Goldman scam rocks Indian markets
Closing

The impact of the crisis surrounding the US financial giant Goldman Sachs spilled onto the Indian markets today. It was not only the benchmark indices that traded weak. Even the overall market breadth was sluggish. On the broader BSE, more than two stocks lost ground today for every one that closed in the positive. Indian markets were though not the worst performer within Asia. China (down 4.8%) and Japan (down 1.7%) performed even worse. European markets have also opened in the red.

The BSE Sensex and NSE Nifty closed with losses of around 190 points (1.1%) and 61 points (1.2%) respectively. Mid and small cap stocks followed suit. The BSE Midcap and BSE Smallcap indices closed down by 1% and 1.5% respectively.

Metal stocks were the worst hit today, as stocks like Tata Steel, SAIL, and JSW Steel fell sharply. Selling in these stocks was on the back of reports that the government is looking to put pressure on steel companies to limit price hikes. In fact, the steel ministry has called a meeting of all the major steel producers this week to advice them against raising the price of the metal that is a key input of many industries. The government’s intention behind this is to control inflation that has already gotten out of shape. The wholesale price index based inflation was almost into double digits in March (at around 9.9%). The government fears high inflation to continue in the coming months on the back of rising commodity and fuel prices.

Realty stocks also closed deep in the red today. Ansal Housing and DLF closed with big losses. With the monetary policy meeting scheduled for tomorrow, there are fears that the RBI will raise interest rates on property loans. This will have a negative impact on realty demand given that customers are yet to come out of the slowdown blues. Small realty companies will be worst hit as consolidation intensifies within the sector. The sector is reeling under oversupply, especially in the commercial real estate space. Now if interest rates were to rise from here on, which they are most likely to, this will act as nail in the coffin for players that still have stretched balance sheets.

Energy stocks also closed weak. Key losers here included Cairn India, ONGC, and Castrol. Selling in Castrol was despite reports that the company is looking to double its volumes from the premium segment of the auto lubricant market. This move must not be seen as just a way to improve margins, but also as a reaction to competition that is fast catching up pace. As reported, Castrol is looking at sprucing up its marketing and promotions to meet its growth target. The company had recently announced results for the first quarter ended March 2010. Therein, it had reported sales and net profit growth of 29% and 54% YoY respectively. The company saw its operating margins rise to 27.4% on the back of lower raw material costs.

Banking stocks somewhat bucked the trend today, and closed mixed. Gains were seen in Yes Bank and Axis Bank. However, selling pressure marked trading in HDFC Bank and ICICI Bank. As per a leading business daily, HDFC Bank, India’s second largest private sector bank, has edged its bigger rival ICICI Bank to the top spot in retail loans in March 2010. The former lent out Rs 13 bn in auto loans, Rs 12 bn in home loans, and Rs 4 bn in commercial vehicle loans during March. As compared to this, the lending for ICICI Bank stood at Rs 3 bn, Rs 7 bn, and Rs 2 bn respectively.

This is the clear impact of ICICI Bank going slow in lending after a maddening past 3-4 years where it emerged as the most aggressive lender in India, and paid for this aggressiveness in the form of sharp rise in NPAs. HDFC Bank, on the other hand, did not follow its larger peer in terms of aggressiveness but kept a tight lid on bad loans.

Infosys outlines European plans
01:30 pm

Though the markets made good part of their losses during the previous two hours of trade, they continued to languish deep in red. Amidst broad based selling activity, the stocks from metal, realty, energy, FMCG and power sectors are the biggest losers.

The BSE-Sensex and the NSE-Nifty are trading lower, down by around 180 points and 60 points respectively. The BSE-Midcap and BSE-Smallcap are also trading lower, down by around 1.2% and 1.6% respectively. The rupee is trading at 44.59 to the dollar.

According to a leading business daily, India's second largest motorcycle manufacturer, Bajaj Auto has increased its stake from 31.9% to 35.7% in the European power bike maker, KTM. The Indian automobile company has invested € 20 m (or Rs 1.2 bn) in order to raise its shareholding in Austria based KTM Power Sports AG which is the second largest motorcycle maker and world's largest Off-Road Bike maker. This increase in shareholding was a part of a loan conversion and rights issue programme.

It may be noted that in 2007, Bajaj Auto acquired 14.9% stake in KTM for around Rs 3 bn. It has been slowly increasing its ownership in the company. By the end of 2008, Bajaj Auto owned 25% stake in KTM. The two partners signed an agreement to jointly develop 125 cc bikes which are manufactured in Bajaj Auto's Pune facility for exports to European markets under KTM brand. It is believed that the joint venture is panning out well and anticipates launching its products in the European market within 1 year. Bajaj will also distribute KTM's products in India and other markets like Sri Lanka, Bangladesh, Indonesia and Africa.

As per a leading business daily, India's second largest IT exporter, Infosys which has been a relative laggard in terms of acquisitions in the recent past, is eyeing strategic acquisitions in Europe. The company while highlighting its 'two-pronged strategy' for the European markets has indicated that it is looking at companies with revenues in the range of US$ 100 m to US$ 300 m in UK, France and Germany. In UK, the company plans to acquire small firms catering to specific industry verticals or ones owning some significant Intellectual Property (IP) or platform. In Germany and France Infosys is targeting companies having capability for enterprise applications and consulting. The company is witnessing significant traction in Switzerland and Nordic countries where it primarily caters to medium and large enterprises.

