Not much fuss over rate hikes
Closing

Although the markets did go down post the announcement of RBI's monetary policy, it still managed to end the day comfortably in the positive. While the BSE Sensex closed higher by around 60 points (up 0.3%), NSE Nifty closed with gains of around 25 points (up 0.5%). BSE Midcap and Small cap indices fared even better, edging higher by more than 1% each. On the Sensex, two stocks gained for every one that declined.

Asia closed mostly in the green today while Europe has also opened on a strong note. The rupee was seen trading at Rs 44.5 to the dollar at the time of writing.

First, it was the Goldman fiasco that threatened a small degree of correction. Although the markets did tumble yesterday, they came out pretty strongly today, indicating that the entire episode was but a small blip. And now, even the RBI rate hike is looking like it may not have a major impact on the markets. All these are pretty bullish signals for the near term movement of the markets. Looks like the uptrend will continue for some time. While this may look good in the short term, we would set up ourselves for a prolonged medium term pain if the trend persists. For higher the markets go in the near term and the more they move out of whack with fundamentals, the bigger the fall is likely to be. We may not have to go a long way back to illustrate the same with a real life example. Hence, caution remains the buzzword as far as we are concerned.

Another factor that must have enthused markets is RBI's bullish undertones with respect to economic growth. For FY11, the central bank has pegged India's GDP growth at an impressive 8%. This, even as the bank goes about its business of hiking interest rates. The central bank feels that India's exports have been growing and with the industrial sector recovery also being broad based, there is no reason to assume that India will grow at below 8% in the current fiscal. Besides, the corporate sector has also recorded an improved profitability, which is reflective of the improved performance of the industrial sector, the RBI is believed to have said.

L&T, the private sector engineering behemoth ended in the positive on the bourses today. As per the company's senior management, the company is looking at bidding for airport projects in West Asia. If successful, this could open up yet another front for the company in terms of growing its revenues, especially at a time when its order book is already very healthy. Nonetheless, the company sees this as an extension of its core activity and hence, the interest. It should be noted that such projects are normally in the range of US$ 1 bn to US$ 1.2 bn and L&T is not the only Indian company that will be looking to do this. Companies like GMR Group have already undertaken a similar development work in the past.

TCS down despite good performance
01:30 pm

The Indian markets continued to move upwards though at a muted pace during the previous two hours of trade. The sustained buying activity witnessed in the stocks from the realty, banking, auto, energy and metal sectors aided the indices in upward march. However, stocks from telecom and IT sectors traded in the red.

The BSE-Sensex and the NSE-Nifty are trading higher, up by around 148 points and 51 points respectively. The BSE-Midcap and BSE-Smallcap are also trading higher, up by around 1.6% and 1.8% respectively. The rupee is trading at 44.57 to the dollar.

India's largest IT services exporter, TCS declared its FY10 and 4QFY10 results yesterday. The company posted an excellent topline growth of 8% YoY for FY10 on back of 17% YoY increase in volumes. Despite the headwinds of appreciating rupee, TCS managed to expand its operating profit margins by 3.2% YoY through better cost management and improved utilization levels. It bottomline surged by 33% YoY during FY10 on back of volume growth and operating efficiency, also aided by increase in other income component. On a sequential basis, the revenues and net profits grew by 1% QoQ and 10% QoQ during 4QFY10.

The management of the company has hinted at a robust deal pipeline particularly in the BFSI (banking, financial services and insurance), retail and healthcare verticals. IT spending appears to be in for a significant increase in geographies like North America, Continental Europe and India. However, industry verticals like manufacturing, telecom and hi-tech and geographies like the UK continue to remain a concern for the company. Nevertheless, we believe that robust growth numbers posted by the two largest Indian IT companies suggest of a sustainable recovery of global demand for IT services.

State-owned engineering major BHEL, has won a Rs 63 bn worth contract for setting up a 1,600 mw supercritical power plant in Karnataka from Raichur Power Corporation (RPCL). This end-to-end project requires BHEL to design, engineer, manufacture, supply, erect as well as commission two coal-fueled thermal power units of 800 mw each. This is a significant order for BHEL as it is the biggest ever order to supply equipment to any single project.

It may be noted that RPCL is a joint venture between Karnataka Power Corporation (KPCL) and BHEL and this is BHEL's first order from this JV. BHEL which is already implementing supercritical power projects for companies like NTPC, Apgenco, Jaypee Group is expecting order flows to increase significantly going forward. It plans to aggressively expand its manufacturing capacity from 15,000 mw to 20,000 mw in the coming years. We believe that though BHEL's order book looks extremely well placed, it is its ability to swiftly execute these orders that will determine the company's fortunes going forward.

Realty leads the rally
11:30 am

Investors seem to be making the most of the correction witnessed in yesterday's trade as stocks across sectors have found favour since the start of the session today. Select stocks in IT sector, however, are eliciting very little interest. Stocks in realty and banking space are seeing the maximum buying interest.

BSE-Sensex is trading higher by 130 points while NSE-Nifty is trading 44.8 points above the dotted line. BSE-Midcap Index is up by 1.9% while the BSE-Smallcap index is trading 1.6% above yesterday's closing. The rupee is trading at 44.54 to the US dollar

As per a leading financial daily, Tata Steel is close to aborting its plan to sell the Teesside unit of Corus. This is due to the difficulty in finding buyers. Prices of iron ore and coal, for which contracts are typically fixed in April have surged by 60-90% on the back of sharp demand revival in China and India. This has inflated costs for companies that buy iron ore and coal to make steel. However, the Teesside unit makes intermediate steel products. The demand for which is still to pick up. This coupled with increase in raw material costs has made the unit unattractive for buyers.

