Global markets gripped by Euro fear
Closing

Indian indices like their peers in Asia had a somber outing today as investors chose to book profits in stocks across the board. Indian markets were in fact the biggest losers in Asia today, following Indonesia and Singapore. Stocks from the banking, auto and commodity sectors were the biggest losers. European markets have also opened lower.

While the BSE Sensex closed lower by around 355 points (down 3%), the NSE Nifty lost around 147 points (down 3%). Midcap and small cap stocks fared marginally better with losses of 2.5% each. The rupee was trading at Rs 46.1 to the dollar at the time of writing.

Stocks and commodities around the world fell today after Germany banned speculators from some bets against government bonds and banks. The new regulations raised concerns about investors being able to hedge their European holdings or sell assets as the region's debt crisis worsens. While the crisis in the developed world is far from getting over, we believe that such corrections offer very attractive opportunities to long term investors in India.

As per a leading business daily, the government has asked ONGC to pay Rs 50 bn for the quarter ended March 2010 for covering downstream companies losses of selling auto fuel below cost. It may be noted that this is almost 500% higher than what the company was forced to bear in the same period a year ago. One reason for this is that crude prices have risen substantially compared to the year ago period. Thus while the subsidy burden that the company has had to bear has gone up, so has their selling price for crude.

In a recent interview, the management of ONGC expressed that they would be agreeable with this arrangement, but only if the subsidy they are asked to bear remains restricted to auto fuels. However, due to the political ramifications of this issue, the uncertainty on this aspect too remains high. The stock of ONGC closed lower on the bourses today.

In light of the ever increasing demand of four wheelers, Maruti has been facing severe capacity constraints. The company produced 1 m units last year and has aggressive plans to produce 1.2 m units this year.  As the company does not want to lose out on the market share because of capacity constraints, as per a leading business daily Maruti has begun capacity expansion talks with its vendors so as to ensure regular and uninterrupted supply of raw materials. Typically the vendors wait until the actual demand surfaces and then expand their capacity.  If this happens Maruti will be a laggard in terms of output in the hyper competitive auto market and lose market share. In order to avoid this situation and maintain/increase market share the company has chalked out a new programme whereby it will work with its vendors to proactively identify their fund raising plans and planned capacity schedules. Auto stocks received a hammering on the bourses today with the stocks of Tata Motors are M&M closing significantly lower.

In another news, Ranbaxy's European unit has recalled select batches of three products from Britain, Denmark and Ireland. However, the recall is being done to include safety warnings initiated by the European Medicines Agency. There does not seem to be any product quality concerns with respect to these 3 drugs whose names have not been divulged. It must be noted that two units of Ranbaxy namely Dewas and Poanta Sahib had come under the US FDA scanner for not complying with quality manufacturing standards. While Ranbaxy has made a formal invitation to the US FDA officials to re-inspect the Dewas plant, issues at the Poanta Sahib plant could take more time to resolve. A corrective action plan is currently underway at that plant. The stock closed lower by 6% today.

Ashok Leyland bets on growth
01:30 pm

Indian markets continued to languish in the red over the last two hours of trade. All indices were seen trading below the dotted line led by stocks from the banking and realty space.

BSE-Sensex is trading lower by 227 points while NSE-Nifty is trading 73 points below the dotted line. BSE-Midcap index is trading lower by 0.8% while the BSE-Smallcap index is trading 0.5% below yesterday's closing. The rupee is trading at 46.03 to the US dollar.

As per a leading financial daily, commercial vehicle major Ashok Leyland is planning a capex of Rs 20 bn over the next two years. Of this investment, Rs 8 bn has been earmarked for investment in joint ventures. As per a company's spokesman, the company expects to see a 15% growth in commercial vehicles this year. This is on the back of positive macro-economic indicators and migration to superior emission norms. This would help the company increase its market share on an improved technology platform.

In fact the company has steadily been ramping production in anticipation of higher demand and has recently inaugurated its Pantnagar plant which will take up the company's installed capacity to 150,500 vehicles. The company plans to introduce 25 new models over the next 18 months. Moreover, the first batch of Light Commercial Vehicle product as part of the company's JV with Nissan Motor Company is expected to roll out in 2011. With these initiatives, it seems the company is looking to position itself to take advantage of the continuing growth trend.

Rural Electrification Corporation (REC) declared its 4QFY10 and FY10 results today. The company's interest income for the year grew by 38% YoY. This growth was aided by growth in advances to generation and T&D. While advances to generation grew by 67% YoY, advances to T&D grew by 26% YoY. The company's operating costs grew by 43% YoY as a result of increase in staff costs and other expenditure. Staff costs during the year increased by 34% YoY while other expenditure increased by 20% YoY. REC's bottom line expanded by 59% during the year. For the quarter, the company's top line grew by 34% YoY while net profits grew by 44% YoY.

Realty, banks drag indices lower
11:30 am

Although slightly above their day’s lows so far, the Indian markets continued to languish in the red during the previous two hours of trade The overall advance to decline ratio on the BSE is skewed in favour of the latter at present. Stocks across sectors are trading weak led by those in realty, banking and metal space. However, those forming part of the IT and consumer durables sectors are trading marginally lower.

BSE-Sensex is trading lower by 190 points (down 1.1%), while the NSE-Nifty is trading down by 60 points (down 1.3%). BSE-Midcap index is trading lower by 0.2% while the BSE-Smallcap index is trading marginally lower. The rupee is trading at 45.91 to the US dollar.

