note. Losers here include Prism cement and Dalmia cement. As per a leading business daily, domestic cement sales have increased by nearly 8% YoY in February to 13.7 m tonnes. India's cement production grew by 9.5% YoY to 13.9 m tonnes. However, when compared to January, 2010 both sales and production fell in February. The increased off take in cement was experienced by almost all the leading players and is driven by demand from the realty and construction sectors. However, there continues to be a risk of crash in prices due to the massive capacity build up underway in the industry. Industry capacity is set to go up from 205 m tonnes per annum (mtpa) in FY09 to 270 mtpa by the end of the current fiscal.

This guru favors commodities too!
Pre-Open

Famous investor Jim Rogers has made no bones of the fact that he still favors commodities over the long term. However, one can now add another name to the list of commodity lovers. That of a fellow famous investor Mark Mobius. Yes, that is right. The guru of emerging markets, as Mobius is widely known, has recently said that commodity related investments will remain an important avenue to gain exposure to the growth trajectory of nations like China and India.

And it isn't that Mobius is not aware of the risks involved in investing in commodities. He correctly observes that risks from derivative contracts, capital flight and sudden changes of sentiment by leveraged investors like hedge funds will continue to exist. However, as per Mobius, these reasons do not outweigh a positive long-term picture for commodities in view of the growth that lies ahead for emerging markets.

We believe Mobius could be right on the button here. While commodity prices could take a hit in the near term on account of deleveraging in the developed nations and flight to safety, over the long term, commodities can head nowhere but northwards. This is as countries like China and India try to bring millions and millions of consumers out of poverty, thus more than making up for the fall in demand from developed nations. Add to this the fact that in the last few years, not a lot of capital has been poured into the commodities space and this may create a lag between the time demand is met by the extra supply coming on stream.

Doubts about the Chinese bubble remain
Of course, there is one risk to long-term bullish outlook for commodities. The implosion of China. Better still, significant economic slowdown for a prolonged period. Indeed, the number of China bears has multiplied in recent times as they argue that a country that a country that has unleashed one of the biggest stimuli as a percentage of GDP escape easily, without undergoing significant pain. However, not all agree. As per a leading financial services company, there is presently no signs of any bubble in China.

It goes on to add that although China might have invested huge sums to boost domestic demand and create infrastructure, it has not created an overcapacity or a bubble. Although the firm does agree that in certain pockets like luxury housing, there is a high possibility of a bubble. It further added that with the Chinese government shifting from investing in physical infrastructure to investing in social infrastructure, there could be huge opportunities for US exporters. Looks like China will continue to remain a black box in the near term for some time to come.