Markets surge on Chinese cues

Thu, 10 Jun Closing

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Reports of soaring exports in China despite the ongoing European crisis brought some respite to the Indian markets today. This seemed on the back of expectations that emerging markets like India can weather the western crisis. Economic sentiment dependent stocks like those from the auto, realty and metal sectors were the best performers today.

The BSE Sensex and NSE Nifty closed with gains of around 265 points (1.6%) and 80 points (1.6%) respectively. Mid and small cap stocks followed suit. The BSE Midcap and BSE Smallcap indices closed up by 1.1% and 1.3% respectively. On the broader BSE, almost two stocks gained for every one that closed in the red.

Among other key Asian markets, while China (down 0.8%) closed weak, strength was seen in Japan (up 1.1%) and Singapore (up 1.2%). Stocks across Europe have also opened with marginal gains.

Earlier, data coming out from China suggested that exports there grew by 49% YoY during May 2010, despite the weakness in the western economies that are the biggest consumers of Chinese products. China now joins South Korea and Australia (that reported lower unemployment rates) in reporting good economic numbers over the past few days. While the news from China indicate that emerging economies have not been affected much from the European crisis, we still need to see whether the buoyancy is sustainable or the impact is still about to be felt.

Anyways, coming back to Indian markets, stocks of PSU banks closed strong today. Major gainers here included SBI, IDBI Bank, and Andhra Bank. With the liquidity in the banking system showing further signs of tightening over the last fortnight, banks may have to contemplate on interest rate hikes sooner than anticipated. The chairman of the country’s largest bank SBI recently aired his views in this direction. Banks have borrowed over Rs 600 bn from the RBI over the last few days. The situation is expected to tighten in the coming weeks. Besides, cost of deposits for banks have gone up in recent months due to overall monetary tightening. PSU banks including SBI are also planning to raise further capital through equity dilution to meet the shortage of funds. We see these measures causing a blip in banks’ margins and return ratios in the medium term.

Engineering major L&T continues to build on its order book thanks to an increased impetus on infrastructure related activities. The company recently reported having bagged orders worth Rs 7.5 bn from the likes of Coal India, Hindalco and Indiabulls Power. The company had reported a robust 28% YoY growth in sales of its engineering and construction (E&C) segment in 4QFY10 (which constituted around 87% of the total sales during the quarter). The company's order book at the end of FY10 stood at Rs 1,000 bn, a growth of 43% over the previous year. The electrical and electronics segment also saw a good quarter, with revenues higher by about 25% YoY. While the addition to order book is noteworthy, execution risks loom large. Anyways, some key gainers from the engineering sector included Blue Star, Crompton Greaves, and BHEL.

As per a business daily cement major ACC's cement despatches fell 3.8% to 1.75 m tonnes (MT) in May 2010 over May 2009. The company’s production remained flat at 1.8 MT so far in 2010. It must be noted that ACC reported a mere 2.3% YoY growth in net sales during the quarter ended March 2010. Non-availability of railway wagons resulted in lower despatches for the company. However, ability to price the commodity higher resulted in a higher topline. Having said that, with more capacities expected to come on stream, these may exert downward pressure on cement prices. This is apart from resulting in reduction in utilisation levels. The stock along with peer Ultratech closed higher today.