Valuations keep investors edgy
Closing

Indian markets were on a roller coaster ride since the start of the session today. Anxiety over the upcoming earnings season and steep valuations seem to have made investors cautious. The RBI’s latest directive allowing FIIs to use government bond holdings as collateral for stock market transactions also failed to lift sentiment. Auto and capital goods stocks led the downward pressure on the indices.

While the BSE Sensex closed lower by around 90 points (0.5%), the NSE Nifty lost around 20 points (0.4%). Midcap stocks also closed lower with losses of 0.1%. Small caps, however, bucked the trend and closed higher by around 0.3%. Losses were largely seen in auto, power and engineering stocks. As regards global markets, Asian markets with the exception of India, China and Hong Kong closed firm. European indices have opened on a mixed note. The rupee was trading at Rs 44.45 to the US dollar at the time of writing.

As per Reuters, FIIs have already invested around US$ 4.5 bn in government bonds out of the maximum limit of US$ 5 bn. The RBI directive released today on their using G-Sec investments as collaterals does away with an earlier rule that only allowed cash to be used.

As per a business daily, Tata Steel, the world's eighth-largest steelmaker, expects demand for steel in India to rise 10-12% in the current fiscal, FY11. The Indian market accounts for a quarter of the company's global capacity of about 30 m tonnes. The company also sees hardening raw material prices as a major concern in FY11. During 3QFY10, Tata Steel posted a 21% YoY decline in consolidated topline even though GDP contraction has slowed in the western markets leading to better demand than the 2QFY10 lows. China and India continue to be the two bright spots in the world steel market. The group produced 6.2 m tonnes of steel, in 2QFY10 as well as 3QFY10.

PSU banking major Corporation Bank plans to increase its capital base to ensure sufficient room for growth. It plans to raise Rs 20 bn in FY11 through a combination of Tier-I and Tier-II capital. It is considering tapping the equity market next fiscal via a rights issue or a follow-on public issue and raise around Rs 30 bn. Further, the bank is targeting a loan growth of 25% YoY during FY11 and hopes to maintain a net interest margin of 2.6% (2.4% in 9mFY10). While Corporation Bank has been affected by lower treasury income due to hardening of interest rates, it expects to mitigate effect of the same through robust fee-based income growth.

Capital goods stocks lose favour
01:30 pm

After some signs of recovery, the benchmark indices reversed the trend and once again slipped below the dotted line during the previous two hours. While buying interest is seen in the FMCG and realty space, the stocks in the capital goods, PSU and banking sectors do not seem to be finding takers.

BSE-Sensex and NSE-Nifty are trading marginally lower while, BSE-Midcap Index is up by 0.2% and the BSE-Smallcap index is trading 0.7% above yesterday’s closing. The rupee is trading at 44.38 to the US dollar

Stocks in the power sector are currently trading weak with Tata Power being the biggest loser. According to leading news daily, Tata Power plans to produce 25,000 MW of power by 2017 up from 2,400 MW today. While several power companies are going for expansion, it may be still too early to think about competition as India is facing an acute power shortage. Nevertheless, Tata Power has made sure that its long term strategy is clear. The company intends to take advantage of the government’s incentive for solar power and has plans to take up the total power generated from clean sources from 20% today to 33% in the future.

Furthermore, the company is upgrading its transmission lines and is working on the long term charter of several ships to ferry its coal for the power plants. With Tata Power on an aggressive growth trajectory, we believe that there are several long term positives for the company.

Another sector whose stocks are trading weak is auto. The sector is being weighed down by Tata Motors, Maruti Suzuki and M&M. As per a financial daily, the automobile industry in India is set to slow down, with growth rates in 2010-11 in low double digits as a result of a high base effect in 2009-10. As per the Society of Indian Automobile Manufacturers (Siam), the auto industry is expected to see a growth rate between 10%-14% next year as compared to 26% in 2009-10. While the demand is expected to come from tier 1 and tier 2 towns, supported by several launches in the compact car category, the main concerns are the rising commodity prices and the expected increase in interest rates. Both these factors are expected to raise the cost of owning an automobile in the range of 4% to 6% this year.

Smallcaps continue to attract investors
11:30 am

Although still trading in the red, the markets did recoup a portion of the opening session losses during the previous two hours of trade. With the BSE-Sensex trading lower, it seems that the large cap stocks are seeing some pressure because the overall advance to decline ratio is poised at a healthy 1.6 to 1 on the BSE. As for the sectoral performance, stocks from the capital goods, banking and healthcare spaces are seeing the most pressure at present. On the other hand, stocks from the consumer durables, FMCG and realty spaces are amongst the top gainers.

The BSE-Sensex is trading lower by about 30 points, while the NSE-Nifty is trading lower by about 10 points. However, stocks from the midcap and smallcap space are trading higher with the BSE-Midcap and BSE-Smallcap indices up by about 0.1% and 0.7% respectively. The rupee is trading at 44.3 to the US dollar.

Engineering stocks are currently trading mixed with L&T, Punj Lloyd and suzlon trading weak while LMW, Siemens and Voltas are trading firm. A leading business daily reported that power equipment major BHEL is likely to pick a minority 25% stake in a joint venture with the Karnataka State Electricity Board (KSEB). This JV will mainly be for setting up a 1,600-megawatt (MW) power project in the state. The total investment in the project is estimated at about Rs 90 bn, which will have a debt-equity ratio of 80 to 20. Going by the data, BHEL will need to invest about Rs 5 bn in the project. The engineering company will be supplying equipment for the JV, which will execute the 2x800-MW coal-fired project. As per a company official, the companies will announce the JV within a period of one month.

