Metals weigh heavy on indices
Closing

After a muted start, profit booking in key index heavyweights led the Indian markets to the same fate as met by its peers in Asia. Except select banks and automobile companies, investors seemed to show little interest on other counters. Heavy profit booking in the metal and telecom spaces ensured that the indices closed well below the dotted line in the final trading hour. While the BSE Sensex closed lower by around 190 points (down 1%), the NSE Nifty lost around 57 points (down 1%). Midcap and small cap stocks fared marginally better with losses of 0.9% each.

As regards global markets, other Asian markets also closed in the red today with China and Japan being the key losers. European markets have opened lower. The rupee was trading at Rs 45.3 to the dollar at the time of writing.

The Indian telecom regulator TRAI put out some important recommendations on the sector’s M&A plans today. The regulator recommended ending restrictions on telecoms firms selling out. This move could help consolidation in the world's fastest growing telecoms market. Currently, India restricts telecoms firms from selling majority stakes within three years of getting license. TRAI also suggested that telecom players pay a one-time fee for holding radio-spectrum beyond 6.2 mega hertz (MHz) based on 3G prices. This move can hit established operators like Bharti Airtel and Vodafone. While these recommendations are yet to be reviewed, the fact that the sector’s need for consolidation is on the regulator’s mind is very apparent.

Crude oil prices fell below US$ 77 a barrel today as a stronger dollar signaled lingering doubts about a resolution to Europe's debt crisis. The US$ 1 trillion package to restore confidence in the Eurozone infact seems to have restored confidence in the US dollar as the reserve currency for the foreseeable future. At the same time, Chinese inflation data raised concern about potential monetary tightening measures. China's inflation edged up to an 18-month high in April 2010 and could call for tighter measures by the Chinese central bank to curb loan growth.

Rating agency CRISIL estimates that Indian banks’ profitability will be hurt this fiscal as they will have to make additional provisions of Rs 620 bn over the next two years to achieve provision coverage of 70% (of gross NPAs) as per the RBI’s mandate. At the end of FY10, the ratio on an average stood at 60%. Further CRISIL expects net NPAs of banks to increase by 0.3% this fiscal. This coupled with restructured loans comprising 3.5% of advances could pose a serious threat to the sector asset quality. PSU banks like SBI, Bank of Baroda and Union Bank of India have a higher share of such restructured loans as compared to their private sector counterparts.

Largecaps not in favour at present
01:30 pm

The India markets continued to trade well below the dotted line during the previous two hours of trade. However, buying activity at the lower levels led the markets rise above the day's low. Apart from selected stocks from the banking and auto spaces, most of the stocks forming part of other sectors are seeing some pressure. At present, the market breadth is negative as the overall decline to advances ratio is poised at 1.3 to 1 on the BSE.

BSE-Sensex is trading lower by about 125 points (0.8%) while NSE-Nifty is trading 40 points (0.7%) below the dotted line. BSE-Midcap Index is trading lower by 0.5% while BSE-Smallcap index is trading 0.2% above yesterday's closing. The rupee is trading at 45.08 to the US dollar.

Hotel stocks are currently trading firm led by Taj GVK, Hotel Leelaventure, Indian Hotels and EIH. It was recently reported that Indian Hotels has paid back debt of about US$ 185 m (or about Rs 8.4 bn) that it had taken to finance capex on new projects, renovations as well as for investment in international subsidiaries. This it has done through restructuring its shareholding in Sea Rock hotel (Rs 7.5 bn proceeds from the same). In addition, it is believed that the company has also restructured a part of its Rupee loans. The company raised a fresh secured Rupee debt of Rs 3 bn during 4QFY10. As such, with this move it is reported that the total debt on the company's book has been brought down to levels of Rs 40 bn from Rs 41 bn earlier. This will bring some respite to the company's profitability going forward.

Apart from the overall debt amount being brought down, the restructured debt portion will also help the company pay a lower interest rate. The interest amount has been an issue for the company over the past year. During 4QFY10 and 9mFY10, interest costs for the company rose by 105% YoY and 77% respectively. Indian Hotels' interest coverage ratio stood at about 3.3 times during 9mFY10.

