Markets languish in the red
Closing

After opening on a weak note, Indian markets oscillated to either side of yesterday's close in the morning session before a fresh bout of profit booking took its toll. Persistent selling in the index heavyweights in the afternoon session led the indices to close well below the dotted line. While the BSE Sensex closed lower by around 322 points (down 2%), the NSE Nifty lost around 85 points (down 2%). Midcap and smallcap stocks were not spared either as the BSE Midcap and BSE Smallcap closed marginally in the red. While losses were seen in stocks across sectors, FMCG and healthcare stocks managed to buck the trend.

As regards global markets, Asian indices closed mixed today while European indices have opened in the red. The rupee was trading at Rs 45.21 to the dollar at the time of writing.

Software stocks closed weak today with the key losers being Infosys and Wipro. As per a leading business daily, UK's National Grid has shortlisted Infosys, Mahindra Satyam and Cognizant for an outsourcing contract. The potential of this deal has been pegged at US$ 250 m. National Grid manages UK's natural gas and electricity networks. The company had a 7 year US$ 470 m contract with Computer Sciences Corporation, which is set to expire this year. The scope of the contract includes developing software applications and maintaining the utility firm's IT infrastructure. If either of the Indian IT firms bag this deal it will be a huge positive given the pressures that Indian IT companies have had to face in the wake of the global economic slowdown. The outlook for global IT spending seems to be improving and so things could be on a further uptick for Indian IT majors.

As per a leading business daily, Aurobindo Pharma has received tentative US FDA approval for US based IPR Inc.'s cholesterol reducing drug 'Crestor' (generic name is 'Rosuvastatin'). It must be noted that Aurobindo had made a Para IV filing for this drug, whereby it had challenged the validity of the drug's patent. The matter is still pending in the courts. Aurobindo has yet to receive final approval. As and when the company launches the drug it will receive 180-day marketing exclusivity given that it has a first-to-file (FTF) status on the same. The total market size of this drug has been pegged at US$ 2.9 bn. Aurobindo now has 116 ANDA approvals out of which 86 are final and 30 are tentative. The stock closed 2% higher today.

India's annual rate of inflation (WPI) managed to ease a bit in April 2010 as compared to March 2010. While in March, the WPI was 9.9%, it fell marginally to 9.59% in April 2010. Food prices, however, failed to cool down. In April, prices of food articles increased 16.87% as compared to 16.65% in March 2010. The government maintains that inflation is on the decline after the fresh rabi crop season. A good monsoon this year will also go a long way in easing food prices. The RBI has forecasted that the annual inflation will be around 5% by the end of March 2011. It remains to be seen whether this target is met and what further measures the central bank chooses to take to bring it under control.

Markets slide on profit booking
01:30 pm

Profit booking in heavy weights facilitated the slid of markets into the red zone during the last two hours of trade. Investors remained largely cautious as stocks from the defensive sectors i.e. FMCG and pharma led the pack of gainers. Heavy selling was seen in stocks from the realty and metals space.

BSE-Sensex is trading down by 79 points while NSE-Nifty is trading 29 points below the dotted line. BSE-Midcap index is trading lower by 0.4% while the BSE-Smallcap index is trading 0.3% below yesterday's closing. The rupee is trading at 45.09 to the US dollar.

As per a financial daily, Japan has agreed in principle to treat Indian pharmaceutical companies at par with Japanese companies on approval and registration in Japan. As per the proposed India-Japan Comprehensive Economic Partnership Agreement (CEPA), Indian pharmaceutical firms will be treated just like their Japanese counterparts and will not face any discrimination. This would be legally binding. While Japan is the world's second largest pharma market and is worth around US$ 60 bn, the country has stringent registration norms. This makes it difficult for any pharma company to enter the Japanese market. However, with this agreement in place it would be a big boost for companies like Ranbaxy, Lupin and Zydus Cadila who have established a presence in the Japanese pharma market.

