Selling intensifies in the final hours
Closing

While the Indian markets traded well above the dotted line for the larger part of the day, selling activity across index heavyweights intensified in the final trading hours to pare most of the gains that were made. While the BSE Sensex closed higher by around 24 points (up 0.2%), the NSE Nifty gained around 13 points (up 0.3%). While the BSE Midcap ended flat, the Smallcap index notched gains of 1%. Gains were largely seen in oil & gas stocks while metals and auto stocks were at the receiving end.

As regards global markets, Asian indices closed mixed today while the European indices have also opened on a mixed note. The rupee was trading at Rs 46.94 to the dollar at the time of writing.

Sun Pharma announced its FY10 results a while ago. The company's topline declined by 4% YoY during the year. This was largely due to the 7% YoY decline in domestic formulations sales and the 12% YoY decline in international formulations. As far as the former is concerned, the decline in sales was largely due to a one time impact in 4QFY09. Thus, on excluding the same, domestic formulations sales grew by 15% YoY. As far as international formulations are concerned, sales declined largely due to the drop in revenues from the US business. Having said that, international formulations grew by 29% YoY during the year. The company's operating margins declined by 10.2% largely due to the higher margins that the company enjoyed in FY09 due to some exclusivity period for some products, which was not present this year. Decline in operating profits and higher depreciation charges led to the 26% YoY decline in net profits. The stock closed higher today.

Cement stocks closed mixed today. While Ambuja Cement and India Cements found favour, Madras Cements closed in the red. Madras Cement announced its FY10 results. Sales for the full year grew by 14% YoY. The operating profits were higher by 10.6% YoY as margins fell by 1%. Higher raw material costs, employee costs and transport & handling charges led to the decline in operating margins during the year. Net profits for the year declined by 3% YoY due to higher interest costs and depreciation charges. Board announced a final dividend of Rs 0.5 per share along with the interim dividend of Rs 1.5 per share.

Smallcaps outperform their peers
01:30 pm

Selective buying activity led the Indian markets to rise marginally during the previous two hours of trade. The overall market breadth is also positive as the advance to decline ratio is poised at 3.2 to 1 on the BSE. Stocks across sectors are in demand at present, led by those form the oil & gas, power and capital goods segments. Stocks from the realty, FMCG and healthcare sectors are amongst the least gainers.

The BSE-Sensex is trading up by 230 points while NSE-Nifty is trading higher by 70 points. While the BSE-Midcap index is trading higher by 1.4%, it seems as though investors are more interested in smallcaps today as the BSE-Smallcap index is trading higher by 2%. The rupee is trading at 46.68 to the US dollar.

Stocks of auto ancillary companies are currently trading firm led by NRB Bearings, Bharat Forge and Sundaram Fasteners. Bharat Forge announced its results recently. For the full year FY10, the company's consolidated net sales declined by 30% YoY. The key reason behind this decline was the weak conditions in the European and US markets. However, on a standalone basis, the company's revenues declined 10% YoY. The reason for the same was the exposure of the company's standalone operations to the international markets. At the operating level, the company reported a 39% YoY decline in profits during the full year. On a standalone basis, operating profits were down by 7% YoY. Operating margins for the company's consolidated business dropped to 10.2% in FY10. It stood at 11.7% during the previous year. Margins contracted mainly on account of stock related adjustments and higher manufacturing expenses. On the bottom line front, the company reported a net loss during the year. Lower other income coupled with the poor operating performance led to this performance during the year.

Auto stocks are currently trading firm led by Tata Motors, Escorts and Hero Honda. A leading business daily has reported that auto major Mahindra and Mahindra is looking at increasing its exposure in the light commercials vehicle category. This it will do by launching newer versions of its newly launched sub-one-tonne mini-truck Maxximo. As per various sources, the company will be launching a passenger carrier variant as well as a goods carrier with at least a one tonne payload. These launches are likely to take place in about six months. The passenger carrier variant of the Maxximo model will fall under the category of Maruti Suzuki's Omni and Eeco. It may be noted that M&M will find it difficult to grab share from these vehicles as they control nearly 80% of the multipurpose vehicle (MPV) segment. At the same time, it may be noted that MPV vehicles have been seeing some good demand in recent times. For example, during the month of April, sales of MPVs rose by 34% YoY. M&M may be launching variants of the Maxximo brand considering the strong growth (although at a lower base) in recent times. On the whole, the demand for such sub one tonne vehicles has been strong as well. It is believed that sales of sub-one-tonne trucks have been growing at 46% annually over the past four years.

Godrej bets on Latin America
11:30 am

Indian markets are seen holding on to their opening gains and trading range bound in the last two hours of trade. Buying interest is seen in stocks from the oil & gas and metals space. Investors are showing marginal interest in defensive stocks such as those from the healthcare and FMCG sectors.

BSE-Sensex is trading up by 193 points while NSE-Nifty is trading 63 points above the dotted line. BSE-Midcap index is trading higher by 1.5% while the BSE-Smallcap index is trading 2% above yesterday’s closing. The rupee is trading at 46.69 to the US dollar.