The interesting part of the deal is that BHEL is entering the deal with an intention of securing the equipment order estimated at about Rs 60 bn. Furthermore, the company is also looking at exiting the JV once the project is commissioned. If this were the case it would be a strong positive for the company, as it would secure new orders worth Rs 60 bn. However, at the same time one should not forget that the company already has a order backlog of a whopping Rs 1.4 trillion to execute. While this Rs 60 bn order may not really make a big impact on its order backlog, on a standalone basis, the order size is quite big.

Pharmaceutical stocks are currently trading weak led by Dr. Reddy's, Glen Pharma and Biocon. The stock of Sun Pharmaceuticals is however amongst the top gainers of stocks forming part of the BSE-100 Index currently. Gains in the stock are on the back of the company’s subsidiary receiving a tentative approval from the US FDA (Food and drug administration) to market its Abbreviated New Drug Application (ANDA), Memantine tablets. Memantine is used for treatment of Alzheimer's disease. These tablets are a generic version of Forest Laboratories, Inc.'s, Namenda 5 mg and 10 mg tablets. This is a positive development for the company considering that these two strengths (5 mg and 10 mg) of Memantine have a combined annual sale of about $1.2 bn (about Rs 54 bn) in the US.

Weak start to the week
09:30 am

The Indian markets have started today's session on a negative note. The benchmark indices opened below the breakeven mark, moved into the green but soon dived back into the negative. Other key Asian markets are trading a mixed bag with Japan (up 1.1%) leading the pack of gainers. The US markets closed higher by 0.6% last Friday.

Currently in India, heavyweights from the BSE-Sensex are trading weak with software and banking facing the brunt of selling activity. The BSE-Sensex is trading lower by around 50 points, while the NSE-Nifty is down by about 15 points. However, buying interest is being witnessed among mid and small cap stocks as the BSE-Midcap and BSE-Smallcap indices are trading higher by 0.3% and 0.5% respectively. The rupee is trading at 44.21 to the US dollar.

Energy stocks have opened the day on a negative note. Losers here include GAIL and ONGC. As per a leading business daily, Reliance Industries has signed a joint venture with US based Atlas Energy. As per the deal, RIL will pay US$ 339 m upfront for its 40% stake. It will also contribute US $1.4 bn out of Atlas’ share of exploration expenditure over a period of eight years. Moreover, Reliance Industries will spend US$ 3.4 bn over ten years towards its own share of exploration expenditure. In return, the Indian petroleum giant will get access to shale gas technology. It also gets an option to operate in certain project areas, although Atlas will serve as the operator for the joint venture. The right of first offer of shale gas assets in case Atlas plans to sell any, also belongs to Reliance Industries. This joint venture comes after its efforts to acquire LyondellBasell and Value Creation failed.

Steel stocks have opened the day on a negative note. Losers here include Sesa Goa and SAIL. As per a leading business daily, SAIL and Posco are likely to sign a joint venture agreement by the end of next month to set up an estimated Rs 150 bn steel plant in Jharkhand. The government is willing to offer all support to expedite the project. The steel giants plan to set up a steel plant in Bokaro, where SAIL operates a 4.5 m tonne per annum (MTPA) facility. The existing steel plant is being expanded to handle 7.5 MTPA. The joint venture could set up a capacity to produce 1.5 MTPA of steel at an investment of Rs 150 bn. In our view, the South Korean steel major is keen on the project after its Rs 540 bn plant in Orissa has failed to take off for the past several years due to land acquisition issues.

War on Ulips: Is SEBI right?
Pre-Open

The war of words just got louder. We are talking about the fighting going on between the stock market regulator SEBI, and insurance regulator IRDA. The bone of contention is the regulation of 'Ulips' or unit linked insurance plans.

Ulips are possibly the single-biggest innovation in the field of life insurance in the past several decades. These are also one of the most mis-sold products in the insurance business. Considering that returns from ULIPs are determined by the stock markets, SEBI had been at loggerheads with IRDA as to who is responsible for regulating the product.

Last weekend, SEBI had banned 14 life insurance companies from selling Ulips without its approval. The IRDA retaliated. It later asked these companies to ignore the ban imposed by SEBI. It also asked them to continue their business as usual.

The big fight between these two regulators started when SEBI last month sent a show-cause notice to all life insurance companies asking them to explain why they hadn't taken its prior approval before launching Ulips. IRDA, for its part, considers Ulips under its purview. Further, it is in no mood to give in to SEBI's intervention in the matter. We believe that since Ulips have a big component that goes towards investments in various securities, it is not surprising that SEBI sees itself as a governing body for the same.

In fact, SEBI's intention is to get the insurance companies selling Ulips to register with it and sell their products after they receive the market regulator's prior approval. As Mint reports, "It (SEBI) does not intend to kill Ulips. So, invoking compliance rather than unsettling insurance companies was called for."

With the kind of sharpness SEBI has shown in recent issues concerning the stock market, we feel that any regulation from it in this matter would be a welcome move.