'Realty' bites the broader markets
Closing

What seemed like a recovery, after yesterday's reaction to the RBI's rate hike, did not last long today. After opening strongly into the positive, the Indian markets fell into the red as trading progressed. However, some late hour buying brought the markets back into gains. Buying in pharma and metal stocks brought some respite to the markets, which were otherwise hurt by selling in auto and realty stocks. The BSE Realty index was the w0rst performer today, as it fell by around 0.7%.

The BSE Sensex and NSE Nifty closed with marginal gains of around 40 points (0.2%) and 20 points (0.3%) respectively. Mid and small cap stocks followed suit. The BSE Midcap and BSE Smallcap indices closed up by 0.2% and 0.3% respectively. On the broader BSE, one stock gained for every one that closed in the red. The rupee was trading at 45.58 to a US dollar at the time of writing.

Energy stocks traded mixed today. While gains were seen in Cairn India and Petronet LNG, selling pressure marked trading in Castrol and BPCL. Gains in Cairn followed reports that the company has discovered new oil reserves in its Rajasthan oilfields. As per reports, this new finding is expected to be big and increase India's domestic oil production by about 23% in the next financial year (FY11). Cairn is one of the major players in India's hunt for energy within both the domestic and international territories. The company is accompanied by others like ONGC and Reliance, who are exploring new oil and gas findings to satiate the country's rising energy requirements.

Take the rising requirements of natural gas for instance. As per the findings from McKinsey, India's natural gas demand is expected to nearly double to 320 million standard cubic meters per day by 2015. This will require fresh investments of around US$ 40-50 bn across the gas value chain (exploration, transportation, delivery). All in all, India's energy hunt is getting exciting by the day. But investors must take note of the execution issues that accompany all such large scale investments.

Shipping stocks also closed mixed. GE Shipping led the gainers' list. Mercator Lines and SCI were in the red. Gains in GE Shipping (GES) followed reports that the company is looking to raise equity funds for its offshore subsidiary, Greatship, though an IPO. As per 9mFY10 numbers, this business currently forms around 21% of the company's total revenues and 19% of its PBIT (profit before interest and tax). As was indicated by GES' management in its last conference call, it is looking to spend US$ 400 m over the next 3-4 years to raise the capacity of the offshore business. A part of this funding has to come via the equity route, thus the need to raise fresh money. With crude oil prices expected to stay high, thereby leading to increased exploration activities around the world, demand for offshore vessels is likely to remain strong.

This might sound like music to infrastructure and related companies. The Prime Minister today hinted at doubling India's infrastructure spending to US$ 1 trillion in the 12th five-year plan (2012-2017). As it is widely known, the government had targeted to spend roughly US$ 500 bn during the current 11th plan period (2007-12) to spruce up its crumbling infrastructure. However, the deep global financial crisis that erupted in 2008 strangled foreign fund inflows, squeezing capital supply to fix the country's infrastructure. This made it obvious that India would miss its aim of targeted spending through the current five-year plan.

India's pain is not just execution of plans. Even domestic long-term financing of infrastructure projects is an issue. This is because Indian banks generally do not have long term resources to fund projects that take long to turn cash flow positive. Foreign fund flows are thus the need of the hour. However, the way these funds dried up during 2008 is a concern the government has to tackle before it starts implementing its dream spending plans.

Anyways, coming back to Dr. Manmohan Singh's latest remarks, he expects the Indian economy to achieve 8.5% growth in 2010-11 and 9% in 2011-12. But if the infrastructure build-up doesn't happen the way he sees, these targets might well be far-fetched! Anyways, infrastructure and related stocks closed mixed today. While gains were seen in Areva T&D, Siemens, and HCC, selling pressure marked trading in ABB and Pratibha Inds.

Realty, FMCG stocks lead the losers
01:30 pm

Profit booking took its toll on the Indian markets as they shed their morning gains and slipped into the negative territory during the previous two hours of trade. Investors were seen booking profits in stock from the realty, auto and FMCG space. However, stocks from the healthcare, oil & gas and metal have managed to garner some buying interest.

BSE-Sensex is trading lower by 50 points while NSE-Nifty is trading lower by 5 points. BSE-Midcap Index is trading marginally higher, while the BSE-Smallcap index is trading higher by about 0.3%. The rupee is trading at 45.59 to the US dollar.

