Markets remain largely rangebound
Closing

Although well into the positive, Indian markets largely traded in a range throughout the trading session today. While the BSE Sensex closed higher by around 49 points (up 0.3%), the NSE Nifty gained around 15 points (up 0.3%). Midcap and small cap stocks did better to notch gains of 1% each. While metals and banking stocks traded firm, oil& gas and auto stocks were at the receiving end.

As regards global markets, Asian indices closed mixed today. Most European indices have opened on a firm note. The rupee was trading at Rs 44.36 to the dollar at the time of writing.

Private banking stocks closed mixed today. While Axis Bank and HDFC Bank found favour, ICICI Bank closed in the red. Selling activity in the stock could be attributed to subdued results declared by ICICI Bank for FY10. Interest income fell by 17% YoY, while advances dropped by 17% YoY. Net interest margin (NIM) improved due to higher CASA proportion (42% of deposits). Operating costs dropped with cost to income ratio being at 38% in FY10 (44% in FY09). Capital adequacy ratio was healthy at 19.4% at the end of FY10. Net NPAs improved marginally to 1.9% of advances in FY10 (2% in FY09). Bottomline grew by 7% YoY due to lower operating costs. The company declared dividend of Rs 12 per share (dividend yield 1.2%).

Sun Pharma closed lower by 5% today. This could be attributed to the company announcing the US District Court’s decision of declaring the patent on Nycomed’s drug ‘Protonix’ (generic name is ‘Pantoprazole’) as valid. It must be noted that Sun Pharma had launched this product at risk in the US market in FY08 and had generated strong revenues and profits from this drug. Consequently, the overall performance in that fiscal was also enhanced. Now that the patent on ‘Protonix’ has been declared valid, there is a possibility that Sun Pharma may have to dole out damages although nothing has been divulged at present.

As per a leading business daily, India is not expected to meet its FY11 target of building roads as was originally envisaged. The original target was to build 20 km of road a day in FY11. It now appears that the country is likely build only 12-13 km of road a day. The reasons cited are problems in acquiring land and awarding contracts. In FY11, the transport minister Kamal Nath expects to build around 3,000 km of road. For this the investment required will be US$ 45 bn annually, 60% of which will come from the private sector. According to the government, India needs to spend US$ 500 bn in the five years to 2012 to overhaul its congested ports and airports, fix its potholed roads and generate more power to sustain an 8-9% growth in GDP. However, while the intention to improve infrastructure is there, execution will remain the key.

Metals prop up markets
01:30 pm

In the last 2 hours of trade the markets continued to trade in the green as buying activity continues. Heavy buying activity was witnessed in stocks in the metal space while investors were seen booking profits on stocks in the oil & gas and realty space.

The BSE-Sensex is trading higher by 74 points while the NSE-Nifty is trading 26 points above the dotted line. BSE-Midcap Index is up by 0.7% while the BSE-Smallcap index is trading 0.8% above yesterday's closing. The rupee is trading at 44.31 to the US dollar.

As per a leading financial daily, competition in the oral care space is set to heat up. Johnson & Johnson (J&J) is looking to launch a toothpaste under its Listerine umbrella while GlaxoSmithKline (GSK) is planning to relaunch its Aquafresh brand, phased out a few years ago. These launches are likely to happen by the end of the year. GSK has already launched Sensodyne, a toothpaste for sensitive teeth, at the beginning of the year. However, Aquafresh would be positioned in the mass market space and the brand will be held, along with Sensodyne, by GSK's 100% unlisted subsidiary in India. It may be recalled, Procter & Gamble (P&G) has already announced the launch of its toothpaste under the Crest brand while Future Group has launched a toothpaste under the Sach brand. As of now Colgate is the market leader in the Rs 44 bn oral care space, followed by HUL and Dabur. However, with the entry of new players in the oral care space, we expect to see a change in the dynamics of this market.

A leading business daily reported that the Indian services sector has recovered from the economic downturn. According to a survey conducted by industry body CII, the Indian services sector's higher growth trends in the last 2 quarters indicate that it has recouped from the slowdown. As per statistics, out of the 51 different service sectors CII tracks, 14% (which includes telecom and mutual funds industry) have reported an over 20% YoY growth in FY10. The sectors like retail trade, air passenger traffic, advertising, logistics, healthcare and education & training services registered growth in the range of 10% YoY to 20% YoY. Also, only 6% of the service sectors reported flatness in growth. Moreover, the proportion of sectors reporting de-growth has declined from 18% in FY09 to 2% in FY10. We believe that this recovery has been largely aided by government's stimulus package which kept the consumer demand strong.

Indices hold on to gains
11:30 am

On account of profit booking witnessed among index heavy weights, the Indian stock markets pared some of their early gains during previous two hours of trade. The stocks from the metal, consumer durables, banking and telecom sectors are leading the pack of gainers. Energy, healthcare and realty sectors are the only ones languishing in the red.

The BSE-Sensex and the NSE-Nifty are trading higher, up by around 64 points and 20 points respectively. The BSE-Midcap and BSE-Smallcap are also trading higher, up by around 0.6% and 0.7% respectively. The rupee is trading at 44.32 to the dollar.

Mid-tier IT firm, 3i-Infotech (3i) announced its FY10 results last weekend. The company’s topline grew by 5% QoQ and 7% YoY during 4QFY10 and FY10 respectively on account of revival in its software services and BPO business. Despite 1% YoY expansion of operation margins, 3i's bottom-line plummeted drastically by 88% YoY during the year. This largely happened on account of the company discontinuing its operations of several government projects which it signed in 2007.