As per a leading financial daily, US-based Purdue Pharma has filed a patent infringement suit against India's largest drug company Ranbaxy. The suit was filed after Ranbaxy's US subsidiary, Ranbaxy Pharmaceuticals Inc, applied for marketing approval of a low-cost version of Purdue's pain relieving medicine, Oxycodone. Purdue has also sued generic drug makers Mylan and Actavis on the same patent infringement charge.

In its application, Ranbaxy has challenged the validity of three patents on Oxycodone in the US. Ranbaxy had last year also attempted to challenge another patent on Oxycodone. However, it later withdrew the application, acknowledging the patent rights of the medicine. As per US laws, a company which intends to apply for marketing approval of a patented medicine should first notify the patent holder. This gives the innovator an opportunity to file a patent infringement suit against the company. Is also ensures an automatic stay on the marketing approval for a period up to 30 months. It may be noted that Oxycodone is a drug derived from opium and is administered to critical patients with acute pain. In case Ranbaxy is able to prove that the patent is invalid, it will gain a 180 days exclusive marketing approval which will help boost its revenues. However, in such cases, courts take a long time to pass their verdicts.

Profit booking takes toll
11:30 am

The benchmark indices continued their south-bound journey during the previous two hours of trade as profit booking gripped index heavyweights. Almost all indices were seen trading lower led by stocks from the power, metal and realty space. However, some buying interest was seen in stocks from the auto and banking space. Buying interest was also seen in smallcap stocks.

BSE-Sensex is trading lower by 98 points while NSE-Nifty is trading 27 points below the dotted line. BSE-Midcap Index is trading lower by 0.1% while BSE-Smallcap index is trading 0.2% above yesterday’s closing. The rupee is trading at 44.87 to the US dollar.

Elecon Engineering announced its 4QFY10 results. The company’s sales grew by 14% YoY on the back of its transmission equipment segment. This business grew by 39% YoY during the quarter. Its material handling equipment business on the other hand turned in a growth of 5.5% YoY. Operating margins declined by 2.3% during the quarter as a result of increase in raw material prices as a percentage of sales. The fall in operating margins could have been steeper but for lower staff costs and lower other expenditure as a percentage of sales. The company’s bottom line grew by 59% during the quarter as a result of profit from the sale of investment. When adjusting for this profit, the bottom line grew by 11% YoY. This growth came in spite of fall in operating income and was aided by a fall of 26% YoY in interest costs.

The auto industry has been on a roll over the past few quarters. Strong sales across categories made FY10 a remarkable year for the auto players as sales volumes sky rocketed. The reason behind the same varied from lower pricing, financing availability and a general economic growth. The same is not expected to continue during the current fiscal considering that the interest rates have marginally moved up and also the excise duty on cars has risen, making them more expensive. However, the first month of FY11 i.e. April 2010 saw sales volumes climb still further. In fact, car sales in India posted their strongest April in at least a decade. But it is too early to say whether this momentum will continue going forward.

However, apart for concerns such as higher raw material prices and interest rates, the industry is also facing another major problem. The problem is of capacity constraints. This may take a toll on the industry’s growth prospects. As per the Society of Indian Automobile Manufacturers (SIAM), the sector will clock 10% to 14% growth in FY11 as compared to a 26% that it witnessed last year. While a handful of players are in the process of expansion, they have not been able to time it too well considering that the demand for vehicles bounced back at a much faster pace than expected. It is believed that leading carmakers such as Maruti Suzuki, Hyundai Motor India and Tata Motors are already facing this problem. As such, this may result in these companies losing market share to the new players who have entered India in recent times. However, this would depend on how much free capacity the new players have.

Markets begin on a negative note
09:30 am

The Indian markets have started today's session on a negative note. The benchmark indices opened in the positive but soon moved into the red. These have managed to pare their losses somewhat since then. Other key Asian markets are in the green with China (up 0.6%) leading the pack of gainers. The US markets closed higher by 3.9% yesterday.

