Realty, power stocks lead mkts down
Closing

Taking cues from weakness in other Asian markets, Indian markets closed in the negative today. This was despite some buying that came in during the closing hours of trade. Power and realty stocks led the pack of losers. However, some buying was seen in auto and FMCG stocks. On the broader BSE, there were three losers for every stock that closed in the positive.

Except China (up 1%), all other key Asian markets like Japan (down 2.5%) and Singapore (down 1.9%) also closed weak. European markets have opened on a weak note as well.

Anyways in India, the BSE Sensex and NSE Nifty closed with losses of around 75 points (0.4%) and 15 points (0.3%) respectively. Mid and small cap stocks saw even greater weakness. The BSE Midcap and BSE Smallcap indices closed lower by 1.3% and 1.5% respectively.

Power stocks closed weak today, led by selling in NTPC, NHPC, and Tata Power. Earlier, reports from the power ministry indicated that the latest gas price hike will impact fuel costs for these companies. Subsequently, it expects power tariffs to rise by Re 1 per unit. However, we believe that the actual impact will be much lesser given that gas makes up just around 11% of the overall power generation in the country. And out of this, less than half the fuel requirement is met by APM gas, whose price has been doubled.

Airline stocks also closed weak, led by Spicejet and Jet Airways. Selling in Jet Airways was despite reports that the company halved its losses in FY10 as compared to FY09. As reported late yesterday, the company's net sales dropped by 9% YoY. The company's operating margins stood at 8.9% of sales in FY10, as compared to an operating loss of 6.6% of sales in FY09. As is widely known, the airline industry has been adversely affected in the recent past by the general economic slowdown. This coupled with weak domestic currency and high fuel cost, affected Jet Airways' performance during FY10. Anyways, the company is exploring ways to raise funds for meeting its capex plans.

Frontline software stocks closed in the red today. The losers' list was led by the likes of Wipro, TCS, and Infosys. Some international papers have reported that Infosys, India's second largest IT services company, is eyeing the UK-based IT services major Logica for a potential acquisition. While many details are not available, the acquisition could be in a range of around US$ 4.2 bn. If it goes through, this move will be pretty interesting from Infosys' standpoint. This is given that the company has never shown an affinity for such large deals in the past. This is despite the company sitting on huge cash pile, which currently stands at around US$ 3.5 bn.

Losers by far outnumber gainers
01:30 pm

Although having recovered from the morning losses during the previous two hours of trade, the Indian markets are trading well below yesterday’s closing levels. The overall market sentiment continues to remain negative as the decline to advance ratio is poised at 3.7 to 1 on the BSE. Stocks from the realty, metal and power sectors are currently amongst the top losers.

BSE-Sensex is trading lower by 200 points while NSE-Nifty is trading 55 points below the dotted line. The BSE-Midcap and BSE-Smallcap indices are trading lower by 1.75% each. The rupee is trading at 47.01 to the US dollar.

Telecom stocks are currently trading weak led by Idea Cellular, Reliance Communications and MTNL. Following the completion of the 3G spectrum auction process, the telecom Regulatory Authority of India (TRAI) has now made a statement that it is planning to come out with recommendations on the next level of services, fourth generation (4G) technology or ultra-broadband. It plans to come out with recommendations on the same by the end of the year. As per the chairman of TRAI, the regulator plans to bring out a consultation paper on 4G in the next two-three months. The successor to the 2G and 3G technology, 4G technology offers download at much faster speed and high definition video on demand, among other services.

In another development, it is reported that the communications ministry has asked telecom operators to implement mobile number portability (MNP), a service that allows a customer to shift their network without changing his number, by September this year. If implemented on time, MNP could be a big game changer for the telecom industry. This is especially after considering that the 3G auction have just ended and 3G services are likely to be launched by the end of the year.

