Chinese jitters spook Indian stocks
Closing

Taking cues from weakness in other Asian markets, especially China, Indian markets closed in the negative today. In fact, a sharp bout of selling came in during the closing hours of trade. Metal and realty stocks led the pack of gainers, while some buying was seen in pharma stocks. On the broader BSE, there were two losers for every stock that closed in the positive.

Chinese markets fell 1.2% today to their lowest close in seven months. Selling there was led by banking and realty stocks after the country’s central bank raised banks’ reserve requirement ratios to fend off the property bubble and inflation. This comes just a day after Dr. Doom Marc Faber warned that China’s economy is looking set to crash within a year. What will fuel it are the declines in stockmarkets and commodity prices which would highlight that the nation’s property bubble is set to burst.

Anyways, other key Asian markets like Hong Kong and Singapore also closed weak, down 0.2% and 1.5% respectively. European markets have opened on a weak note as well.

Anyways in India, the BSE Sensex and NSE Nifty closed with losses of over 270 points (1.6%) and 75 points (1.6%) respectively. Mid and small cap stocks followed suit. The BSE Midcap and BSE Smallcap indices closed lower by 1.9% each.

Telecom stocks closed mixed today. While gains were seen in Idea Cellular, selling pressure marked trading in Bharti Airtel and MTNL. Gains in Idea followed a decent set of numbers announced by the company for FY10. For the fiscal, while sales have grown by 23% YoY, net profits have risen by 8% YoY. Its operating margins stood at 27.4% during the year, marginally down from 27.9% in FY09. Idea’s sales growth was largely driven by a 64% YoY rise in its mobile subscriber base. However as for the other key metrics of average minutes of usage and average revenue per user, these declined by 1% YoY and 27% YoY respectively. Owing to competition, the company also saw an increase in its pre-paid churn, from 5.3% in FY09 to 7.9% at the end of March 2010.

Energy stocks closed weak. Castrol and Gujarat Gas closed in the red. ONGC, which announced an acquisition of a Russian oil company earlier during the day, also closed with a marginal decline. The company has acquired Russia based Imperial Energy through its overseas subsidiary ONGC Videsh. It has also acquired an 18% stake in a Venezuelan field project through the consortium route. These acquisitions further add to ONGC Videsh’s kitty of offshore oil & gas assets. Our concern though remains with the geopolitical issues that the company can face given that most of these assets are in troubled regions of Russia and Venezuela.

Shriram Transport Finance (STF) was the leading gainer among finance stocks. It was followed by PFC and HDFC. The country’s largest non-banking finance company (NBFC) in terms of asset size, STF announced its 4QFY10 and FY10 results recently. The financier of commercial vehicles continued to maintain its stronghold over financing used vehicles. It fetched marginally higher net interest margin of 7.3% in FY10 as against 7.2% in FY09. This was nevertheless at least 3% higher than that of the best performing banks. During 4QFY10, its net interest income and profits grew by 44% YoY and 72% YoY respectively. STF sustained robust return on equity of 30% and sees its assets growing at annual rate of 25% over the next 3 years without equity dilution. It raised funds through non convertibles debentures in FY10. Its net NPA to advance ratio and capital adequacy ratios were also very comfortable at 0.7% and 21% respectively at the end of FY10.

Metal, realty stocks see most pressure
01:30 pm

Selling pressure led the Indian markets to shed their morning losses and drift into the negative territory during the previous two hours of trade. The market breadth is negative as the overall decline to advance ratio is poised at 1.2 to 1 on the BSE. While stocks from the healthcare, oil & gas and auto spaces are holding up, those from the other sectors are seeing some pressure. Those leading the pack of losers include metal, realty and FMCG.

The BSE-Sensex is trading lower by about 45 points, while the NSE-Nifty is trading lower by about 10 points. While stocks from the midcap space are seeing some pressure, those from the smallcap space have managed to garner the investors' interest as the BSE-Smallcap Index is currently trading marginally up. The BSE-Midcap Index is down by about 0.4%. The rupee is trading at 44.6 to the US dollar.

Healthcare stocks are currently trading firm led by Panacea Biotec, Piramal Healthcare and Glenmark Pharmaceuticals. Glenmark Generics, a unit of Glenmark Pharmaceuticals has gotten into a licensing agreement with a unit of US based Par Pharmaceutical Companies Inc. This agreement is to market 'Ezetimibe' tablets, which are a generic version of Merck-Schering Plough's 'Zetia' tablets. Zetia is a cholesterol-modifying agent and whose annual sales have been pegged at US$ 1.4 bn. This is a strong benefit for the company as it is reportedly the first company to file for a paragraph-IV certification for the product. As such, this could possibly allow it to get a 180-day exclusivity of exclusive marketing rights for the product. As part of the agreement, both the companies will share profits from sales of the product. As per the company, it is currently involved in a patent litigation concerning this tablet in a US district court. At the same time it must be noted that Glenmark had received a tentative US FDA (food and drug administration) approval for 'Ezetimibe' tablets in April 2009. Given that the US generics market is highly competitive, receiving exclusivity window for products would certainly enhance revenues and profits going forward.

Media stocks are currently trading weak led by Zee Entertainment, Deccan Chronicle and TV18. Balaji Telefilms announced its results recently. The company reported a 15% YoY decline in revenues during the quarter. This was seemingly on the back of a fall in both hours of programming and average realisations per hour. However, at the operating level, the company was able to improve its performance. While staff cost increased by 7% (as a percentage of sales), production and telecast costs decreased by 30% (as a percentage of sales). During the corresponding quarter last year, Balaji recorded a loss at the operating level. Higher other income and lower depreciation costs helped the company improve its position at the profit before tax level. However, higher tax outgo reduced its profits during the quarter. During the full year FY10, the company's revenues and profits declined by 45% YoY and 42% YoY respectively. Operating margins during the year stood at 6.5% as against 14.6% last year.

