Euro problems continue to take toll
Closing

While the markets came off significantly from the day's lows, they were still not able to avert a negative ending. Thus, the Sensex closed the day with a decline of around 170 points (down 1%) whereas Nifty closed lower by around 40 points (down 0.7%). BSE Mid cap and Small cap indices also fared poorly, edging lower by 0.2% and 0.7% respectively. On the Sensex, six stocks gained for every four that ended the day in the red.

While most Asian markets also closed weak today, European stocks are trading surprisingly buoyant currently. The rupee was trading at Rs 45.7 to the dollar at the time of writing.

The decline today comes on the back of a huge decline of more than 300 points witnessed on Friday and does mark a turning point of sorts from the buoyancy witnessed on account of the European stimulus package early last week. While it has been late in the coming, the reality of long term structural problems with the European nations is finally dawning upon investors and this seems to be making markets across the world jittery. And India is no exception. While some degree of correction is justified here, any overreaction and it will be a fantastic opportunity for investors to partake in the long term India growth story.

With loss in the region of 4%, DLF emerged as the biggest loser on the Sensex today. The company announced its full year and fourth quarter FY10 results late last week whereby the topline suffered a fall of 26% for the full year whereas the bottomline fell even more, recording a decline of 61% YoY. The fourth quarter performance however was enthusing. Topline registered 78% YoY growth during 4QFY10 on the back of strong sales booking and low base effect whereas growth in net profits came in even higher at 168% YoY. Important to add that the company's operating profits increased 5 fold on a YoY basis. Operating margins stood at 50% as compared to 14% in 4QFY09. Total developable area stood at 416 m sqft at the end of the quarter as compared to 430 m sqft at the end of the preceding quarter. It should be noted that the company is working consistently on reducing its debt burden by ‘unlocking' its non-core assets and has plans to divest nearly Rs 27 bn over the next 12-18 months. Cash flows arising from sale of non-core assets will be used to repay debts.

While DLF closed weaker on account of its results, engineering major L&T emerged stronger due to the same. The company announced its 4QFY10 results a while back. Its standalone net sales grew by a 28% YoY during 4QFY10. This growth was led by a 28% YoY growth in sales of the company's engineering and construction (E&C) segment. The company's EBIDTA margins expanded by 0.9% YoY during the quarter on the back of lower sub contracting charges as well as administrative expenses (as percentage of sales). Excluding extraordinary items, net profits grew by 17% YoY during 4QFY10, a slower growth when compared to the topline on account of a big spike in interest expenses as also a much higher effective tax rate. The company also had an extraordinary gain during the quarter of Rs 1,007 m which included a gain from the sale of the company's Petroleum Dispensing Pumps & Systems business. For the full year FY10, the company has reported 9% YoY growth in sales while its net profits have grown 26% year on year.

Negative sentiments sink markets
01:30 pm

Markets continue to languish in the red as negative sentiments continue to drag the markets. However, the markets pared some of its opening loss during the last two hours of trade. Stocks from IT and realty space were the biggest losers while stocks from the FMCG space were trading marginally in the red.

BSE-Sensex is trading down by 328 points while NSE-Nifty is trading 93 points below the dotted line. BSE-Midcap index is trading lower by 1.3% while the BSE-Smallcap index is trading 1.7% below Friday's closing. The rupee is trading at 45.7 to the US dollar.

Banking stocks are currently trading weak with Axis Bank the biggest loser. As per a leading daily, Axis Bank has entered into an agreement with Prizm Payment Services and AGS Infotech. These companies have signed a contract to set up and manage 5,000 ATMs for the bank. With this agreement, Axis bank would have more than 9,000 ATMs in the next 18 months. As per the contract, Axis Bank would not incur any capital expenditure and would be responsible for cash settlements. The fees for cash withdrawal would be Rs 13-15 and for balance enquiry would be Rs 3-5. For third party transaction the fees would be higher. These fees would be split between the bank and the service provider. With setting up of ATMs becoming a costly affair, more and more banks are looking to outsource the setting up and maintenance of their ATM network to a third party. With this addition to its ATM network, Axis bank would have the second largest ATM network in India after SBI. This would help the bank increase its distribution reach while keeping a check on costs.

