Euro concerns fade, not disappear
Closing

Markets came off the day’s highs during the closing hours of trade but have managed to end the day in the positive. The BSE Sensex closed the day with gains of around 40 points (up 0.2%) whereas NSE Nifty edged higher by around 10 points (up 0.2%). BSE Midcap and Small cap indices also closed in the positive, gaining 0.4% and 0.7% respectively. On the Sensex, three stocks gained for every two that closed in the red.

While most Asian markets closed in the green today, Europe too is trading strong currently. The rupee was seen pegged at Rs 45.6 to the dollar at the time of writing.

While the markets threatened to end in the negative on yet another occasion, they quickly clawed back in the positive territory and remained there for the rest of the session. Today’s session thus takes some of the spotlight away from the Euro crisis and instead, focuses on some good news coming out of the continent. But the question is for how long. The problems facing some of the Euro nations are so huge that they cannot be solved in a hurry. Thus, there’s every chance that more pain lies ahead for the troubled nations. And also, there’s every chance that the rally that we witnessed today is nothing more than a dead cat bounce with Indian markets too, getting caught in the sentiment.

GAIL, the gas distribution and transmission major, announced its FY10 results recently. The company’s topline grew by 4% YoY during the fiscal whereas the bottomline growth came in at 12% YoY, thanks mainly to an expansion in operating margins. EBITDA margin expanded to 25.1% during the year from 23.8% in FY09 on the back of lower raw material costs. Coming back to the topline growth, the 4% growth was driven by a 28% YoY growth in the natural gas transmission business. Sales from the petrochemicals segment grew by 2% YoY, while LPG transmission segment grew 18% YoY. GAIL has planned a capex of Rs 80 bn in FY11, mostly towards expanding its pipeline network. The stock closed higher by around 2% on the bourses today.

With decline in the region of 2%, Deccan Chronicle, one of India’s leading newspaper dailies, had yet another poor outing today. The stock seems to be feeling the heat of its sub-par performance in the quarter gone by. The company’s bottomline during the quarter fell by 20% YoY despite a 6% growth in topline and strong expansion in operating margins. However, it was the nearly threefold jump in tax outgo that spoiled the show for the company. For the full year though, bottomline growth came in at an impressive 86% YoY as lower newsprint costs gave margins a big boost and interest expenses also fell.

Smallcaps outperform their peers
01:30 pm

Buying activity led the Indian indices to shed their morning session losses and rise well above the dotted line during the previous two hours of trade. The overall advance to decline ratio is poised at 2.3 to 1 on the BSE. Currently stocks from the consumer durables, capital goods and oil & gas spaces are amongst the top gainers. Stocks from the metal and realty spaces are however seeing some pressure at the moment.

BSE-Sensex is trading higher by 120 points (up 0.7%), while the NSE-Nifty is trading higher by about 30 points (up 0.6%). Stocks from the midcap and smallcap spaces are however garnering more interest as the BSE-Midcap index and BSE-Smallcap indices are trading higher by 0.9% and 1.5% respectively. The rupee is trading at 45.54 to the US dollar.

Power stocks are currently trading firm led by Torrent Power, Reliance Power and CESC. Power major, NTPC announced its results for the quarter and full year ending March 2010 recently. For the full year, the company reported a sales growth of 9% YoY. The company reported operating margins of 29.7%, higher by 1.2% YoY as compared to FY09. Margin expansion was mainly on account of lower fuel and staff costs (both as percentage of sales). The company's net profits rose by 6% YoY. As compared to operating profit growth of 14% YoY, the net profit growth has slowed down on account of lower other income and higher tax outgo. The other income is lower on account of lesser interest income. As for the quarterly numbers, revenues and operating profits are higher by 5% YoY and 3% YoY respectively. Net profits, on the other hand, are down by 5% YoY as compared to the corresponding quarter last year.

In other news, a leading business daily has reported that the company plans to float a US$ 4.2 bn (approximately Rs 190 bn) tender for the supply of super critical equipment manufactured in India. The tender will be for around 8 units of 800 MW (megawatts) each.

Stocks of battery manufacturers are trading firm led by Amara Raja and Exide Industries. As per a leading news agency, India's largest automobile battery maker Exide Industries is planning to invest nearly Rs 4 bn for expanding its capacity. This expansion would be mainly aimed towards building up its two-wheeler battery capacities. It is reported that the installed capacity would increase by 60% from current levels. This plan would be in anticipation of strong demand, especially after considering the strong volumes sales of two-wheelers during the past year. This growth in two-wheeler volumes had been rural driven. With the economy expecting to clock 8.5% GDP growth this fiscal, demand for two wheelers is expected to remain strong. Furthermore, Exide plans to improve its sales to original equipment manufacturers from 70% to 90% in order to improve relationship with the companies. It may be noted that demand for automobiles has helped Exide improve its bottom line by 88% YoY in FY10.

Metal, realty keeps markets in red
11:30 am

The benchmark indices pared most of their opening losses and traded marginally below the dotted line during the previous two hours of trade. Stocks from consumer durable and capital goods space are seeing buying interest while stocks from realty and metal sectors are witnessing a sell off.

BSE-Sensex is trading marginally in the red while NSE-Nifty is trading 7 points below the dotted line. BSE-Midcap index is trading higher by 0.5% while the BSE-Smallcap index is trading 1.2% above yesterday's closing. The rupee is trading at 45.6 to the US dollar.