Banking stocks are currently trading weak led by ICICI Bank, Axis Bank and HDFC Bank. The stock of ICICI Bank is currently the top loser amongst stocks forming part of the BSE-Sensex. Losses in the stock are seemingly on the back of its plans to acquire Bank of Rajasthan (BoR). The latter’s stock has however, been on a tear as it is trading higher by 20% today. Under the agreement ICICI Bank will offer 25 shares for every 118 shares of BoR held by the promoters of Bank of Rajasthan.

It may be noted that ICICI Bank is nearly 25 times the size (in terms of assets) of BoR. However, the latter has only one-fourth the numbers of branches as that of ICICI Bank, which has about 2,000 branches across the country. BoR on the other hand has good presence in the northern region of the country. As such, from this it is quite evident that ICICI is aiming at expanding its retail franchise. However, this may not have a significant impact on ICICI Bank’s books (considering BoR size as compared to itself). Nonetheless, we are not thrilled about the valuations at which the ICICI Bank is acquiring the BoR. The move could have a small impact on ICICI’s NPA levels in the medium term as well. It must be noted that BoR is not really known for its financial stability in the past. The bank had reported a loss at the bottomline level during the 9mFY10 period.

Auto stocks are currently trading weak led by Tata Motors, TVS Motor and Bajaj Auto. A leading business daily recently reported that India’s largest commercial vehicle manufacturer Tata Motors is looking at manufacturing cars in Mexico. The company is believed to be in talks with a Mexican firm to make its cars there. If these talks do go through, Mexico's Metalsa SA de CV will be manufacturing the Indian company’s models such as the Indica Vista, Indigo Manza and the Nano. This development will be done with the help of a contract manufacturing arrangement and will enable Tata Motors to establish a presence in and around the country. This will be a positive development for the company as this would enable it to diversify its presence geographically thereby catering to various kinds of markets. These include the emerging markets and the developed nations such as the US. While there has been no official statement from the company itself, its management has not denied this development.

Markets begin on a negative note
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 slipped further 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 South Korea (down 1.8%) 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 metal and construction majors facing the brunt of selling activity. The BSE-Sensex is trading lower by around 151 points, while the NSE-Nifty is down by about 48 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 0.1% and 0.2% respectively. The rupee is trading at 45.86 to the US dollar.

Energy stocks have opened the day on a negative note. Losers here include Cairn India and Gujarat Gas. As per a leading business daily, the government is planning to launch the ninth round of the New Exploration Licensing Policy (NELP) in July this year. Around 45 oil and gas blocks will be put up for auction. Some of these blocks will be from the eighth round for which no bids were received. Of the 70 blocks offered under Nelp-VIII, only 36 attracted bids. The failure was attributed to falling crude oil prices which resulted in a freeze in exploration plans of global energy majors. However, the lack of clarity in policies such as tax holiday on gas production also contributed. It may be noted that NELP auctions have resulted in major hydrocarbon discoveries by both Reliance Industries and ONGC. Hence in our view, it is high time we sorted out the policy issues to attract investments into India's energy sector especially given the fact that we import over 70% of our hydrocarbon needs.

Textile stocks have opened the day on a negative note. Losers here include Welspun India and Alok Industries. Raymond announced its FY10 results. It reported a 3% YoY decline in standalone sales during the year. Standalone EBIDTA margins improved to 10% in FY10 from 9% in FY09, due to lower input costs. While garments enjoyed higher margins, the branded apparel business suffered from lower volume growth. The company declared profits at the net level as against losses last year. The improvement was due to the absence of losses on foreign currency borrowings this fiscal. The results include the voluntary retirement write offs, which also took a toll this year. 88 new stores were opened during FY10 adding 99,000 sq feet of retail space and this sustained Raymond's position as India's largest specialty retailer. Simultaneously, aggressive reviews of the non performing stores during the year resulted in 28 store closures. The company plans to add 200 stores in tier 3 and 4 cities by 2011 mainly through the franchise model.

Another start to banks' consolidation?
Pre-Open

The latest marriage that is expected to get solemnized in Indian banking space is that of one of the oldest with the country's largest private sector bank. We are referring to the proposed merger of ICICI Bank with Bank of Rajasthan. The last union was that of HDFC Bank with Centurion Bank of Punjab. The latter turned out to be reasonably successful and benign for shareholders. But the rationale and cost of merger are best evaluated on a case to case basis.

In the case of Bank of Rajasthan, the RBI's mandate to the promoters to dilute their stake in the entity was a one off. But more such cases cannot be ruled out. Particularly if the managements of the bank fail to live up to the central bank's guidance. Building up a robust financial structure is the RBI's key objective. And to fulfill the same, the central bank needs to ensure that all players in the sector are equally well placed. Both in terms of risk averseness and profitability.

Such merger serves the purpose of fortifying Indian banking sector in two ways. One it offers the larger banks extended franchise and client base. Two it takes off risk from the smaller banks and puts it in the balance sheets of larger and well capitalized entities. It also makes the RBI's job that much easier in terms of risk surveillance. The reluctance of Indian PSU banking entities to participate in this exercise may stand to be detrimental to them. While their interests lie in reducing excess franchise and employee base, these entities exert the pressure of their labour unions. This may serve their short term interests but over the longer term competition with private and foreign sector will only get intense.

The private sector will, however, have to be realistic in terms of the cost of the inorganic growth. Overpaying for franchise or deposit base could again paralyse the future growth potential of these banks. Also they need to ensure that the merged entity has a good mix of assets. Furthermore, that the basic risk assessment procedure for the combined loan book is in place.

The merger of ICICI Bank and Bank of Rajasthan could once again kick start the consolidation process. Both in private sector as also (hopefully) in PSUs. The pace of integration and extent to which they make the players competitive, would determine their imminence to evolution of Indian banking.