Cement stocks are trading lower lead by heavy weights like ACC and Dalmia Cements. As per a leading business daily, cement prices are expected to soften by 7% to 10% in June on account of two counts. First being the effect of upcoming capacities leading to oversupply. Second, the slowing down of construction activity due to onset of monsoon season. This in turn would lead to lower demand for cement. Thus, in the near to medium term, margin of the cement manufacturers are likely to come under pressure on account of softening of cement prices. Managements of top cement manufacturers have also indicated their concern regarding fall in cement prices. A few of them have informed dealers too with regards to lower demand particularly during monsoon season.

Thus, accordingly companies and dealers are preparing for the slack season (typically June to September). To push volumes, dealers are likely to sell below the maximum retail price. The companies have even agreed to adjust the difference in margin in the next order. Currently, cement prices are hovering at around Rs 255 per bag. Cement prices are expected to settle at around Rs 235 per 50 kg bag in the medium term. The fall in cement prices are expected to vary region on region. It may be noted that India expects to add 60 MT of new cement capacity by the end of December. This would be due to companies, which had reined in plans during the liquidity crisis, resuming expansion. This addition will take India's total capacity to 300 MT.

Realty, banking amongst top losers
11:30 am

Continued pessimism led the Indian markets to languish in the red during the previous two hours of trade. The market breadth is negative at the moment as the overall decline to advance is poised at 3.4 to 1 on the BSE. Stocks from all sectors are trading lower with those from the realty, banking, IT and oil & gas seeing the most pressure. Stocks from the healthcare and FMCG spaces are trading marginally lower.

The BSE-Sensex is trading lower by about 390 points (down 2.3%), while the NSE-Nifty is trading lower by around 110 points (down 2.1%). Stocks from the smallcap and midcap spaces are also seeing pressure as the BSE-Midcap and BSE-Smallcap indices are down by 1.7% and 1.8% respectively. The rupee is trading at 45.69 to the US dollar.

Power stocks are currently trading weak led by Reliance Power and Tata Power. As per a leading financial daily, the government has thrown a spanner in NTPC's 1000 MW project. The project being constructed at Mauda near Nagpur, at a cost of Rs 55 bn is slated to start operation in 2013. However, last Wednesday, the District Collector asked the company to stop construction as it failed to comply with the state's provision for relief and rehabilitation. While NTPC has acquired over 3,300 acres of land for relief and rehabilitation, Maharashtra State Rehabilitation Authority (MSRA) found the progress slow and tardy. This prompted the "stop construction" order. It may be recalled that NTPC's board had given the approval for this plant in November, 2007 and the foundation stone was laid in February 2009. This delay is a matter for concern for NTPC as this plant would have added 24 m units of power per day to NTPC's capacity.

Healthcare stocks are trading weak led by Wockhardt, Torrent Pharma and Sun Pharmaceuticals. A leading business daily has reported that the management of Ranbaxy is looking to focus on generic drugs as compared to the current focus on research on development of new drugs. As per the company, this change in strategy is aimed at effecting a better synergy between the parent company, Daiichi Sankyo and Ranbaxy. It is believed that Ranbaxy's Japanese parent company had recently incorporated a new company called Daiichi Sankyo Espha Co Ltd (DSECL), which was mainly aimed at marketing generic drugs. As such, with this, Ranbaxy will be able to develop, manufacture and supply products to the Japanese market.

Daiichi Sankyo and Ranbaxy had signed a three-year synergy plan wherein both the companies would work on developing a hybrid business model. As part of this model, the Indian company would mainly focus on generic medicine research both for itself and its parent firm. Instead, the new drug discovery programme would be taken up by Daiichi Sankyo. As per Ranbaxy's parent company, the whole group is constructing a global research and development setup in collaboration with the New Drug Discovery Research (NDDR) division of Ranbaxy. This is mainly aimed at speeding up the research process and expanding the pipeline of new drug candidates.

Markets plunge on opening
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 have plunged further into the red since then. Other key Asian markets are in the red with South Korea (down 2.9%) leading the pack of losers. The US markets closed lower by 1.5% last Friday.