Engineering stocks are trading strong with heavyweights like L&T and Cummins leading the gainers. As per a press release, Swiss engineering company ABB has announced an open offer for the shares of its Indian subsidiary ABB Ltd. The open offer is for 48.5 m equity shares at an offer price of Rs 900. This represents 22.89% of voting rights in ABB Ltd. This deal is worth US$ 965 m and will raise the stake of the parent company from 52% to 75%. Even after this buy back, the parent company will have US$ 5 bn in cash, leading to speculation that the parent company plans to take its stake even higher and eventually plans to delist the Indian subsidiary. The open offer will commence on 8th July and end on 27th July 2010. While the offer price is expensive at three times sales of ABB Ltd, the premium is a reflection of the growth potential of the company.

Telecom stocks are trading higher led by Bharti Airtel and Idea Cellular. A leading business daily has reported that the Department of Telecommunications (DoT) might reject the recent proposals that were made by the Telecom Regulatory Authority of India (TRAI) last week. One of the key proposals was that of the telecom operators paying a one-time fee on excess spectrum on the basis of the 3G spectrum prices. This proposal in itself saw a lot of controversy considering that the efficiency of 2G spectrum is way below that of 3G spectrum. As per the DoT, the efficiency of 3G spectrum is three times more than that of the 2G spectrum. As such, the price of 2G Spectrum has to be accordingly discounted over 3G.

However, it is further reported the DoT plans to work on a new formula based on the efficiency of the spectrum. While there is no official statement from the department, keeping in mind the overall efficiency of the spectrum, the rates would be in the range of about one-third of what was originally proposed. This would be a relief on the incumbent telecom operators as the overall one-time fee would be much lower than what was anticipated earlier.

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 above the breakeven mark but soon slipped into the red. They have not managed to emerge out of the negative territory since then. Other key Asian markets are in the red with China (down 0.8%) leading the pack of losers. The US markets closed higher by 0.1% yesterday.

Currently in India, heavyweights from the BSE-Sensex are trading weak with metal and banking majors facing the brunt of selling activity. The BSE-Sensex is trading lower by around 41 points, while the NSE-Nifty is down by about 16 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 0.4% and 0.6% respectively. The rupee is trading at 45.71 to the US dollar.

Energy stocks have opened the day on a negative note. Losers here include Castrol and Gujarat Gas. As per a leading business daily, GAIL plans a capex of Rs 80 bn in FY11 mostly towards expanding its pipeline network. The company plans to add 1,200 km of pipeline in the current financial year on the back of an addition of 800 km in FY10. Given the large amount of capex involved, the company plans to borrow Rs 35 bn this fiscal to meet its funding needs. Rs 5 bn will be raised in Rupee denominated bonds, with an option of issuing further bonds to the extent of 50%, if demand is strong. Another US$ 150 m will be raised in foreign currency bonds. The company has 7,200 km of natural gas pipelines with a capacity of 148 m cubic metres a day. It aims to add another 8,200 km by FY14. As a result, the company will invest Rs 353 bn by FY14 funded by debt to the tune of Rs 200 bn. It may be noted that with the arrival of KG basin gas on the scene, India's pipeline infrastructure needs to expand to meet the growing need for transporting natural gas.

Metal stocks have opened the day on a negative note. Losers here include Hindalco and Hindustan Zinc. NALCO announced its 4QFY10 results. The company reported a topline growth of 44% in 4QFY10 on the back of firm aluminium prices. Its operating margin expanded to 33% during 4QFY10, up from 8.5% in 4QFY09 due to lower raw material and staff cost, as a percentage of sales. However, other income declined by 39% YoY. The company's bottomline zoomed more than four-fold on the back of higher margins. For the full year, the company reported a topline decline of 1.4% YoY, while bottomline declined 34.6% YoY due to lower margins and higher depreciation.

Emerging mkt banks getting stronger
Pre-Open

At no time has the stark difference between the banks of the rich world and those of the emerging markets including India been more apparent than at the height of the global financial crisis. During this crisis, big global banks were brought down to their knees by that section of the population known as the subprime borrowers. Global banks wanted to grow aggressively. And inorder to do that 'financial engineering' was given importance, lines became blurred between investment and commercial banking operations and the credit profile of potential customers were not rigourously looked into. The final outcome of this was there for everyone to see.

In contrast banks in the emerging markets fared much better. Take the case of India. Indian banks were relatively unscathed from the global crisis which crippled US and European banks and compelled them to run with a begging bowl to their respective governments. So what did Indian banks do better than their Western counterparts. They stuck to the sound principles of good, solid, conservative banking. As reported in the Economist, emerging market banks including those in India are of the old-school, with branches, profits, low pay and high capital. What is more, they are also much more tightly regulated than the banks in the rich world.

Emerging market banks have managed to tide over the crisis rather well. However, they still have a tough issue to address. Emerging economies need solid banks to grow fast. But too much fast growth will then undermine the safety of banks. Their mettle will be tested especially during the time when the consumers decide to spend more and deposit less with banks. Also, businesses would then want to tap the international markets for capital rather than access banks. This could then thwart to some extent the latter's growth.

Will banks in the emerging markets then throw caution to the winds? Will they pursue growth at the cost of safety? In India's case atleast the RBI has displayed a lot of independence in framing its policies for the Indian banking sector. And given the strong growth potential in the country, the idea of Indian banks following the footsteps of their beleaguered Western counterparts certainly seems less likely.