IDBI Bank announced its fourth quarter and full year FY10 results recently. During the year, the bank reported a 32% YoY increase in interest income and a slower 26.2% YoY increase in interest expenses. This was despite a low capital adequacy ratio, which stood at 11.3% at the end of FY10. The advances growth during the year stood at 34% YoY. IDBI's net interest income grew by 83% YoY for the full year. In the process, the bank's net interest margins (NIMs) expanded by 0.3% YoY to 1.3%. At the profit before tax level, the bank's profits were higher by 6% YoY. This is mainly due to a higher 328.9% YoY increase in provisions and contingencies. However, its cost to income ratio shrank from 49% in FY09 to 40% in FY10. IDBI Bank's profits for the full year however, increased by 20% YoY on account of a lower tax outgo. Net profit margins dropped by 0.6% YoY in FY10 to 6.8% due to higher provisioning costs. A key factor that will play a role in the banks future growth is its capital adequacy ratio. Unless the bank goes in for some measure, it is quite possible that it would not be able to sustain such high levels of advances.

Telecom, FMCG stocks lead gains
11:30 am

Selective buying activity led the Indian markets to rise above the dotted line and move into the positive territory during the previous two hours of trade. However, the indices did shed part of these gains and are currently trading at the neutral zone. As for the sector-wise movement, stocks from the telecom, FMCG and healthcare spaces are amongst the top gainers, while those from the metal, energy and realty spaces are amongst the top losers.

The BSE-Sensex is trading marginally higher by 10 points, while the NSE-Nifty is trading flat. The BSE-Midcap and BSE-Smallcap indices are both trading flat as well. The rupee is trading at 45.07 to the US dollar.

Engineering stocks are currently trading mixed with Thermax, ABB and Siemens trading firm, while Punj Lloyd, Alfa Laval and Areva T&D are trading weak. The stock of wind energy major Suzlon Energy has been under pressure over the past few days. This is most likely due to the crisis that has occurred in Europe, a key market for Suzlon. In a recent interview with a news channel, the company's management did say that orders from Europe are getting deferred due to the slowdown. This is because it gets difficult for its clients to raise funds for renewable-energy projects. This would only lead to more problems for Suzlon as its order execution period would be extended. As such, the management expects 2010 to be a moderate year for Suzlon.

It must be noted that for Suzlon as a standalone company, about 11% of its order backlog were from the European orders as of January 2010 out of total order back log of 1,484 MW (megawatts). As for its European based subsidiary, REpower (92% stake) and which mainly caters to that region, it had a order back log of Euro 1.7 bn as of December 2009. However, while the management expects a slowdown from this region, it expects orders from the Asian regions to remains strong. Plus, it also expects a pickup in offshore (sea-based) projects, especially in their size. However, these orders are expected to flow in over the long run.

As per a leading financial daily, Tata Power has offered to sell Reliance Infrastructure (R-Infra) 200 Mw at Rs 5.9 per unit till June. This is Rs 1.5 higher than the regulated rate. In case R-Infra rejects this offer then it would be forced to buy from the open market at Rs 6.5 – 7 per unit. Earlier, Tata Power had rejected the state government's order for the continuation of supply of 360 Mw to R-Infra up to June 2010 and 200 Mw from July to March 2011 at the regulated rate.

R-Infra is alleging that Tata Power is profiteering by not selling it power at the regulated rates as the company is interested in selling power outside Mumbai at higher rates. However, according to Tata Power, the present situation had arisen because R-Infra did not make adequate arrangements to procure power from April 1 2010, despite more than nine months notice given by the company. Furthermore, Reliance had not signed a purchase power agreement with Tata Power. Hence, the company would not be interested in diverting power from customers who have signed this agreement with the company to R-Infra. Tata Power's production capacity is 2,449 MW. Hence, we do not expect much addition to the company's bottom line even if R-Infra agrees to the company's terms of power supply. Power stocks are currently trading mixed with Tata Power and NTPC trading firm, while NHPC and CESC are trading weak.

Markets begin on a volatile note
09:30 am

The Indian markets have started today's session on a volatile note. The benchmark indices opened below the breakeven mark. Although they have tried to cross over into the positive territory since then, they have not managed to stay there for long. Other key Asian markets are in the red with Japan (down 1.6%) leading the pack of losers. The US markets closed lower by 1.1% yesterday.