Cement stocks are currently trading mixed with India Cements, Prism Cement and Shree Cement trading firm, while ACC, UltraTech and Ambuja Cement are trading weak. With a strong build up in cement capacities expected over the next coming years, cement manufacturers are likely to face an issue of over capacity. This would lead to a decline in realisation as the capacity build up is happening at a faster pace as compared to the actual growth in demand. During the month of February 2010, the capacity utilisation stood at 83% as against 92% recorded in the same period last year. However, a leading business daily has reported that cement manufacturers are planning to target rural markets for their next growth driver. This would also help them control realisations to an extent. Cement majors such as UltraTech, HeidelbergCement, ACC, Ambuja along with the relatively smaller players such as Shree Cement are all planning on taking up this strategy. These companies are implementing various strategies including expanding their retail and distribution network, amongst others.

The government has earmarked Rs 480 bn for rural infrastructure programmes under the Bharat Nirman. This development could clearly be the reason for the cement manufacturers to focus on rural markets. Rural markets do not really contribute a significant amount to the revenues of cement manufacturers. For example, Shree Cement earns only one-fifth of its revenues from rural markets. However, the company plans to raise this to about 40% over time.

Steel stocks are currently trading firm led by Jindal Steel, JSW Steel, SAIL and Tata Steel. Gains in this pack are on the back of reports of a fresh round of hike in steel prices. This is likely to be the case for both - long and flat products. A leading business daily has reported that these price hikes are on the back of a rise in international steel prices (by about US$ 100 per tonne) coupled with the overall pick up in demand. These price hikes are likely to take place from April 1 2010.

The cost of the key raw materials, iron ore and coking coal have also moved up by over 20% in the recent past. Further, they are expected to move up even more. Steel prices were hiked by about Rs 2,000 to Rs 2,500 per tonne during the month of February this year. There was slight increase in the price earlier this month on the back of a roll back in excise duty during the Budget.

L&T buoyed by defense order
11:30 am

After starting on a positive note, the Indian stock markets lost some traction during previous two hours of trade. They could not hold on to the opening gains and pared some of it on account of profit booking in realty, auto, telecom and FMCG sectors. Nevertheless, stocks from healthcare, metal, energy and consumer durable sectors are managing to find investors’ favor.

The BSE-Sensex and the NSE-Nifty are trading higher, up by 52 points and 20 points respectively. The BSE-Midcap and BSE-Smallcap are trading in the positive, up by around 0.43% and 0.75% respectively. The rupee is trading at 45.51 to the dollar.

According to a leading business daily, India’s largest engineering company L&T has won an order worth Rs 9.8 from the Indian defense ministry. This order will require L&T to design and construct 36 high-speed interceptor boats which will be used by the coast guards for patrolling the high seas. It will build these boats in its shipyards in Gujarat and Tamil Nadu with the expected delivery time of 18-19 months. It may be noted that the company is betting big on the defense sector as a future growth driver.

It may be noted that L&T has been involved in India-Russia project for building the supersonic cruise missile BrahMos and also in construction of a nuclear-powered submarine in association with the DRDO (Defence Research and Development Organisation). Given L&T’s experience of working with the defense sector, we believe that the company has lot to gain from the opening up of the defense sector to private players. The government’s trust creates a huge entry barrier to new entrants. However, the orders can be sporadic making the future prospects a little unpredictable. Engineering stocks like L&T, Crompton Greaves and BHEL are currently trading in the green.

According to a leading business daily, India's largest private sector lender ICICI Bank has got a Qualified Full Banking (QFB) status in Singapore. This means that the bank through its Singapore branch can launch full banking services in Singapore going forward. It may be noted that since 2003, the bank has been offering banking services like international loan syndication and corporate banking in Singapore. With the new QFB approval the bank will also be able to take deposits and disburse loans in Singapore. ICICI Bank believes that this is significant for the bank as it expects the client base to increase significantly in the market. This will also strengthen the bank’s footprint in terms of corporate, commercial, wealth management and direct banking services in the region. Though this appears to be a positive for the bank, we hope that it does not go over the board in aggressively tapping the market and as a consequence amass more bad debts on its books. Currently, the stock of ICICI Bank is trading lower.

Indian stocks up on global cues
09:30 am

After yesterday's weakness, the Indian markets have started today's session on a strong note. The benchmark indices opened today 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 Indonesia (up 1.5%) leading the pack of gainers. The US markets closed higher by 0.4% yesterday.

