Global markets gripped by Euro fear

Wed, 19 May Closing

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Indian indices like their peers in Asia had a somber outing today as investors chose to book profits in stocks across the board. Indian markets were in fact the biggest losers in Asia today, following Indonesia and Singapore. Stocks from the banking, auto and commodity sectors were the biggest losers. European markets have also opened lower.

While the BSE Sensex closed lower by around 355 points (down 3%), the NSE Nifty lost around 147 points (down 3%). Midcap and small cap stocks fared marginally better with losses of 2.5% each. The rupee was trading at Rs 46.1 to the dollar at the time of writing.

Stocks and commodities around the world fell today after Germany banned speculators from some bets against government bonds and banks. The new regulations raised concerns about investors being able to hedge their European holdings or sell assets as the region's debt crisis worsens. While the crisis in the developed world is far from getting over, we believe that such corrections offer very attractive opportunities to long term investors in India.

As per a leading business daily, the government has asked ONGC to pay Rs 50 bn for the quarter ended March 2010 for covering downstream companies losses of selling auto fuel below cost. It may be noted that this is almost 500% higher than what the company was forced to bear in the same period a year ago. One reason for this is that crude prices have risen substantially compared to the year ago period. Thus while the subsidy burden that the company has had to bear has gone up, so has their selling price for crude.

In a recent interview, the management of ONGC expressed that they would be agreeable with this arrangement, but only if the subsidy they are asked to bear remains restricted to auto fuels. However, due to the political ramifications of this issue, the uncertainty on this aspect too remains high. The stock of ONGC closed lower on the bourses today.

In light of the ever increasing demand of four wheelers, Maruti has been facing severe capacity constraints. The company produced 1 m units last year and has aggressive plans to produce 1.2 m units this year.  As the company does not want to lose out on the market share because of capacity constraints, as per a leading business daily Maruti has begun capacity expansion talks with its vendors so as to ensure regular and uninterrupted supply of raw materials. Typically the vendors wait until the actual demand surfaces and then expand their capacity.  If this happens Maruti will be a laggard in terms of output in the hyper competitive auto market and lose market share. In order to avoid this situation and maintain/increase market share the company has chalked out a new programme whereby it will work with its vendors to proactively identify their fund raising plans and planned capacity schedules. Auto stocks received a hammering on the bourses today with the stocks of Tata Motors are M&M closing significantly lower.

In another news, Ranbaxy's European unit has recalled select batches of three products from Britain, Denmark and Ireland. However, the recall is being done to include safety warnings initiated by the European Medicines Agency. There does not seem to be any product quality concerns with respect to these 3 drugs whose names have not been divulged. It must be noted that two units of Ranbaxy namely Dewas and Poanta Sahib had come under the US FDA scanner for not complying with quality manufacturing standards. While Ranbaxy has made a formal invitation to the US FDA officials to re-inspect the Dewas plant, issues at the Poanta Sahib plant could take more time to resolve. A corrective action plan is currently underway at that plant. The stock closed lower by 6% today.