Currently in India, heavyweights from the BSE-Sensex are trading weak with auto and metal majors facing the brunt of selling activity. The BSE-Sensex is trading lower by around 12 points, while the NSE-Nifty is down by about 6 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% and 0.2% respectively. The rupee is trading at 45.07 to the US dollar.

Software stocks have opened the day on a positive note. Gainers here include NIIT and Wipro. As per a leading business daily, Wipro has bagged three projects from the governments of Maharashtra, West Bengal and Gujarat for setting up data centers. The Maharashtra project involves commissioning a state data center covering about 3,000 sq feet and managing it for a period of five years. Similarly, the West Bengal project is for designing and building the data center including both the IT and non-IT components and managing it for five years. The Gujarat project is for upgradation and commissioning of the data center. It will also act as a disaster recovery site for four other mini data centers already present in Gujarat. These centers will help citizens file their taxes, access information on public expenditure, lodge complaints etc. Data centers, along with state wide area network and common service centers are part the government's National e-Governance Plan. While financial details of Wipro's orders are not known, in our view, these developments highlight the increasing importance of the Indian IT market in the software giants' overall business.

Engineering stocks have also opened the day on a positive note. Gainers here include Crompton Greaves and Alfa Laval. Crompton Greaves announced its 4QFY10 results. The company has reported a 2% YoY growth in topline during the quarter. It was led by a strong performance from the 'consumer products' business, which recorded a growth of 24% YoY in 4QFY10. Sales of the 'industrial systems' business also saw a good growth of 17% YoY. However, its largest business of 'power systems' registered a topline decline of around 5% YoY during the period. The company's operating margins expanded by 2.7% YoY, as a percentage of sales, due to a big drop in cost of traded goods as also other expenditure. Bottomline grew by 40% YoY during the quarter, excluding extraordinary items, on the back of improved operating margins, lower interest expenses and a lower effective tax rate.

Similar crises, different responses
Pre-Open

Every time moneymaking seems to become too easy to be true, a crisis erupts. These crises are called by different names – the dotcom bubble, yen carry trade, subprime crisis, euro zone crisis etc. But look closely and there are often striking similarities between them.

Take for example, the US subprime crisis and the recent PIGS (Portugal, Italy, Greece and Spain) crisis in Europe. One had overleveraged Wall Street banks; the other had peripheral European nations in deep debt. One set was too big to fail. The other was too interconnected with the European Union to fail. One has raised questions on the functioning of investment banks; the other has rattled the idea of common currencies.

Ironically, the response to the two recent crises has been contrasting. The US reacted swiftly to the credit crisis. It exercised all its options, fumbled along and changed course several times. But there was no lack of intent whatsoever. In sharp contrast, the response to the euro zone crisis was rather limp. In fact, the European Union dilly dallied a great deal before coming out with the rescue package. While the US Fed didn't think twice about unleashing the genie of inflation from to the influx of liquidity, its European counterpart lost much sleep over the issue.

In our view, it is time to question the very idea of the European Union. A sovereign state like Greece without the ability to print its own currency is defenseless in such crises. It also cannot raise interest rates or devalue its currency. While we are not big fans of financial indiscipline, it does make us wonder if Greece would be a similar bind if it could control its own currency.

On a broader level, the results of every economic experiment take a long time to unravel. Even when they are conceptualised and implemented by the best and the brightest. Hence, there is something to be said about conservatism in the design of financial systems and preparing for the worse case scenario.

More disclosure from rating agencies

Market regulator Sebi is on an overdrive these days, plugging the loopholes in several areas. It has now proposed stronger disclosure norms for credit rating agencies. As per the proposals, ratings agencies will have to disclose their shareholding patterns. They will also have to put up a list of their publicly outstanding ratings that have moved by more than one notch over the preceding six months. While these are still at the proposal stage and are not final regulations, we believe it is high time the rating agencies were made more accountable for their actions.