As per a press release, Godrej Consumer Products Limited (GCPL) is acquiring 100% stake in Issue Group. Issue Group is a hair colour company based in Latin America and has a strong presence in Argentina, Peru, Uruguay and Paraguay. Issue group enjoys a volume market leadership in Argentina with over 20% market share. The sales of the company in 2009 were over US$ 33 m. The hair color market in Argentina is estimated at over US$ 200 m and has shown a 22% CAGR over the last 2 years.

The Issue group acquisition has been valued at approximately 8 times operating (EBITDA) income and is expected to be EPS accretive for GCPL from the first year of operations. This is the first acquisition of GCPL in Latin America. Issue group is expected to complement GCPL’s strengths as it is positioned in the mass market segment. Moreover, this acquisition provides a distribution platform for GCPL’s portfolio of products.

Kanoria Chemicals released its results 4QFY10 and FY10 results last week. The company’s top line fell by 14% YoY during the year. This fall was due to lower realizations for the year. In fact both the company’s segments viz. chloro chemicals and alco chemicals saw double digit fall in revenues. For the year, operating (EBITDA) products fell by 26% YoY as a result of sharp increase in staff costs as well in power costs. However, net profit increased by 92% YoY as a result of forex gains. On the other hand, when adjusted for forex gains, the net profit is seen to fall by 65% YoY. For the quarter, the top line fell by 13% while the bottom line fell by 83% YoY. However, when adjusted for forex gains, the bottom line turns negative. The company suffered during the year as it is a commodity company and hence does not enjoy any pricing power. However, the concerns are expected to get ironed out going forward.

Reliance truce boosts markets
09:30 am

The Indian markets have started today's session on a positive note, largely led by Reliance group of stocks. The benchmark indices opened above the breakeven mark and have managed to hold on to their gains since then. Other key Asian markets are in the green with China (up 3%) leading the pack of gainers. The US markets closed higher by 1.3% last Friday.

Currently in India, heavyweights from the BSE-Sensex are trading strong with the Reliance pack, auto, and construction majors finding buying interest. The BSE-Sensex is trading higher by around 200 points, while the NSE-Nifty is up by about 60 points. Buying interest is also being witnessed among mid and small cap stocks as the BSE-Midcap and BSE-Smallcap indices are trading higher by 1.9% and 2.1% respectively. The rupee is trading at 46.93 to the US dollar.

Steel stocks have opened the day on a positive note. Gainers here include Jindal Saw and JSW Steel. As per a leading business daily, steel giant SAIL plans to expand operations worldwide after being conferred the 'Maharatna' status by the government recently. This status will allow the company to make equity investments up to Rs 50 bn to set up financial joint ventures and wholly-owned subsidiaries in India or abroad without government's approval. However, the company needs to first appoint five independent directors to qualify for the status. It may be noted that the government has recently also awarded this status to NTPC, Indian Oil, and ONGC. It may be noted that SAIL is currently undertaking Rs 700 bn expansion project to enhance its annual production capacity to 23 m tonnes, from the current 14 m tonnes. It is also in talks with Posco to jointly set up steel plants at a cost of Rs 150 bn in India. As such, in our view, the financial powers under the 'Maharatna' status will help execute its plans.

FMCG stocks have opened the day on a positive note. Gainers here include Godrej Consumer and Henkel India. ITC declared its FY10 results late last week. Overall sales grew by 17% during the year backed by higher sales in the FMCG business as well as the paper and paperboard business. ITC's cigarette portfolio grew 20% YoY during 4QFY10. This growth in sales was supported by introduction of new brands, price hikes and strengthening of trade and distribution channels. The branded packaged foods business grew on the back of improved product mix, smarter sourcing of inputs, improved servicing of markets and supply chain efficiencies. The hotels business showed a decline of 9% in sales during the year. Net profit of the company for FY10 increased by 24% YoY, while net profit margins expanded by 1.5%. This growth comes on the back of higher operating income registered during the year, partly offset by higher interest costs and higher tax expense.

Treat this correction well
Pre-Open

The Indian markets have faced turbulence in the past three weeks. And not much respite seems on the horizon. Some snap reactions might though be in the offing. One positive reaction could be for the truce between the Ambani brothers. Also, more positive surprises from Indian companies through their good March quarter performance cannot be ruled out.

However, the darkest cloud covering investors' sentiment - Euro crisis - remains in its full glory. And we see it continuing to be the deciding factor in the way markets move over the next few days. After all, the magnitude of the Euro crisis is huge and widespread. Thing are not looking too bright in the US as well, as we saw from the recent rise in the country's unemployment rate. A falling inflation in the US also speaks volumes about the slackness in consumer spending, which is counted as a factor that can take the US economy out of the slump.

In all, most of the concerns impacting Indian markets are foreign in nature. Of course, domestic concerns remain in the form of high inflation and stock market overvaluation. But do not expect these to be significant factors impacting the long term direction of the Indian economy.

As we quoted in a recent issue of the 5 Minute Wrapup, emerging markets like India present themselves as the best bet in times of the global economic uncertainty. Expert emerging market investors like Mark Mobius in fact find less risk and better return in emerging markets. And India is no exception.

Long term investors would do themselves a world of good by sticking to quality companies for 5 to 10 years. Looking at any correction as simply a 'price action' and not as 'value destruction' would be the key here. Given India's domestic demand led economy, any correction in asset prices emanating from the developed world would only provide investors to buy good companies at reasonable prices.