RBI spoils the show
Closing

Attempts at recovery went into vain as investors chose to book profits at higher levels and consequently, led the indices lower during the closing hours of trade. While the BSE Sensex edged lower by around 170 points (down 1%) today, NSE Nifty closed around 60 points lower (down 1.2%). Even BSE Midcap and Small cap indices were not spared as both of them lost in the region of 1% each. More than three stocks slid on the Sensex today for every stock that gained.

Other Asian indices also closed mostly in the negative today while Europe too is trading weak currently. The rupee was trading at Rs 45.5 to the dollar at the time of writing.

It is quite obvious that today's weakness was caused by the interest rate hikes affected by the Reserve Bank of India. What made the markets all the more jittery is the fact that the hikes came just days before the RBI was supposed to have its policy meet. This indicates how serious a threat the RBI perceives inflation to be to the economic stability of the country. Furthermore, the possibility that the central bank could hike its rates further in the forthcoming policy meet can also be not denied. The impact of the recent hike was not restricted to India alone. Other Asian markets and even oil prices turned shaky today because of the surprise thrown in by India's central bank.

Pharma stocks closed mostly strong today with some of the prominent gainers being Lupin, Cadila Healthcare and Dr Reddy's. Special mention should be made here of Lupin. As per reports, the counter struck an all time high today presumably on the back of a news item that the company has received a tentative approval from the US FDA for Eszopiclone tablets used in the treatment of a sleep disorder. The company has welcomed the move and has gone on to state that the product would be introduced in the US market through Lupin Pharmaceuticals' strong network of national wholesalers and pharmacy chains post the patent expiry in 2012. It should be noted that the drug, which is a generic version of Sepracor's Lunesta tablets, had annual sales of approximately US$ 761 m for 2009 and thus, could turn out to be a good revenue generator for the company going forward.

Nalco, the public sector alumina major closed lower today. The weakness seemed a result of the announcement made by the centre that there is no plan of divestment in the company in the immediate future. This view ran contrary to the announcement by the disinvestment department that they would indeed consider 5%-10% stake sale in the company. It should be noted that the Government of India holds about 87.2% in the company. In another news on the company, it is also said to be suffering some sort of disruption in the production of aluminium as its supplies of coal are turning out to be rather inadequate.

Realty, auto stocks lead the losers
01:30 pm

The Indian markets once again slipped into the red as selling pressure intensified during the previous two hours of trade. Currently, selling activity is being witnessed in stocks across sectors led by realty, auto and metal spaces. Stocks from the healthcare and energy sectors have managed to garner the investors’ interest. Stocks from the telecom space are also amongst the key gainers.

The BSE-Sensex and the NSE-Nifty are trading lower, shedding around 100 points and 30 points respectively. The BSE-Midcap and BSE-Smallcap indices are trading in red, down by 0.5% and 0.2% respectively. The rupee is trading at 45.53 to the dollar.

Auto stocks are currently trading weak led by TVS Motor, M&M, Tata Motors and Maruti Suzuki. A leading business daily has reported that auto major Tata Motors has prepared a package which would help compensate its vendors, which had set up units at Singur. These were for servicing Tata Motors’ facility that was expected to be set up for manufacturing the Nano. However, as the company now has relocated its plant to Sanand, Gujarat, many of the vendors had no option but to relocate their units as well. While there is no official statement from the company, the compensation package is believed to be estimated at about Rs 2 bn (US$ 44 m). With this move, nearly 75% to 80% of the vendors’ incurred losses are likely to get recovered. However, at the same time, this compensation will not be in the form of cash. While these vendors are still in discussions on the nature of compensation, it is expected that Tata Motors would give options such as loans or higher prices for components as part of the compensatory package.

It must be noted that with the deadline of the production for the Nano likely to begin from next month (at the Sanand plant), the auto company would be doing all that it can to maintain its close relationships with its vendors. It is also reported that the company will not compensate its vendors in one go for their losses, but will do so in a phased manner.

Engineering stocks are currently trading mixed with Suzlon, Praj Industries and BHEL leading the pack of losers, while Voltas, Punj Lloyd and Crompton Greaves are trading firm. Engineering and construction major, Larsen & Toubro (L&T) has been awarded a contract worth Rs 9.8 bn from the Ministry of Defense. The scope of this order includes designing and manufacturing 36 high speed interceptor boats for the Coast Guard. This is part of the defense ministry’s initiatives to strengthen coastal security. These boats will be designed in-house at L&T's Ship Design Centre, which is part of its heavy engineering division. They will be constructed at the company’s shipyard at Hazira (Gujarat) and the new shipyard coming up at Katupalli near Ennore (Tamil Nadu).

It must be noted that L&T’s management has identified the defense sector as one of the key growth drivers for the company in the future. However, as of now the defense and shipbuilding segments of the company form a marginal part of the company’s order book

Smallcaps outperform larger peers
11:30 am

Though the markets made good part of their opening losses, they remained in the red during the previous two hours of the trade. Currently, stocks from the realty, consumer durables, metals and auto sectors are dragging the indices lower, while stocks from the healthcare, oil & gas, FMCG and telecom sectors are trading higher.

The BSE-Sensex and the NSE-Nifty are trading lower, shedding around 34 points and 16 points respectively. While the BSE-Midcap are trading in red, with BSE-midcap index down by 0.2%, BSE-Smallcap are trading in the green, up by 0.12%. The rupee is trading at 45.49 to the dollar.

According to a leading business daily, the Indian textile industry has big plans for the Latin American markets. The markets in Argentina and Brazil which are scouting investments in the Indian textile industry are organizing a Mega Textile & Clothing Exhibition around the end of this month. Around 22 of Indian Textile companies will be showcasing their products there. Given the huge size of the Latin American markets, we believe that this is a big step forward for domestic textile companies as they will be able to showcase and market their products to the fashion conscious buyers.

