Strong Asian cues buoy India

Wed, 17 Feb Closing

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Strong buying activity across index heavyweights throughput the session today ensured that the indices closed well above the dotted line. While there were some attempts at profit booking witnessed at higher levels, it was not enough to dent the optimism among participants. While the BSE Sensex closed higher by around 204 points (up 1%), the NSE Nifty gained around 58 points (up 1%). This optimism spilled over to midcap and small cap stocks as well as they notched gains of 1% each. Gains were largely seen in metals and consumer durable stocks.

As regards global markets, most Asian indices closed firm today while European indices have opened on a mixed note. The rupee was trading at Rs 46.04 to the dollar at the time of writing.

As per a leading business daily, engineering major BHEL is expected to sign a memorandum of understanding with Japan's Toshiba Corp. for a transmission and distribution joint venture. This JV is expected to offer turnkey services in India’s power transmission sector and step up focus on the distribution segment as well. Interestingly, BHEL’s move to form this JV comes at a time when the government is looking to add power generation capacity of 78,577 MW by 2012. What is more, revenues from the power segment accounts for around 77% of BHEL’s overall sales. During the December quarter, the power segment sales grew by a decent 19% YoY. Not just that, at the end of December 2009, the company’s order backlog stood at Rs 1,340 bn, which was about 4.8 times its FY09 annual sales. This signals revenue visibility for the future.

However, as is the case with many engineering companies, execution is the key. Therefore, even a swelling order book may not hold weight unless the company focuses on completing projects on time. The stock, along with its peers ABB and L&T, closed firm.

Barring Novartis, MNC pharma stocks closed firm today with the leading gainers being GSK Pharma, Aventis and Pfizer. All these stocks have gained quite a bit since the rally began due to many factors. The first is due to improvement in sales growth as their respective power brands have performed well and maintained market share. Further, certain factors such as trade issues, sale of non-core businesses all of which had impacted sales for a few quarters earlier now seem to be a thing of the past. Most of the companies have also managed to maintain operating margins due to a favourable product mix. The fact that they have strong cash flows and no debt on their books also gives them an advantage. Having said that, most companies have not yet effectively utilized surplus cash on their books and this could have an impact on their return ratios going forward.

In a survey conducted by Reuters and published in a leading business daily, India is expected to gradually exit stimulus measures from the start of FY11, but will still need to borrow a record amount from the market. Further, most of the economists polled are of the opinion that the fiscal deficit could hover around 5.6% of GDP in FY11. For FY10, the fiscal deficit has been pegged at 6.8% of GDP by the government. Gross market borrowing of the government is forecast to rise to a record Rs 4.6 trillion in FY11 from this year’s Rs 4.5 trillion.

Further, the government is likely to raise US$ 6 bn by selling stakes in state-run companies. However, given the precarious state of the government’s finances, little or no change in spending on social sectors such as education, healthcare and rural development cannot be ruled out. While the government’s intention to reduce the deficit is certainly a step in the right direction, one will have to wait and see how it all pans out.