Currently in India, heavyweights from the BSE-Sensex are trading in the green with metal stocks attracting investors' interest. The BSE-Sensex is trading higher by around 85 points, while the NSE-Nifty is up by about 25 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 0.8% and 1% respectively. The rupee is trading at 45.53 to the US dollar.

Power stocks have opened the day on a positive note. Gainers here include Torrent Power and CESC. As per a leading business daily, the Comptroller and Auditor General of India (CAG) will examine the contracts entered into by NTPC with various suppliers and contractors. It seeks to find out the reasons for the delays in implementation of NTPC's power projects. More than a dozen large projects of the thermal power giant are stuck at various levels of implementation, due to contractual loopholes. Such loopholes are responsible for the commercial disputes in projects like the Barh Stage-I project in Bihar and the Sipat-I project in Chhattisgarh. In our view, this is a much needed exercise as NTPC is the single largest driver of India's power capacity addition program. It was supposed to add nearly one third of the 78,000 MW target in the 11th plan.

Auto stocks have opened the day on a positive note. Gainers here include Escorts and Eicher Motors. As per a leading business daily, Tata Motors has signed an agreement with the Myanmar government for setting up a heavy truck plant with an initial capacity of 1,000 vehicles per year. The capacity will subsequently be expanded to 5,000 units per year. The plant is expected to be operational by the last quarter of FY11. It will be funded by a line of credit from the Indian government. It may be noted that Tata Motors has given a significant thrust in recent years on increasing its geographical presence. Currently, the company has developed its presence in several countries in the European, African, South American, South East Asian and Middle East regions.

Tough times ahead for central banks
Pre-Open

The road ahead looks tough for the developed nations. The subprime crisis may have laid bare the excess debt on the books of companies but this disease has now spread to governments as well. What is more, John Lipsky of the IMF is of the view that advanced economies face 'acute' challenges in tackling high public debt. Further, he opines that unwinding existing stimulus measures will not come close to bringing deficits back to prudent levels.

In fact, it is expected that all G7 countries, except Canada and Germany, will have debt-to-GDP ratios close to or exceeding 100% by 2014. Stimulus measures have obviously lent a hand in widening the deficit but the consensus is that even if governments choose to withdraw the same, it will not have much of a meaningful impact on the overall debt position of countries.

And if you thought that this problem is contained only within the rich world, that appears not to be the case. Lipsky says that government debt in some emerging nations has also reached 'worrisome' levels. While inflation is not the chief concern in the developed world for the time being since most countries are yet to come out of the slump, it could be a bigger problem in the longer term. This would be especially so if the governments stick to their expansionary monetary policies for a much longer time and print more money to counter the recession.

In the emerging nations, higher inflation has already made its presence felt and have kept central banks on their toes. Emerging nations, more specifically BRICS, have not been hit hard by the crisis as the rich world has. As a result, a deadly cocktail of stimulus measures, relaxed monetary policies and abundant liquidity has jacked up the prices of many asset classes. Indeed, it is obvious that whatever be the circumstances, central banks all over the world will see their mettle tested in the coming months.

China could roll back stimulus

Just as US and China are exchanging heated words due to the latter's policy of pegging the yuan to the dollar, China seems to be considering a gradual rollback of its gargantuan stimulus package of US$ 586 bn last year. Having said that, the dragon nation has not set any deadline with respect to the same. It may be noted that the global financial crisis hit China's exports sector very hard and lowered the economy's growth rate. The impact was greater as compared to India simply because China's economy did not have the benefit of strong domestic consumption as India. In addition to the massive doses of liquidity into the country, Chinese banks also resorted to indiscriminate lending to spur consumption. The latter especially proved poisonous as this easy money began to find its way into stockmarkets and real estate the prices of which have reached unjustifiable levels.

The Chinese government as a result resorted to raising the reserve requirements of banks to cool down its economy. Little wonder then that concerns of the Chinese bubble bursting is making the headlines every other day. And while China has a lot of issues to deal with, the US is beginning to breathe hard down China's bank to make the latter let its currency appreciate against the dollar. Whether China will choose to comply given the precarious state that the country's exporters are still in is anybody's guess. But it does seem that the country will have to take some serious steps in preventing its economy from overheating.