It may be noted that in 2007, 3i signed 'Master Service Agreement' (MAS) with several state governments of India that required setting up and operating Citizen Service Centers across these states. However on account of adverse business environment 3i exited these agreements which entailed a compensation of Rs 109.2 m on these agreements. Further considering it unviable, 3i exited this line of business making the asset base amassed for these projects disposable. As these assets will be disposed at their realizable value, the company wrote them off resulting in a loss of Rs 2.6 bn. This severely dented the net profits for 3i. Excluding exceptional items, profits remained flat for FY10. Working with the government of India has not been any easy task ever. Nevertheless given the huge pool of opportunity that e-governance brings, it is important for Indian IT companies to learn this soon.

Procter & Gamble Hygiene and Health Care Ltd. (P&G) released its 3QFY10 results on Friday. The company posted a strong topline growth of 15% YoY. The topline growth was supported by strong performance of the company’s two segments, healthcare and feminine hygiene. The healthcare segment posted a 15% YoY growth led by strong sales of VICKS vaporub and VICKS cough drops while the feminine hygiene segment grew by 16% YoY. Growth of the feminine hygiene segment was aided by robust sales of Whisper Ultra, Whisper Maxi and Whisper Choice. P&G’s bottomline grew by 26% YoY during the quarter. Higher bottomline growth as compared to the topline comes on the back of lower costs of goods and lower advertisement expenditure as a percentage of sales. The company’s strong performance comes on the back of new product innovations and increase in distribution levels.

Positive start to the week
09:30 am

The Indian markets have started today's session on a positive note. The benchmark indices opened at the breakeven mark but quickly moved into the positive. They have managed to stay in the green since then. Other key Asian markets are trading in the green with Japan (up 2.1%) 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 strong with banking, auto and metal majors finding investors' favour. The BSE-Sensex is trading higher by around 84 points, while the NSE-Nifty is up by about 22 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 0.6% and 0.8% respectively. The rupee is trading at 44.45 to the US dollar.

Energy stocks have opened the day on a positive note. Gainers here include Cairn India and Gujarat Gas. Reliance Industries announced its FY10 results. The company posted a topline growth of 36% YoY during FY10 led by a 51% growth in the company's refining business. Revenues from the petrochemical business grew by 5% YoY, while the exploration and production business grew nearly 4 times during the year. Gross refining margins stood at US$ 6.6 per barrel during FY10, as compared to US$ 12.2 per barrel in FY09. Operating margins decline by 0.8% YoY to 15.9%. This is largely on account of higher raw material costs, as a percentage of sales. Net profits grew by 6% YoY during the quarter on the back of topline growth despite lower margins. During the year, the company entered into a joint venture with US based Atlas Energy, under which it will acquire a 40% interest in Atlas's Marcellus Shale acreage. Reliance also surrendered the EOU status of its refinery to allow domestic sales.

Banking stocks have opened the day on a positive note. Gainers here include Axis Bank and HDFC Bank. Recently teaser offers for home loans have been in the headlines. HDFC Bank and ICICI Bank have re-launched their offers. As per a leading business daily, the finance ministry may bar public sector banks from launching similar teaser loan schemes. In our view, the finance ministry is worried that these offers could start a rate war that will increase the bad loans of banks. It may be noted that among the public sector banks SBI, Canara Bank, Union Bank of India and IDBI already have teaser offers. Besides the risk of bad loans, we believe such rates are against the credit-tightening measures taken by the RBI. Interestingly, a more transparent 'base rate' system for loans is set to come into effect from July this year.

What will drive Indian markets?
Pre-Open

"Where do you think the markets are going over the next few days?" This is one oft-repeated question that you must be hearing, or asking, these days. We are also asked this question many times from those who write in to us. And our answer is always the same - "We have no idea."

Sure, we can make a guess. But our chance of being right would be about the same as anybody else's. What we can do is look at is the factors that can impact the markets positively or negatively in the short term. But that's all about it. Which factor will impact the markets more and which will impact them less is something that we can never predict with certainty. But let's try!

One factor that we think will impact Indian markets in the next few weeks is the March quarter result season. As it seems now, this quarter is likely to pan out better than the past few quarters. And it's not just about a lower base of the weak last year. Indian companies are seeing a gradual recovery in their businesses. Profits are also on the rise. And this time it's not just due to cost cutting. Companies are also seeing rising sales on the back of rising consumption. Investment demand is also picking up pace.

Overall, things look good for Indian companies as we see now. And that's good news for stock prices.

However, one factor that can cut short this recovery is the rising interest rates. With inflation not showing any signs of cooling off, higher interest rates is the only option left with the RBI. The RBI has already raised its key interest rates. But it has done this is small pieces while keeping a close tab on inflation. If food and non-food prices continue to rise the way are rising now, the RBI will have to take big steps to cool them down.

This we believe can impact profits of companies that have high debt on their books. Some of these are from high growth sectors like real estate and retailing. Companies from the power sector that are mandated to fund their expansion on a debt/equity ratio of 70/30 will also feel the pinch of rising interest rates.

As such, it is important for you to stay away from companies that have high debt on their books. Certain companies can mask their high debt levels by showing high growth rates in the short term. But this - high growth using high debt - is not the mantra for long term success. It's a toxic mix that can dent a big hole in such companies' performance during bad times. And you as an investor in them won't be spared either!