'Realty' bites the broader markets

Tue, 23 Mar Closing

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What seemed like a recovery, after yesterday's reaction to the RBI's rate hike, did not last long today. After opening strongly into the positive, the Indian markets fell into the red as trading progressed. However, some late hour buying brought the markets back into gains. Buying in pharma and metal stocks brought some respite to the markets, which were otherwise hurt by selling in auto and realty stocks. The BSE Realty index was the w0rst performer today, as it fell by around 0.7%.

The BSE Sensex and NSE Nifty closed with marginal gains of around 40 points (0.2%) and 20 points (0.3%) respectively. Mid and small cap stocks followed suit. The BSE Midcap and BSE Smallcap indices closed up by 0.2% and 0.3% respectively. On the broader BSE, one stock gained for every one that closed in the red. The rupee was trading at 45.58 to a US dollar at the time of writing.

Energy stocks traded mixed today. While gains were seen in Cairn India and Petronet LNG, selling pressure marked trading in Castrol and BPCL. Gains in Cairn followed reports that the company has discovered new oil reserves in its Rajasthan oilfields. As per reports, this new finding is expected to be big and increase India's domestic oil production by about 23% in the next financial year (FY11). Cairn is one of the major players in India's hunt for energy within both the domestic and international territories. The company is accompanied by others like ONGC and Reliance, who are exploring new oil and gas findings to satiate the country's rising energy requirements.

Take the rising requirements of natural gas for instance. As per the findings from McKinsey, India's natural gas demand is expected to nearly double to 320 million standard cubic meters per day by 2015. This will require fresh investments of around US$ 40-50 bn across the gas value chain (exploration, transportation, delivery). All in all, India's energy hunt is getting exciting by the day. But investors must take note of the execution issues that accompany all such large scale investments.

Shipping stocks also closed mixed. GE Shipping led the gainers' list. Mercator Lines and SCI were in the red. Gains in GE Shipping (GES) followed reports that the company is looking to raise equity funds for its offshore subsidiary, Greatship, though an IPO. As per 9mFY10 numbers, this business currently forms around 21% of the company's total revenues and 19% of its PBIT (profit before interest and tax). As was indicated by GES' management in its last conference call, it is looking to spend US$ 400 m over the next 3-4 years to raise the capacity of the offshore business. A part of this funding has to come via the equity route, thus the need to raise fresh money. With crude oil prices expected to stay high, thereby leading to increased exploration activities around the world, demand for offshore vessels is likely to remain strong.

This might sound like music to infrastructure and related companies. The Prime Minister today hinted at doubling India's infrastructure spending to US$ 1 trillion in the 12th five-year plan (2012-2017). As it is widely known, the government had targeted to spend roughly US$ 500 bn during the current 11th plan period (2007-12) to spruce up its crumbling infrastructure. However, the deep global financial crisis that erupted in 2008 strangled foreign fund inflows, squeezing capital supply to fix the country's infrastructure. This made it obvious that India would miss its aim of targeted spending through the current five-year plan.

India's pain is not just execution of plans. Even domestic long-term financing of infrastructure projects is an issue. This is because Indian banks generally do not have long term resources to fund projects that take long to turn cash flow positive. Foreign fund flows are thus the need of the hour. However, the way these funds dried up during 2008 is a concern the government has to tackle before it starts implementing its dream spending plans.

Anyways, coming back to Dr. Manmohan Singh's latest remarks, he expects the Indian economy to achieve 8.5% growth in 2010-11 and 9% in 2011-12. But if the infrastructure build-up doesn't happen the way he sees, these targets might well be far-fetched! Anyways, infrastructure and related stocks closed mixed today. While gains were seen in Areva T&D, Siemens, and HCC, selling pressure marked trading in ABB and Pratibha Inds.