It may be noted that recession hit Indian textile industry is betting big on Latin American markets which provide huge potential of export expansion. Brazil and Argentina imported textile and clothing worth Rs 172.4 bn and Rs 72.9 bn respectively in FY09 out of which India's export share stood at dismal 12% and 6% respectively. Also Brazil and Argentina are major importers of man-made fiber (MMF). Their imports stand tall at about 30% and 42% in value of the overall global markets. The major exporters are China, Indonesian Pakistan and Republic of Korea.

Bharti Airtel is the top gainer on BSE currently. According to a leading business daily, the company has tied up the entire amount of US$ 8.3 bn (or Rs 377.6 bn) required to finance its proposed acquisition of Zain's African assets. As per the arrangement, the company will get US$ 7.5 bn in loans from a group of banks led by Standard Chartered Plc and Barclays Plz. Also SBI will give Bharti rupee loan worth US$ 1 bn which will cover the associated transaction cost.

It may be noted that Bharti is in exclusive talks with Zain till 25th March 2010 over the offer for acquisition. As of now it has indicated that, Bharti will pay US$ 9 bn for acquiring Zain's assets in 15 African countries and will take over US$ 1.7 bn of debt on Zain's book. Bharti already has a debt of Rs 19 bn on its balance sheet with a debt to equity ratio of around 0.26 times. Nevertheless, it is the only telecom player in India which has positive free cash flows. We believe that given its strong balance sheet, the company will be able to absorb the increase in debt. We believe this acquisition will aid to the future growth of the telecom service provider.

Mkts react to RBI's rate hike
09:30 am

The Indian markets have started today's session on a weak note. The benchmark indices opened below the breakeven mark and have not managed to break into the positive territory since then. Other key Asian markets are trading in the red with Hong Kong (down 1.9%) leading the pack of gainers. The US markets closed lower by 0.4% last Friday.

Currently in India, heavyweights from the BSE-Sensex are trading in the red with construction and banking stocks attracting buying interest. The BSE-Sensex is trading lower by around 90 points, while the NSE-Nifty is down by about 30 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 0.5% and 0.4% respectively. The rupee is trading at 45.49 to the US dollar.

Energy stocks have opened the day on a negative note. Losers here include Petronet LNG and Chennai Petroleum. Indian state owned energy companies have become quite active in scouting for oil and gas assets overseas. As per a leading business daily, Indian Oil and Oil India have been trying to takeover UK based Gulfsands Petroleum at around 400 m British pounds. Gulfsands has a strong focus on exploration in the Middle East, especially Syria. The company produces around 11,000 barrels of oil per day (bpd) in Syria and about 6,000 bpd in the Gulf of Mexico in the US. The takeover bid has not received a positive response so far primarily on the question of valuation. In our view, the takeover attempt is part of India's strategy to acquire oil assets abroad and strengthen its energy security. In fact, the Indian Oil and Oil India combine already have exploration blocks in Gabon, Iran, Libya, Nigeria and Yemen. They have also been pursuing assets in South-East Asia, South America, CIS countries and Russia.

Banking stocks have opened the day on a negative note. Gainers here include Dena Bank and Vijaya Bank. As per a leading business daily, India's largest bank SBI is marching ahead with its expansion plans. It plans to open 1,000 branches in FY11 to take the tally to over 13,000. The bank also plans to add almost 4,000 ATMs by the end of March to take the figure to around 25,000. SBI also plans to hire more than 27,000 employees across its various divisions during FY11 including 5,500 at the probationary officer level. In our view, this is part of SBI's efforts to acquire global size and scale.

Mkts set to react to RBI's move
Pre-Open

After last weekend's interest rate hike by the RBI, all eyes will be set today on how stocks react to the same. Showing that it's getting increasingly worried about rising inflation, the RBI raised interest rates late last Friday. It raised both the repo and reverse repo rates by 0.25% each to 5% and 3.5% respectively. It would thus be interesting to see how interest rate sensitive sectors like auto, banking, and realty react today.

We see these rate hikes as insignificant to impact the economic recovery. Some have even pointed that the rate increases have come later than they should have. Inflation already is taking a bite out of India's economy. Wholesale prices, the most watched gauge of inflation, have risen to around 10%. Consumer prices are rising at closer to 17% over the previous year's levels.

Now, given that the economy is showing some signs of recovering, demand is picking up pace. This is likely to add to the inflation that is not showing any signs of cooling off. Economists expect a recovery in manufacturing activity, and rising fuel prices to push inflation higher over the next few months. And not to forget the government spending program that many see as a precursor to higher inflation in the future. All in all, the RBI has a long way to go in its fight against the price rise, which has now moved from food to other essential commodities like fuel.

As such, the RBI's latest action can be seen as a sign of things to come. With the central bank getting uneasy about rising food and non-food prices, we foresee more such hikes over the next few months. The next could well come on April 20, when the RBI will meet to review its annual monetary policy.

Now, how will the markets react to the RBI's move is anybody's guess. Investors in auto and realty stocks might not like the central bank's move. Even if this rate rise is not going to make loans and credit expensive, one can still expect a knee-jerk reaction of the markets towards stocks from these sectors. This is considering that companies from these sectors flourish in a low interest rate environment, and suffer when rates rise.

Whatever be the reaction of the markets today, we advise you to not act in haste. Treat any correction in stock prices triggered by RBI's latest and future rate hikes as healthy. This is considering that these will bring valuations of good quality stocks at reasonable levels for you to buy into them.