Fear index at its highest in 3 years
Closing

The markets staged a good comeback during the closing hours of trade. However, the momentum was not good enough to take them into the positive territory, thus resulting into a closing just below the breakeven mark. The Sensex ended lower by around 50 points today (-0.3%) while the NSE Nifty lost around 25 points (-0.5%). BSE Midcap and Small cap witnessed contrasting trends, with the former ending marginally in the green while the latter closed slightly lower. On the Sensex, gainers and losers were rather evenly split today.

Most Asian markets closed in the red today whereas Europe is also trading below the breakeven currently. The rupee was trading Rs 44.9 to the dollar at the time of writing.

Financial aid for Greece is a closed chapter now. The troubled Euro nation has been rescued and nine times out of ten, this should have cheered investors. However, that was not to be. The fact remains that Greece may not be alone. Investors are worried that Spain and Portugal could be two of the next countries that could need financial assistance and hence, they seem to be unwilling to make bullish bets just yet. An indication of how fear has gripped market participants anew could also be gauged from Wall Street’s key index of volatility, which has hit its highest level in more than two months and which is up more than 53% since early April, when the index was trading at its lowest level in nearly three years.

While it may be going through a tough time currently, domestic wind power equipment maker Suzlon is likely to see some better days ahead, atleast in the domestic markets if not globally. As per a leading daily, wind energy sector in India is all set to add over 5,000 MW generation capacity per annum by 2015. It should be noted that the country today has around 11,000 MW of installed wind energy capacity with utilization in the range of 15% to 20%. On the other hand, the total potential is in the region of 48,000 MW and with new technology, this could go up to as much as 1.2 lakh MW. Thus, even if a small part of this gap is breached, it would be huge benefit for wind power equipment makers like Suzlon. The stock closed flat today.

After wind power, there seems to be some good news in store for the Indian textile sector as well. As per a daily, the Indian textile sector is on its recovery path and exports are likely to increase by 10% in the current financial year. The textile sector was one of the hardest hit during the US financial crisis with exports contracting by 4.3% during the first nine months of FY10 and industry players facing a lot of hardships. However, with demand reviving, things should certainly improve for the better. Shareholders though may find very few reasons to get enthused as the sector is not really known for long term shareholder value creation. Textile stocks closed mixed today with Page Industries and Arvind Ltd finding themselves on the positive side of things.

Debt crisis spooks markets
01:30 pm

The Indian indices continued to languish in the red during the previous two hours of trade as fears of the debt crisis in Europe dragged global markets lower. Strong selling is seen in stocks in the metal, realty and consumer durable space. Stocks from healthcare and IT are trading in the green albeit marginally.

BSE-Sensex is trading lower by 191 points while NSE-Nifty is trading 66 points below the dotted line. BSE-Midcap Index is trading lower by 1% while BSE-Smallcap index is down by 1.3% from yesterday's closing. The rupee is trading at 44.90 to the US dollar.

As if the personal care segment was not competitive enough already, a leading financial daily has reported that this segment is about to see a flurry of activity. ITC and Dabur India have chalked out new strategies to take on competition and increase market share. While ITC has plans of extending its manufacturing capacities, investing in research and development, launching new products and have a broad based media campaign, Dabur has drawn up a three prong strategy. Under this the company will increase its distribution network to reach the rural markets. For this, Dabur intends to leverage its manufacturing facilities at Baddi and Uttarakhand. The company also intends to increase its brand building spending through mass market advertising and consumer promotion to drive up volumes. Furthermore, Dabur plans to launch new innovative products to support its growth. With aggressive plans for growth by the two FMCG heavyweights, we can expect other players in this segment like HUL to be affected.

Maharashtra Seamless released its FY10 results. The topline fell by 22% as a result of lower average realization. This was a result of falling raw material costs which was passed on to customers in the form of lower prices. However, operating margins expanded by 8.4% on account of reduced costs of raw material. This resulted in the company's bottomline growing by 9.1% YoY. Net profits were further boosted by lower interest outgo. However, a fall in other income capped the company's bottomline growth. The company during the year benefited from the anti dumping duty imposed on Chinese seamless pipe manufacturers in US and Europe. Going forward, the company is set to benefit from improved demand outlook and also from increase in exploration and production activity on account of recovery in crude oil prices.

IT, pharma stocks buck the trend
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 from the metals, consumer durables and realty spaces. Stocks from the capital goods and banking spaces are also seeing some pressure. Healthcare and IT stocks on the other hand are trading firm.

BSE-Sensex is trading lower by 215 points while NSE-Nifty is trading 75 points below the dotted line. While the BSE-Midcap Index is trading lower by about 91 points (down 1.3%), smallcaps are under more pressure as the BSE-Smallcap Index is down by about 140 points or 1.5%. The rupee is trading at 44.93 to the US dollar.

Stocks of tyre manufacturers are trading mixed with Apollo Tyres trading firm, while Ceat and MRF are trading weak. On the back of rising input prices, tyre manufacturers have been facing tough times in the recent past. A leading business daily has reported that the association representing the tyre manufacturing community, the Automotive Tyre Manufacturers' Association (ATMA) recently approached the prime minister’s office for seeking a solution to the rising input problem. However, since there has been no action taken regarding the same, tyre manufacturers are now mulling over a strong 25% price hike to offset the impact of rising input costs. The tyre industry had demanded that the government scraps the 20% import duty on natural rubber as well as ban futures trading of the commodity. In addition, the industry has also demanded an increase in duty on finished products. It must be noted that many tyre manufacturers have increased prices in the recent past. However, since they continue to face difficult times, they will have to resort to further price hikes.