Healthcare stocks are currently trading weak led by Wockhardt, Piramal Healthcare and Ranbaxy. As per a press release, US based Abbott will acquire Piramal Healthcare’s domestic formulation business for US$ 3.7 bn. This will involve US$ 2.1 bn payment upfront and US$ 400 m payment annually for the next four years. Under this deal, Piramal will transfer its domestic formulation business including manufacturing, marketing and selling of branded generic pharmaceutical products in India, Nepal and Sri Lanka. It will also be transferring its manufacturing facility at Baddi and marketing rights for over 350 brands and trademarks to Abbott.

As such, Piramal will be retaining its other business - custom manufacturing for third party, critical care, OTC products, manufacture and supply of active pharmaceutical ingredients, vitamins and fine chemicals, diagnostic medical devices and equipment and diagnostic and clinical research services. Piramal would also be able to continue its novel drug discovery and research. With this acquisition, Abbott will be able to accelerate its growth in emerging markets. The company expects that the combined sales force would be the largest in the pharma industry in India, and forecast sales of more than US$ 2.5 bn by 2020.

Realty, metals drag markets
11:30 am

Indian markets languished in the red as heavy selling activity continued during the previous two hours of trade. The advance to decline ratio is 1:5 on the BSE 100. The biggest fall was seen in the metal and realty space as investors booked profits in stocks from these sectors.

BSE-Sensex is trading lower by 192 points while NSE-Nifty is trading 55 points below the dotted line. BSE-Midcap index is trading lower by 2% while the BSE-Smallcap index is trading 1.8% below yesterday's closing. The rupee is trading at 47.06 to the US dollar.

Stocks in the FMCG space are trading weak lead by Nestle and Tata Tea. As per a leading daily, FMCG companies are looking at better growth in the second half of this financial year. This would be the result of food inflation losing steam as monsoons are expected to be normal. It is reported that FMCG industry is currently growing at 9% YoY. In fact, as per the industry, FMCG companies saw average growth rates drop by 6% to 11% in the March quarter due to high food inflation and restrictive consumer buying.

However it is expected that FMCG companies would grow at 14% YoY in the second half of this year. This is because post June quarter, consumer purchasing power which was impacted as a result of food inflation is likely to bounce back. A good monsoon is expected to create higher demand for FMCG companies as consumers would have higher discretionary income in hand. This is a positive for companies like Godrej which suffered as a result of consumers cutting down on discretionary spending. This is also a positive for companies like Nestle and GSK Consumer which have been reeling under high commodity prices as drop in food inflation would ease margin pressure.

Banking stocks are currently trading weak led by ICICI Bank and Axis Bank. A leading business daily has reported that India's largest bank SBI is aiming to bring down its operating expenditure. During FY10, the bank's cost to income ratio rose to 53% from 47% during FY09. A key reason for the same was additional hiring. The bank has been expanding its branch network quite aggressively in recent times. During FY10, SBI had opened around 1,000 branches. This is quite an aggressive number considering that over the past four years, the bank had opened about 3,000 branches. As per the bank, it plans to scale down its branch expansion plan to about 500 from the earlier estimate of 1,000 for this year.

As per SBI, the returns of the aggressive expansion have not met expectations as well. The bank felt some pressure on account of the same during the fourth quarter of FY10, where operating expense grew by 40% YoY. This coupled with higher provisions and contingencies led to a 32% YoY decline in net profits for the quarter. It may be noted that while the overall aim is to lower costs, the bank will be continuing with recruiting new employees over the next two years. This is on the back of a large number of natural attrition (retirements) due over the next two years.

Markets open in a sea of red
09:30 am

The Indian markets have started today's session on an extremely negative note. The benchmark indices opened well below the breakeven mark and have not managed to pare their losses since then. Other key Asian markets are in the red with Indonesia (down 3.2%) leading the pack of losers. The US markets closed lower by 3.6% yesterday.

