China concerns spook investors
Closing

Although the markets did recover some lost ground and came off the day's lows during the final hours of closing, they still ended the day significantly in the red. While the BSE Sensex lost in the region of around 170 points (down 1%), Nifty edged lower by around 55 points (down 1%). BSE Midcap and Smallcap indices were also not spared as both of them declined by around 0.5% each. On the Sensex, six stocks declined for every one that ended in the green today.

Weakness was also seen amongst most Asian stocks today whereas Europe is also trading in the red currently. The rupee was seen trading at Rs 44.6 to the dollar at the time of writing.

Investors are eagerly awaiting the next catalyst to drive growth but sadly, it appears nowhere in sight. Just as problems with respect to Greece showed signs of abating, a couple of new issues have emerged. The most important being China asking its banks to set aside more money in the form of reserves as it seeks to cool down property price and rein in inflation. The problem with such measures is that while the authorities have all the good intentions of bringing about a soft landing, more often than not, hard lending is the norm and this has thus spooked investors. A hard landing for China could create a ripple effect with asset prices across the globe coming in for some sharp correction. While Indian stocks could also come under selling pressure, we believe that slowdown in countries like China and the developed markets would be positive for the economy. We say so because not only is India less dependent on exports it is also hugely reliant on import of commodities like oil that will become a lot cheaper with the onset of the crisis.

The overall market sentiments got the better of the stock of Bajaj Auto, which opened the day on a positive note, but closed, marginally in the red. The stock ended lower despite the company recording its highest ever monthly sales during April 2010. Total sales volumes stood at 313,472 units as compared to about 169,119 units during the same month last year.

This is a growth of about 85% YoY. Motorcycle sales, which contributed to nearly 88% of total volumes, grew by 84% YoY. Three-wheeler sales grew at a faster pace of 98% YoY. However, the key factor was the increase in exports. Total exports during the month formed about 35% of total sales volumes as compared to about 30% during April 2009. Export sales volumes increased by 120% YoY. It must be noted that the export numbers include that of two and three-wheelers. During the preceding month i.e. March 2010, the total sales volumes stood at 274,233 units, translating into a growth of 14% on a month on month basis.

Plastics major, Sintex announced its FY10 results late last week. The company reported a 6% YoY growth in its sales while net profits have grown by 1% YoY. Growth in sales has been primarily driven by the plastics division that saw its sales rise 8% YoY during the year. Sales of the textile division fell by 7% YoY. The company also saw some pressure on its operating margins, which dropped marginally to 16.2% in FY10. This was owing to a rise in raw material costs. Further, higher depreciation led to net profit growing at a slower pace than sales growth for the year. The company has recommended a dividend of Rs 1.2 per share and also a stock-split in the ratio of 2:1. One share of Rs 2 face value will split into two shares of Re 1 face value. Sintex's stock closed weak today. Other notable mid-cap losers included GSK Consumer, HCC, and Exide.

Strong selling takes Sensex lower
01:30 pm

Strong selling activity led the Indian indices to drop further into the red during the previous hour of trade. The overall market breadth seems pessimistic as the decline to advance ratio is poised at 1.4 to 1 on the BSE. Selling activity is seen in stocks across the sectors led by metal, capital goods and power stocks. IT stocks are also seeing some pressure. Stocks from the healthcare and auto spaces are amongst the lowest losers.

BSE-Sensex is trading lower by 160 points while the NSE-Nifty is down by about 35 points. Pressure is also being seen in stocks from the mid and smallcap spaces as the BSE-Midcap Index and the BSE-Smallcap indices are trading lower by 0.4% and 0.2% respectively. The rupee is trading at 44.6 to the US dollar.

Auto stocks are trading mixed with Bajaj Auto and Ashok Leyland trading firm, while Tata Motors and Eicher Motors are trading weak. Maruti Suzuki announced its sales numbers for the month of April 2010 recently. The total sales volumes stood over 93,000 units. The same figure last year stood at about 71,450 units translating to a 30% YoY increase. The increase in volumes largely came from the company’s C segment (11% of total sales volumes), A2 (60% of total sales volumes) and A3 segment (11% of total sales volumes), which saw a volume increase of 38% YoY, 21% YoY and 41% YoY respectively. Exports grew at a strong pace of 89% YoY and contributed to about 14% of total volumes. During April 2009, export sales formed about 9.5% of total sales volumes. Domestic sales volumes grew at a pace of 23% YoY during the month.

Considering that the company’s closest rival Hyundai Motor India’s total sales volumes grew at a pace of 17% YoY, this definitely is a good performance by Maruti. The general belief is that customers do not seem to be really worried about the hike in prices of vehicles. However, it is quite possible that the industry will not be able to sustain a very high increase in sales volumes if the input prices move upwards.

IT stocks are currently trading mixed with Infosys and HCL Technologies trading weak while Wipro and Tech Mahindra are trading firm. Tech Mahindra announced its fourth quarter and full year results recently. The company reported a marginal drop in revenues during the quarter (on a sequential basis) during 4QFY10. This was mainly on the back of reduced volumes in its ‘Telecom Service Provider (TSP)’ segment. Operating margins during the quartet remained flat at 23.6%. However at the bottomline level, the company was able to grow its profits by 31% QoQ. This was mainly due to higher other income. In addition, lower interest costs aided the bottomline growth. As for the full year numbers, sales improved by about 4% YoY. This was mainly due to improved volumes across all segments. Profits however dropped by 31% YoY on the back of a poor operating performance. The company’s operating margins declined by 4.2% YoY on the back of higher operating expenses and rupee’s appreciation against the US dollar. Plus, a very large increase in interest costs brought down the bottomline of the company. The debt taken on its books were mainly for the acquisition of Satyam

Jewellery shines for Titan
11:30 am

The benchmark indices languished in the red as investors continued to book profits during the last two hours of trade. Strong selling is seen in stocks in the IT, capital goods and metals space as these stocks trade below the dotted line. However, stocks in the consumer durable, auto and healthcare are seeing some buying interest as they are trading in the green.