The production of natural rubber, one of the key raw materials for manufacturing tyres is under pressure following the poor monsoons last year. It is believed that India is going to face a shortfall of about 175,000 tonnes of natural rubber this year. Last year the same figure stood at 100,000 tonnes.

IT stocks are currently trading firm led by Patni Computers, HCL Technologies and Wipro. The stock of HCL Technologies is trading firm on the back of the company bagging a large US$ 500 m (approx Rs 23 bn) deal from Merck & Co. Merck is a pharmaceutical company based in the US. This contract is spread over a period of five years and revenues from the same are likely to flow in from the current quarter. As part of the deal, HCL will provide various services such as remote infrastructure management (RIM), software led IT solutions, engineering and back office services.

HCL derives nearly 8% of its revenues from the healthcare and pharmaceutical space. This large deal signed does indicate that it is aggressively targeting additional revenues from this. In addition, this development indirectly comes in as good news for the Indian IT space, especially those companies that are vying opportunities in the global healthcare and pharmaceutical space. It is believed that the healthcare and pharmaceutical sectors, globally, present a US $47 bn outsourcing opportunity. This segment has been growing at a steady pace of 2% to 3%.

Down on global cues
09:30 am

The Indian markets have started today's session on an extremely 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 Indonesia (down 3.2%) leading the pack of losers. The US markets closed lower by 2% yesterday.

Currently in India, heavyweights from the BSE-Sensex are trading weak with construction, metal and auto majors facing the brunt of selling activity. The BSE-Sensex is trading lower by around 240 points, while the NSE-Nifty is down by about 70 points. Selling interest is also being witnessed among mid and small cap stocks as the BSE-Midcap and BSE-Smallcap indices are trading lower by 1.9% and 2% respectively. The rupee is trading at 44.93 to the US dollar.

Energy stocks have opened the day on a negative note. Losers here include Petronet LNG and Indraprastha Gas. As per a leading business daily, the government has asked Reliance Industries to reduce its natural gas production from the KG basin D6 fields. The reason is that liquefied natural gas (LNG) imported by Petronet LNG is piling up at its terminal in Dahej, Gujarat. Some of Petronet LNG's customers, including three fertiliser plants and a NTPC power plant, have not taken delivery due to shut downs. It may be noted that LNG involves a process of converting gas into liquid, shipping it and then reconverting the liquid into gas. This makes it a costlier fuel than domestic source of natural gas. In our view, the high cost is a structural disadvantage of Petronet LNG's business and not merely a one time occurrence. As a high cost supplier, it will succeed only when it has long term off take agreements or when demand greatly outstrips supply in the spot market.

Engineering stocks have also opened the day on a negative note. Losers here include Alstom Projects and Engineers India. L&T has entered into a joint venture with England based Howden to design and manufacture axial fans and air pre-heaters for thermal power plants. The JV will invest around Rs 1 bn to set up the facility in Hazira, Gujarat. The facility is likely to commence operation next year. In our view, this is a positive development for the company as it will help access Howden's technology in the area of fans and rotary heat exchangers in the power sector, which it has been providing for several decades in more than 100 countries.

Indian banks fail to fill in the 'gap'
Pre-Open

They have had a reasonable growth in asset book despite severe liquidity pressures in the past fiscal. Most have seen their net interest margins improve by a few percentage points despite lower pricing power. In spite of the distress on credit cards and personal loans, they have maintained some of the best asset quality amongst global peers. These may seem to suggest that Indian banks have nothing really to worry about. We wish we could agree with this logic. A closer look at their balance sheets shows some gaping holes that need to be filled in.

Banks need to ensure that the loans that they have sanctioned are also given out. They also need to ensure that the duration of their assets (loans) and corresponding liabilities are matched. The low interest rate and slow economic growth scenario seem to have created a gap in these.

Indian banks have in the past fiscal continued to sanction more loans. But unfortunately a significantly lower proportion has actually gone out of their books. The reason being that most banks were risk averse and chose to fund only corporate assets. These did belong to good quality corporate capex and infrastructure funding segment. But due to project delays and debt averseness of companies the loan disbursal lagged behind.

This is not just the case with the PSU or project financing companies. Things are no different at private sector and smaller banks. Infact even infrastructure financing companies reported similar numbers . Take the case of IDFC for instance. The institution doubled its sanctions in FY10, despite a muted first half. But the growth in disbursements was only 60% YoY. The large sanctions give the impression of impending robust growth in credit. But the same cannot fructify unless they go out of the banks and finance companies' books. This explains the relatively higher sanctions but lower interest revenues in their books in FY10.

Another gap that can be dangerous to the banks' future is the mismatch in duration. Banks have been taking on plenty of short term deposits on their books. But these have been lent out for long term project financing. On one hand this poses the risk of lower margins due to re-pricing of deposits. On the other hand, the mismatch in funding can also destabilize banks' balance sheets. The RBI has already issued a warning in this regard to them.

We believe that their eye on growth, profitability and asset quality can certainly help Indian banks rise above their peers. But keeping a watch on their balance sheet stability and revenue sustainability is paramount to their existence.