Auto, banking lead the gains

Mon, 8 Mar Closing

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Indian markets had a strong start to a new week today, as buying in auto and banking stocks pushed the markets higher. Realty stocks however closed in the red. On the broader BSE, two stocks gained today for every one that closed in the red.

The BSE Sensex and NSE Nifty closed with gains of around 110 points (0.6%) and 30 points (0.6%) respectively. Mid and small cap stocks followed suit. The BSE Midcap and BSE Smallcap indices closed up by 0.8% and 1.3% respectively. Among other Asian markets, China (up 0.7%), Hong Kong (up 2%), and Japan (up 2%) closed in the positive. European markets have also opened the day on a strong note.

Auto stocks were amongst the biggest gainers today. Buying interest was seen in stocks like M&M, Hero Honda, and Maruti. Gains in car manufacturers like M&M and Maruti was on the back of reports of a strong sales performance by these companies in February 2010. As per the Wall Street Journal, India's car sales touched their highest-ever monthly number in February as cheaper loans and apprehensions of price hikes in March drove purchases. Domestic car sales during the month grew by 33% YoY and 5% over the previous month i.e., January 2010. The strong performance in February comes after the even better 40% and 61% growth in car sales during the preceding two months of January 2010 and December 2009.

As per the Society of Indian Automobile Manufacturers (SIAM), a large part of this growth during February was on the back of pre-buying of cars in anticipation of a price hike post the Union Budget 2010. SIAM has also indicated that there is a lot of pent up demand in India and loans are still available at lower interest rates, which is helping sales. We also believe the same. However, seeing the indications coming out of the RBI that is fearing even higher inflation in the future, a rise in interest rates as well as costlier vehicles could affect demand in the coming months.

Energy stocks also closed in the positive today. Key gainers here included Castrol, Gujarat Gas, and GAIL. The stock of India's largest oil and gas exploration and mining company ONGC also closed with gains. Earlier today, the company had announced plans of raising US$ 10 bn over the next ten years to buy oil assets overseas to meet India's fuel demand. As a matter of fact, ONGC produces almost 25% of the crude used by India. Declining output at three-decade old domestic fields has forced the company to diversify its sources of supplies. And it has been quite aggressive in pushing for acquisition of international oil and gas assets.

Given ONGC's robust balance sheet and minimal debt on the books currently, we do not see any major problem in the company taking such a big loan on its books. This is however provided that it is able to prudently employ this capital in buying worthwhile assets that can sustain over a long period.