It may be recalled, the 3 m tonne Teesside unit has been temporarily closed since January. The recession in UK and the walking away of a customer who had contracted to buy 80% of the units' production forced the closure, putting 1,600 workers out of work. This led to union labor problems for Tata Steel and the company has been looking for buyers since. Tough times for Corus are not yet over as the steel demand in Europe is still weak. Furthermore, inability to service the debt covenant, expected to resume from the 4th quarter can result in prepayment of debt or increase in interest costs, further hurting the company.

Hero Honda Motors released its 4QFY10 and FY10 results. The company had one of the best quarters in its history posting a net profit of Rs 5.9 bn, a growth of 49% YoY. The sales for the quarter registered a 20% YoY jump with volume sales of 1,186,536 units, the highest for any quarter. The growth in the quarter is due good demand and advance buying in anticipation of increase in excise duty in the budget. For the year, the net profit surged by 74% YoY while sales grew by 28% YoY. This performance was aided by 23.6% YoY increase in unit sales during the year. Hero Honda's operating (EBITDA) margin improved by 3.3% to 17.4% as a result of higher production from units in excise duty and tax exempt zones.

Going forward, the company hopes to maintain the growth momentum albeit at a slower pace due to the base effect and the partial role back of the stimulus. In FY11, the company expects to grow in line with industry and sell 5 m units. The company plans to incur a capex of Rs 3-3.5 bn for FY11 to increase capacity and upgrade its plants. The company plans to increase its production capacity from 5.4 m units to 5.7 m units during the year to cater to increase in demand.

Markets start on a positive note
09:30 am

The Indian markets have started today's session on a positive note. The benchmark indices opened at the breakeven mark, but soon darted into the positive where they have been able to stay since then. Other key Asian markets are trading in the green with Hong Kong (up 0.6%) leading the pack of gainers. The US markets closed higher by 0.7% yesterday.

Currently in India, heavyweights from the BSE-Sensex are trading strong with auto and metal majors finding investors' favour. The BSE-Sensex is trading higher by around 42 points, while the NSE-Nifty is up by about 15 points. Buying interest is also being witnessed among mid and small cap stocks as the BSE-Midcap and BSE-Smallcap indices are trading lower by 0.7% and 1% respectively. The rupee is trading at 44.6 to the US dollar.

Pharma stocks have opened the day on a positive note. Gainers here include Dishman Pharma and IPCA Labs. As per a leading business daily, Cipla has developed three low-cost generic medicines to treat blood pressure, allergic rhinitis and control excessive bleeding in women during delivery. The first drug is a combination of hypertension drugs and is branded as Cresar AM. The second drug is for the inflammation of nasal passages and is branded as Furamist Aze. The third drug is a 600 microgram tablet branded as MisoProst priced at Rs 52 per pill. It will help in reducing delivery related deaths especially in rural hospitals. Cipla plans to sell the new products in India and markets where the drugs lack patent protection. It may be noted that the company recently sold its over the counter, emergency contraceptive drug i-pill in order to better concentrate on its generics business.

Steel stocks have opened the day on a positive note. Gainers here include NMDC and JSW Steel. As per a leading business daily, the plans of SAIL and Posco to set up a steel plant in Bokaro, Jharkhand have hit roadblocks on the question of location and control. Posco wants a controlling stake as it will provide the FINEX technology and capital expenditure for the steel making facility. SAIL wants the controlling stake as it will provide land and infrastructure around its existing plant. There is also a view that this joint venture should not interfere with the brownfield expansion at existing plant. There are also issues regarding pricing of iron ore, valuation of SAIL's contribution, manpower related issues. These issues will be tackled by a joint task force. In our view, both the parties will be keen at the end of the day. Posco has made little progress in its project in Orissa. SAIL would want access to the latest technology.

All eyes today on the RBI
Pre-Open

The RBI will be releasing its monetary policy today and there are expectations of a hike in interest rates as high inflation continues to persist in the Indian economy. Having said that, while these are measures that would tone down inflation in the near term, certain issues will have to be addressed to ensure that inflation in the longer term is on the lower side. This will have to be done by doing away with certain roadblocks that have hampered India's growth. These are inadequate power capacity, roads and ports all of which also play a role in driving up prices.

In the past one year, poor monsoons pushed food prices higher. But of late a trend of rising non-food inflation has also been observed. This is because domestic demand pressures are building in the Indian economy without a commensurate increase in capacity creation. Plus, rise in global commodity prices has meant that non-food inflation is likely to stay on the higher side.

Consider these statistics. As reported on Bloomberg, India produces about 10% less electricity than it needs. As far as roads are concerned, while they account for 65% of the nation's cargo, they are plagued by single lanes and irregular surfaces. This then boosts companies' costs. Infrastructure spending accounts for just 4% of India's GDP compared with 9% in China. Increasing costs for commodities such as oil are also fuelling price pressures given that India imports around 70% of the oil that it consumes. Infact, crude oil prices have surged 70% in the past year.

Thus, the inflationary trends strengthen the case for a hike in interest rates. And all eyes will therefore be on Mr. Subbarao when the monetary policy is outlined later today. But in the longer term, taking serious steps towards removing infrastructural roadblocks will go a long way in bolstering the health of the Indian economy.