Engg. stocks lead Sensex's freefall

Thu, 21 Jan Closing

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A weak set of numbers reported by India's largest engineering company, L&T, did not go down well with the markets, as they slid sharply in today's trade. Then, the markets also had to contend with China's clampdown on bank lending with a view to nip the emerging realty bubble out there. Interestingly, China was amongst the few gainers amongst Asian markets today.

Anyways, the BSE Sensex and NSE Nifty closed with losses of around 420 points (2.4%) and 125 points (2.4%) respectively. Mid and small cap stocks followed suit. The BSE Midcap and BSE Smallcap indices closed down by 2.4% apiece. On the broader BSE, just one stock gained today for every five that closed in the red.

Capital goods stocks were the worst performers today. The BSE-Capital Goods index closed lower by over 5%. Big losers here included heavyweights like L&T, Punj Lloyd, Siemens, and BHEL. A poor set of numbers from L&T spoiled the mood on the street. For the quarter ended December 2009, L&T reported a 6% YoY decline in its net sales. Net profit (before extraordinary items) managed a 15% YoY growth owing to improved operating margins. The company has cited slow execution of some contracts and delayed financial closure as the key reasons for the drop in topline during the quarter. The company also deferred release of some high value orders, which affected sales during the quarter. This has led to the company lowering its full-year FY10 growth estimate to 10% from 15% earlier, which seemingly soured markets' sentiment. The management has however indicated of better times in the future.

We are not shocked to see such a performance from L&T, given that the Indian economy is still to see the full effects of a worldwide economic slowdown. And this is especially considering that the impact is felt by the capital goods sector with a lag. India's infrastructure investments are anyways prone to execution issues, and this we believe can pose as the biggest constraint to our economic future.

Banking stocks also felt the heat of today's selling wave. The BSE-Bankex closed down by 2.4%. Major losers here included Kotak Bank, Yes Bank, and ICICI Bank. Selling in ICICI Bank was owing to weak results announced by the company for the quarter ended December 2009. Continuing to cut down its balance sheet size, the bank reduced the size of its loan book by 16% YoY in 9mFY10. This was backed by 6% YoY fall in the deposit base as well. While ICICI Bank attributed the fall in advances to repayments by retail and international customers, the bank's unwillingness to incremental lending was also evident. On the liabilities side, it concentrated on CASA (low cost) deposits which grew to 37% of the bank's total deposits in 9mFY10 from 27% in 9mFY09. The bank's strong capital adequacy ratio of 19.4% and net interest margin of 2.6% at the end of December 2009 were, however, encouraging signs. Net NPAs remained at 2.2% of advances.

Tata Power was also amongst the biggest losers in the Sensex. It was closely followed by Sterlite, HDFC, and Bharti Airtel. Selling in Tata Power has continued after the company has announced weak 3QFY10 results just a couple of days back. The company had announced a 12% YoY decline in sales owing to lower electricity tariffs in the Mumbai market. Tata Power is on an aggressive expansion drive, and we see the company facing some execution issues out there. Over that, the stock's current valuations do not leave much on the table for investors.