India shakes off Asia blues

Wed, 13 Jan Closing

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India was the only Asian market to close in the positive today. Gains here were led by stocks from the IT, telecom and metal sectors. While the BSE Sensex closed higher by around 85 points (0.5%), the NSE Nifty managed gains of around 25 points (0.5%).

Mid and small-cap stocks also followed the Sensex's lead. The BSE Midcap and BSE Smallcap indices closed with gains of 0.6% and 0.9% respectively. The rupee was seen trading at Rs 45.59 to the US dollar at the time of writing.

Among other Asian markets, the indices in China (down 3%) and Hong Kong (down 2.6%) lost the most. Lending curbs imposed by the Chinese policymakers seemed to be the key reason that spooked these markets. Economists believe that China's decision to raise proportion of deposits that banks must hold in reserve, which is a way to pull brakes on lending, is a small first step toward reducing the massive stimulus provided to its economy. While this would go some way in extending a bubble burst in the Chinese property market, we do not see these measures as big enough to prick the bubble in its nip. And that's a big danger to the global economy in 2010.

IT stocks remained in limelight today as well. TCS, Infosys, and Wipro emerged as the major gainers from the pack. These stocks seem to be riding a wave of improved sentiment towards the sector after Infosys pronounced a good future outlook yesterday. Now while TCS and Wipro will be announcing their 3QFY10 results on Jan. 15 and Jan. 20 respectively, investors are seemingly already factoring in similar outlook from their managements. And not without reason!

With an improvement in the global economic landscape, these companies are eying faster decision making from their clients with respect to their 2010 tech spending. As Infosys' management indicated yesterday, volume growth is again picking up and billing rates are sort of stabilizing. With the rupee-dollar volatility as the only major concern these companies face, we do not see any reason IT stocks won't be in limelight in 2010 as well. Investors however need to keep a close track of valuations as most frontline stocks from the sector are already trading at fair valuations.

Cement stocks were also amongst the key gainers today. ACC and Ambuja Cement topped the list. Reports that cement companies are on the verge of raising their product prices led by rising demand seemed to be the reason for today's buying in these stocks. An Economic Times report has in fact pegged the price hike to be in the range of Rs 3 to 5 per 50 kg bag in the northern, southern and western markets. This is the third time in the past three months that cement prices will be raised in these markets.

What the current round of price hikes mean is that the cement market will still take some time to react to the capacity addition, which is expected to take India's total cement manufacturing capacity to around 250 m tonnes by March 2010. Here again, while earnings growth is on a recovery path, investors would do well to understand that valuations of cement stocks aren't really attractive. And this would pare the chances of extraordinary gains from these stocks in the short to medium term.

Plastics major Sintex announced its 3QFY10 results a short while ago. In what might seem as a sign of recovery, the company has managed to grow its net sales by 3% YoY during the quarter. This growth has been led by the plastics division where sales grew 5% YoY. Sales for the company's textile division fell by 6% YoY. What is more, the company managed to improve its operating margins to 18.1% during the quarter, led by lower other expenditure. Otherwise, raw material costs rose on the back of higher commodity prices. Now, despite the 17% YoY growth in operating profits, Sintex's net profits grew by a marginal 2% YoY, dented by higher depreciation costs. The company's management believes that it is seeing some strong signs of a pickup in economic activity that is leading to higher capacity utilization for the company.