It may be noted that at end of March, 2010 Infosys had a huge cash reserve of US$ 3.5 bn. We believe the cash rich company has a lot of opportunity and capability to scale up its operations in Europe. Lack of technology talent pool in Europe is compelling more and more organisations to embrace IT outsourcing and off-shoring to destinations like India.

Metals weigh heavy on markets
11:30 am

Indian markets failed to recover from the range-bound activity during the previous two hours of trade as index heavyweights continued to remain under pressure. While stocks across sectors are being subject to profit booking, stocks in the metals space seem to be particularly out of favour.

BSE-Sensex is trading lower by 241 points while NSE-Nifty is trading 79 points below the dotted line. BSE-Midcap Index is down by 1.5% while the BSE-Smallcap index is trading 1.7% below last week’s closing. The rupee is trading at 44.58 to the US dollar

According to a leading financial daily, P&G has filed a petition for contempt of court against HUL. This is the next round of the Rin-Tide advertisement face-off. The point in contention is the new advertisement being aired for Rin. Although, unlike the last advertisement for Rin, the name of the competing brand is not shown, the models used are the same. This is providing a clear association with the previous advertisement. It may be recalled that HUL launched its first combative advertisement with Rin openly challenging P&G’s Tide. P&G had filed a court case and had got HUL to stop airing the advertisement. It looks like the fight for the Rs 45 bn detergents market is set to become even dirtier.

HDFC Ltd. has renewed its teaser home loan offering with a dual rate scheme. This is seen as a step by the company to protect its market share. The company’s biggest competitor, SBI had previously extended its teaser home rates till end of April. It may be recalled that most banks had stopped the special home rate schemes in January when the interest rates had started showing a rising trend. However, SBI and HDFC had continued with these schemes.

HDFC has chosen a short tenor for its special loan scheme as it expects a policy hike to come through with the monetary policy being announced on the 20th April. Loan disbursement for HDFC has been its best in March 2010 making it the top private lender. Nevertheless, this teaser home rate may pressurise the company’s NIMs as well as having an impact on NPAs in the medium term.

Weak start to the week
09:30 am

The Indian markets have started today's session on an extremely weak note. The benchmark indices are currently deep into the red. Other key Asian markets are trading in the red with China (down 2.7%) leading the pack of losers. The US markets closed lower by 1.1% last Friday on the news of the SEC suit on Goldman Sachs.

Currently in India, heavyweights from the BSE-Sensex are trading weak with construction and metal majors bearing the brunt of selling activity. The BSE-Sensex is trading lower by around 180 points, while the NSE-Nifty is down by about 60 points. Selling is also being witnessed among mid and small cap stocks as the BSE-Midcap and BSE-Smallcap indices are trading lower by 1.2% each. The rupee is trading at 44.6 to the US dollar.

Auto stocks have opened the day on a negative note. Losers here include Escorts and TVS Motor. As per a leading business daily, M&M is eyeing a double-digit growth for its two-wheeler business in the next two years. The company took over the two-wheeler business of Kinetic Motor in 2008. Since then, it has launched three 125 cc scooters - Rodeo, Duro, and Flyte. The company has a production capacity of 500,000 to 600,000 units per year. It has a market share of 8% in the two-wheeler industry. The company has 350 dealers across India and plans to add 50 more this year especially in the small towns. It also plans to step up its exports, which is currently limited to Bangladesh, Nepal and South Asia. In our view, the scooter segment could be a surprise story at a time when most large two-wheeler players are focusing on motorcycles.

Energy stocks have opened on a negative note. Losers here include Castrol and Cairn India. As per a leading business daily, Chennai Petroleum has stalled its plans to build a new 300,000 barrels per day (bpd) refinery at Ennore, Tamil Nadu. It has not received environmental clearance from the government for the site. In fact, Cuddalore has been proposed as an alternative site. The company is going ahead with the expansion of its existing 210,000 bpd refinery at Manali, Tamil Nadu. It also plans to improve the refinery's ability to process sour crude from 70% currently to 85% by FY14. The company has a capex plan of around Rs 15 bn for FY11 as compared with Rs 10 bn in FY10. It may be noted the profitability of standalone refiners depends on global spreads between crude oil and various petroleum products.

Indian markets can triple by 2020
Pre-Open

Foreign long term investors are looking at Indian markets with high level of interest. This is especially as they look out for fast growth options outside their own markets that are in stagnation. India definitely holds a lot of promise to them. This is due to the speed at which India is growing and the opportunities that she is springing up for global investors.

However, despite the 'growth' carrot, there are few concerns that foreign investors have as they see India as an investment option. One is the low depth in our equity markets that do not have the capacity to absorb large amount of inflows. And two, the low level of retail participation that has led to the Indian markets having less breadth. Add to this the high costs of trade and insignificant participation by India's own long term investors like pension funds.

But if India can get over these issues, our markets can triple in size by 2020. This is a view outlined by FICCI-McKinsey study. The study also outlines that India's stock markets have risen over six fold in the last 10 years despite these challenges. The country has also seen a number of regulatory reforms and has witnessed the launch of many financial products. But all this is past now. If the country is to see its financial markets reach the next level of growth, the above issues have to be taken care of.

We also believe so. There's no denying that India must embark on major reforms to expand the retail customer base. Or our markets will continue to depend on the mood swings of short term foreign investor. As we see now, FII inflows form more than 70% of the trading volume of Indian equity markets. This must reduce if we are to see less volatility in our markets.

Apart from this, the FICCI-McKinsey report suggests, "Moving the Indian pension fund market closer to international levels could potentially create equity inflows of up to Rs 2,500 billion at current levels." This is big money, and can change the face of India's financial markets.