Currently in India, heavyweights from the BSE-Sensex are trading weak with metal and construction majors facing the brunt of selling activity. The BSE-Sensex is trading lower by around 343 points, while the NSE-Nifty is down by about 96 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 1.3% and 1.5% respectively. The rupee is trading at 45.23 to the US dollar.

Energy stocks have opened the day on a negative note. Losers here include Reliance Industries and Castrol. As per a leading business daily, Reliance Industries has entered into a joint venture with Russian petrochemical major SIBUR to make butyl rubber. SIBUR will provide proprietary technology for polymerisation and its finishing, while RIL will supply monomers. The JV will produce the rubber at Reliance Industries' petrochemical complex in Jamnagar. This move comes on the back of the rapid increase in demand for rubber from India's automobile industry of late. In fact, the trend for rubber consumption is rising across Asia due to increased volumes of tire production. It may be noted that Reliance Industries recently entered into a joint venture with US based Atlas Energy to produce and market shale gas. The Indian petrochemical major has been on a look out for global acquisitions and tie-ups in order to access specialised technology and achieve greater scale.

Banking stocks have opened the day on a negative note. Losers here include SBI and Allahabad bank. SBI declared its FY10 results. The banking giant reported an interest income growth of 11% YoY in FY10 on the back of 17% YoY growth in advances. However, net interest margins slipped to 2.7% in FY10 from 2.9% in FY09. Cost to income ratio increased from 47% in FY09 to 53% in FY10 on the back of additional hiring. Gross NPAs rose to 3.0% from 2.9% in FY09, while net NPAs remained at 1.7%. Capital adequacy ratio stood at 13.4% (as per Basel II) at the end of FY10. The bank declared final dividend of Rs 20 per share, in addition to an interim dividend of Rs 10 per share.

Will India waste the 3G bounty?
Pre-Open

If the goings on in the past few weeks is any indication, Mr. Pranab Mukherjee, the country's finance minister, should be one happy man. In all likelihood, the country's tax payers are likely to earn a potential windfall from the ongoing 3G auctions in the Indian telecom industry. Infact, by the time the whole affair wraps up, the taxpayers would be richer by some Rs 700 bn. And this may not be all. What with the divestment program once again receiving a shot in the arm, the likelihood of the Government earning another Rs 400 bn from the same has become stronger than ever. Thus, with Rs 1.1 trillion almost certain to be in the bag, the country's dilapidated finances do have a very good chance of getting back on their feet.

However, this is easier said than done. The government's track record in spending such one off non-tax revenues does not inspire a lot of confidence. With big money will come demands from various ministries to go slow on certain reforms like the fuel price deregulation and fertilizer subsidies. And don't be surprised if the Government is all too willing to oblige. Let us just hope that better sense prevails this time around. After all, they don't have to look beyond their European counterparts to gauge the consequences of keeping on kicking the can down the road.

Are emerging markets still cheap?

There are two things more important than any other in the field of investing. First, the asset under consideration should have above average growth prospects for many years to come. And secondly, the asset should not be bought at expensive valuations. It goes without saying that the emerging economies like India and China will be able to comfortably grow at above average world GDP growth rates for many years into the future. Hence, they satisfy first of the two conditions highlighted above.

However, what about the valuations of their respective stock market indices. It is here where a few doubts start to creep in. About a year back, very few people would have bet against the fact that emerging markets were indeed cheap relative to their growth prospects. But not anymore. Thanks to the huge rally that they have witnessed since the March of 2009, the valuations at most emerging markets have really shot up. Infact, as per some estimates, they seem to be ruling at the same levels as just before the sub prime crisis. This then begs the question of whether a fresh exposure can be taken in these markets.

While we cannot talk about other markets, we certainly feel that investing in Indian stocks even at the current levels can prove to be quite profitable provided one takes a long term view of 3-5 years. However, we would like to caution about the fact that most of the low hanging fruits have already been picked up and hence, investors should seriously guard against the fact that the stock that they buy into does not turn out to be some sort of a value trap. In other words, there are strong chances that an investor buys into a cheap stock that remains forever cheap! While this is true across market cycles, the tendency to commit such a mistake is at its highest during the peak of a bull run. And we believe that the present scenario is one such scenario. Thus, we advice investors to be that much more cautious during stock picking.