Currently in India, heavyweights from the BSE-Sensex are trading weak with power and software majors facing the brunt of selling activity. The BSE-Sensex is trading lower by around 50 points, while the NSE-Nifty is down by about 15 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 0.3% and 0.5% respectively. The rupee is trading at 44.87 to the US dollar.

Energy stocks have opened the day on a positive note. Gainers here include Castrol and Indian oil. As per a leading business daily, Reliance Industries will seek a higher price for its gas production from the KG D6 block in the future. It currently gets US$ 4.2 per million British thermal unit (mBtu). However, it believes smaller gas fields become economically unviable at this price. Hence, it would seek at least US$ 6 per mBtu when its smaller fields in KG D6 start production in 2014. Currently Reliance Industries produces from 2 gas finds in the block - Dhirubhai-1 and 3. There are 16 other smaller finds in the region. It may be noted that the price of US$ 4.2 per mBtu was set by an empowered group of ministers in 2007 and will come up for review in 2014. Under the production sharing contract between Reliance Industries and the government, the company has to discover a market price for natural gas and submit it for government approval. After the recent Supreme Court ruling, this process has been held proper beyond any dispute.

Banking stocks have also opened the day on a positive note. Gainers here include Bank of India and Central bank. Union Bank of India declared its FY10 results. The bank reported a 12% YoY growth in interest income in FY10 on the back of a 23% YoY growth in advances. However, this growth has come while partially sacrificing margins and asset quality. In order to hedge the slowdown in the growth of retail and agriculture segments, the bank tapped SME clients. Net interest margin dropped from 3.2% in FY09 to 2.7% in FY10 due to pricing pressure. Other income grew by 33% YoY on the back of 47% YoY growth in fees. The bank's capital adequacy ratio stood at 12.5% as per Basel II at the end of FY10. Net NPA ratio moved higher to 0.8% in FY10 from 0.3% in FY09.

Big rescue package for Europe
Pre-Open

In late 2008 a plethora of stimulus packages were doled out by governments across the world. The reason? To tide over the global financial crisis. And what's more, another one was announced just yesterday. This was by the European policymakers to prevent the collapse of Greece and the aftershocks thereon. As reported on Bloomberg, European policymakers unveiled a gargantuan loan package worth US$ 1 trillion. Coupled with this is a program of bond purchases to stop the sovereign debt crisis that has threatened to shatter confidence in the euro. The 16 Euro nations have agreed to offer as much as 750 bn euros to countries facing instability. This includes International Monetary Fund backing. Moreover, the European Central Bank stated its intention of buying government and private debt.

Stockmarkets around the world were jittery last week. Concerns emanated that the sovereign debt crisis would spiral out of control. This would then worsen the dynamics of the global economy. Especially when the latter had already been hammered due to the ill effects of the subprime crisis. Although a 110 bn euro package was announced for Greece initially, this did not do much to douse investor concerns. The credibility of the Euro was now questioned. This then prompted European policymakers to go in for another massive attempt to boost the beleaguered European currency. For the time being atleast, these policymakers have averted a catastrophe in the financial markets. But the long term outlook for the European economy looks bleak.

Interestingly, it was not too long ago that the dollar's status as the world's reserve currency was questioned. This was because the global financial crisis hit US hard and pushed unemployment to unprecedented levels. The Euro was put forward as a likely candidate. But the debt crisis in Europe only goes to show that the Euro has a long way to go before it can topple the US dollar. True, the US economy has not been doing great shakes. But the way the scenario is panning out in Europe, it faces no competition anytime soon.

For investors in India, the European debt crisis should not be looked upon with too much alarm. What it could do is lure FIIs to pull money from the Indian stockmarkets to cut losses elsewhere. And so this would provide a perfect opportunity to long term investors. How? They can then buy some good quality stocks at bargain prices.

The Indian economy is expected to perform strongly in the years ahead. Of course, there are still various challenges that the country faces particularly on the infrastructure and fiscal deficit front. But the growth prospects here are certainly much more compelling than what is being observed in the rich world. And therefore, even if there is near term volatility in the stockmarkets, staying invested for the long term in strong companies is sure to deliver healthy returns to shareholders.