BSE-Sensex is trading lower by 101 points while NSE-Nifty is trading 35 points below the dotted line. BSE-Midcap Index is trading flat while some buying activity is seen in the smallcap space as the BSE-Smallcap index is up by 0.1%. The rupee is trading at 44.57 to the US dollar.

Titan Industries announced its FY10 results. The company's standalone top line grew by 23% YoY while the standalone bottom line increased by 58% YoY. Jewellery business which contributes over 70% to the company's topline grew by almost 27% YoY. This was the result of positive consumer sentiments as a result of economic revival and slow rise in price of gold (as opposed to a sudden surge in FY09). Time pieces on the other hand grew by 13% YoY while eyewear and precision engineering grew by 11% YoY. Net profits growth was positively affected by higher operating profits, lower interest costs and higher other income during the year.

Moreover, during the year, Titan adopted new principles of hedging and derivative accounting. The company feels that this would give a more accurate reflection of operating performance and appropriate presentation of statements. The company we feel is in a sweet spot, capitalizing on its brand name, and riding on low penetration levels and rising aspirations of the Indian middle class.

As per a press release, Glenmark Pharmaceuticals S.A (GPSA) has entered into a license agreement with Sanofi-Aventis. GPSA is a wholly owned subsidiary of Glenmark Pharmaceuticals Limited India (GPL). Under this agreement, Sanofi-Aventis has been granted license by GPSA for the development and commercialization of novel agents to treat chronic pain. In return, Glenmark will receive US$ 20 m upfront. Along with this, the company will receive development, regulatory and commercial milestone payments. All in all such payments could reach US$ 350 m. In addition, Glenmark will receive tiered double digit royalty on sale of commercialized products. Furthermore, Sanofi-Aventis will have the exclusive marketing rights for North America, EU and Japan. Glenmark will have the right to co-promote the product in the US and five eastern European countries. Glenmark will also have exclusive marketing rights for India and it will share co-marketing rights with Sanofi-Aventis in 10 other countries including Brazil, Russia and China. However, for the all other countries in the rest of the world, Glenmark will have exclusive marketing rights. This agreement would benefit Glenmark as it would add to its revenues and profitability.

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 and soon moved further into the red. They have not managed to pare their losses since then. Other key Asian markets are in the red with Hong Kong (down 1.4%) leading the pack of losers. The US markets closed lower by 1.4% last Friday.

Currently in India, heavyweights from the BSE-Sensex are trading weak with metal and software majors facing the brunt of selling activity. The BSE-Sensex is trading lower by around 92 points, while the NSE-Nifty is down by about 35 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 0.1% each. The rupee is trading at 44.49 to the US dollar.

FMCG stocks have opened the day on a negative note. Losers here include Hindustan Unilever and Pidilite Industries. As per a leading business daily, Hindustan Unilever plans to deploy nearly 4,000 of its staff this week to visit 20,000 kirana stores and chemists in 72 cities. They will arrange the product display of the stores to resemble organised retail stores. Proper segmentation and arranging of products helps the customer navigate the store better and could help boost sales by 30%. This drive reflects the company's wish to get out of the corporate ivory tower and reconnect to the India growth story, something the FMCG giant has apparently missed, thereby giving a chance to competitors to acquire market share. Although it is too early to call, we believe this is a step in the right direction with attention now being paid on distribution and not only on advertising.

Banking stocks have also opened the day on a negative note. Losers here include Central Bank and Union Bank. Bank of Baroda declared its FY10 results recently. The bank reported a 11% YoY growth in interest income for the year on the back of a 22% YoY growth in advances. Other income grew by 2% YoY backed by lower growth in treasury income. Having an exposure of 25% of its advances in overseas markets did not do any good to the bank. With yields on overseas assets getting re-priced substantially lower, global net interest margins (NIMs) dropped from 2.9% in FY09 to 2.7% in FY10. Net profits for the year grew by 37% YoY. Net NPAs moved up from 0.31% in FY09 to 0.34% in FY10. Capital adequacy ratio remained comfortable at 14.4% at the end of FY10.

Bad behaviour rewarded again
Pre-Open

Greece has sealed a rescue deal with the European Union (EU) and IMF. This might help it secure a multi-billion dollar bailout from the financial mess it is in currently. This might seem like music to the ears of investors worldwide. This is given that the global markets went into a spin after the country's credit rating was downgraded to junk a few days back.

Anyways, someone like Mark Mobius, the noted emerging market investor, does not think that a Greece bailout makes any sense. He believes that lending aid to Greece may drag down the EU as other indebted nations seek a bailout in turn. As he says, "A default will help to plug the leak."

As a matter of fact, Greece needs to repay Euro 8.5 bn of maturing bonds on May 19th, while the country's finance minister has indicated that the country can no longer afford to borrow.

Greece's bailout is yet another instance of bad behaviour (of taking too much debt) getting rewarded. It is also another instance of taxpayers bearing the brunt of the policymakers' short-sightedness. It is true that fear is high in such situations. And policymakers have fewer choices but to dole out billions to save the troubled entities - companies or countries.

But then, the policymakers are themselves to blame for bringing their companies and countries to such dire situations. And then their subsequent bailout just encourages more bad behaviour. This is a dangerous precedent to set for the future generation of managers and decision makers!