Currently in India, heavyweights from the BSE-Sensex are trading weak with auto, construction and metal majors facing the brunt of selling activity. The BSE-Sensex is trading lower by around 240 points, while the NSE-Nifty is down by about 70 points. Selling is also being witnessed among mid and small cap stocks as the BSE-Midcap and BSE-Smallcap indices are trading lower by 2.1% and 2.4% respectively. The rupee is trading at 47.07 to the US dollar.

Energy stocks have opened the day on a negative note. Losers here include Cairn India and MRPL. As per a leading business daily, Indraprastha Gas (IGL) plans to increase CNG prices in the national capital region by about 20%. Currently CNG costs about Rs 22 per KG in Delhi. Since IGL is the sole supplier of CNG in the region, the fares of auto-rickshaws and buses which run on gas is set to increase. This move comes on the back of the government's decision to hike the price of administered price mechanism (APM) gas produced by ONGC and OIL from US$ 1.8 per m British thermal units (mBtu) to US$ 4.2 per mBtu. That is in line with prices of Reliance Industries' KG basin gas. IGL's current supply mix is 2.2 m standard cubic meters per day (mmscmd) of APM gas, 0.3 mmscmd of KG basin gas, and 0.4 mmscmd of regassified LNG. Since a bulk of IGL's gas supplies are sourced from APM gas, it had to choose between passing the cost to the customer and absorbing it. It may be noted that the city gas operator in Mumbai, Mahanagar Gas, is also dependent on APM gas and will thus have to take a similar call soon.

Stocks of financial institutions have opened today on a negative note. Losers here include LIC housing and ICRA. Power finance major REC has declared its FY10 results. It has posted a 38% YoY growth in income from operations in FY10, on the back of 30% YoY growth in advances. Advances grew on the back of a reasonable pick-up in demand for funding power projects and banks' reluctance to fund long term assets with their short term liabilities. Disbursements grew by 23% YoY, while approvals grew by 11% YoY in FY10. Net interest margin improved by 0.3% to 4% in FY10 due to lower funding costs. Non-interest income grew by just 4% YoY due to lower loan related fees. The institution reported a bottomline growth of 57% YoY in FY10 backed by lower provisioning cost. It declared a dividend of Rs 6.5 per share for FY10, including the interim dividend.

Solution to India's fiscal deficit woes?
Pre-Open

Imagine a listed company. You are analysing it as a potential investment. You are going through its profit and loss account and find that it doesn't make much money. It spends more that it earns and runs up a loss. To fund this yearly revenue gap, it borrows. And that debt slowly accumulates in the balance sheet. What would you make of this company? Not a pretty picture, you would say. Fair enough.

Now let us add a twist to the tale. The company has some valuable assets, some of which don't even appear on its balance sheet. The company owns a territory where it controls the airwaves. Telecom spectrum. It decides to hold an auction for the use of this spectrum. It raises a neat sum of money, which makes the debt on its balance sheet look less threatening than before. Now, what would you make of this company?

If you haven't already guessed it - we are talking about the 3G auctions. It has generated a lot of hype about how it will help meet India's fiscal deficit target. But we are not that enthused about it. Let's go back to the company analogy. Any windfall cash flow helps deal with the existing debt on the balance sheet. But as long as expenses exceed revenues in the profit and loss account, there will be fresh debt on the balance sheet pretty soon. Windfall gains merely ease the symptoms of the malaise. They do not cure the disease. The disease of lower earning power and wasteful expenditure.

The windfall from the sale of spectrum or disinvestment might seem to be the solution to India's fiscal deficit worries. But, in our view it doesn't solve the problem. In fact, such one-time bonanzas reduce the incentive of politicians to curb wasteful expenditure and plug revenue leakage. Instead, such one time gains should be deployed for specific purpose like building infrastructure. The gap in yearly accounts must eventually be solved through everyday effort to shore up tax revenues and running a tight ship. In fact, making a habit of using resources like telecom spectrum to bail itself out could lead the government to keep the resources under its control in a permanent state of short supply. That's the last thing the world's second fastest major economy needs.