Big competition for Nano
11:30 am

The last 2 hours of trade have seen the markets hold on to their opening gains while remaining range bound. Buying activity is being seen in the index heavy weights.However, investors remain cautious with news of realty bubble spreading in China. Buying activity is seen in the health care and auto space while selling activity is seen in the metals space.

BSE-Sensex is trading higher by 49 points while NSE-Nifty is trading 18 points above the dotted line. BSE-Midcap Index is up by 0.4% while BSE-Smallcap index is trading 0.9% above the dotted line. The rupee is trading at 44.52 to the US dollar.

As per a leading financial daily, competition is about to heat up for Tata Motors. French auto major Renault and Bajaj Auto have decided to price the ultra low-cost car being jointly developed by them at US$ 2,500 i.e. around Rs 110,000. The car being developed to Renault-Nissan Alliance and Bajaj auto was announced in 2008. However, the launch was delayed as a result of differences between the partners. While Renault wanted a low cost car, Bajaj was keen on a car with high mileage and low maintenance. The other hurdle was the pricing which was holding up the launch of the car. Now that these issues have been resolved we can expect the car to hit the market in 2012 instead of 2010 as was originally planned. It may be noted that as per agreement, the design, engineering, sourcing and manufacturing will be handled by Bajaj Auto, while marketing and selling will be handled by the Renault-Nissan Alliance.

HDFC announced its full year results. The company's interest income grew by 1.4% YoY during FY10 on the back of growth in advances. Other income grew by 403% aided by cash surplus and sale of investments. Net profit for the company grew by 23.8% YoY as a result of lower provisioning and aggressive cost saving measures. During the year, HDFC had repriced its assets and relaxed its home loan rates as a result of competitive pressure. However, this did not have any material impact on the company's performance. We believe that the company's unique business model of selling through direct selling agents and through the branches of HDFC Bank will help the company enjoy a low cost to income ratio and enjoy operating leverage.

Markets begin on a positive note
09:30 am

The Indian markets have started today's session on a positive note. The benchmark indices opened below the breakeven mark but soon moved into the green. They have managed to hold on to their gains since then. Other key Asian markets are in the green with Indonesia (up 1.1%) leading the pack of gainers. The US markets closed higher by 1.3% yesterday.

Currently in India, heavyweights from the BSE-Sensex are trading strong with construction and auto majors finding investors' interest. The BSE-Sensex is trading higher by around 55 points, while the NSE-Nifty is up by about 10 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 0.5% and 0.9% respectively. The rupee is trading at 44.49 to the US dollar.

Steel stocks have opened the day on a positive note. Gainers here include Sesa Goa and Tata Steel. As per a leading business daily, SAIL plans to set up a port in Orissa to cater to its upcoming steel capacity in the region. The proposed port will have a capacity of handling 20 m tonnes of cargo. The location has not been finalised although there are 13 spots already identified in the state's 480 km coastline. It may be noted that SAIL is executing Rs 700 bn expansion programme to raise its installed production capacity from 14.6 m tonnes per annum (mtpa) to 23.5 mtpa. In fact, the government has approved a follow-on offer to the public to help raise capital for the company. Hence, it doesn't come as a surprise that the steel giant is looking at dedicated infrastructure like ports to handle both inbound as well as outbound logistics.

Engineering stocks have also opened the day on a positive note. Gainers here include Thermax and Suzlon. KSB Pumps announced its 1QCY10 results. The company has reported a topline growth of 2.5% YoY during the quarter. The growth has been driven by pumps segment sales. This division accounts for 80% of the sales and has reported nearly 7% YoY growth in revenues. On the other hand, revenues from the valves segment declined by 16% YoY. However, costs grew at a faster pace, resulting in 8.3% YoY fall in operating profits. The company has been able to lower its finance charges substantially. The tax outgo was also lower in 1QCY10. Despite this, net profits declined by 13% YoY due to lower operating margins and higher depreciation charges.

China looks set to crash
Pre-Open

Noted investor Marc Faber, author of the Gloom, Boom & Doom report, is wary of investing in China. He believes that China's economy will slow and possibly crash within a year. What will fuel it are the declines in stockmarkets and commodity prices which would highlight that the nation's property bubble is set to burst. Readers would do well to recall that the Chinese economy was impacted by the global financial crisis due to slowdown in exports.

A nation which relies heavily on exports to bolster its GDP, recession in the developed world meant that demand and consumption waned. Suddenly, there was not much of a market for Chinese goods. This slowed down Chinese GDP growth although it was way above what the rich world was recording at the time.

As green shoots began to spring up and stockmarkets across the world zoomed, China also benefitted. What followed thereafter is a surge in stockmarkets and bank lending. This in turn fuelled property prices which began to run way ahead of fundamentals. The Chinese central bank did step in to curb excess liquidity but that does not seem to have done much. As reported on Bloomberg, the Shanghai Composite has slumped 12% this year and has been Asia's worst performer.

China is in peril because the economy has been latching on to property development for driving growth. As per reports, as much as 60% of the country's gross domestic product relies on construction. What is more, with policymakers in China trying to arrest the surge in property prices, Faber is of the view that investors would then be goaded to turn to Chinese stockmarkets. This too at a time when stocks in that nation appear fully priced.

Assuming that China does crash, it would be naïve to assume that the same would not have an impact on the Indian stockmarkets. Surely, there could be a knee jerk reaction which would then provide investors with a perfect opportunity to pick up some good quality stocks. India, at the end of the day, is not reliant on exports the way China is and the domestic growth story in the former still has a lot of steam left. Thus, a loss in Chinese stockmarkets could very well turn out to be a gain for the bourses in India.