Inflation doesn't deter rising stocks

Mon, 14 Jun Closing

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Led by strong buying in stocks from the IT and oil & gas sectors, Indian markets closed strong in the red today. On the broader BSE, more than two stocks gained today for every one that closed in the negative. Indian markets were second only to Japan, which closed with gains of 1.8%. European markets have also opened in the positive.

The BSE Sensex and NSE Nifty closed with gains of around 275 points (1.6%) and 75 points (1.5%) respectively. Mid and small cap stocks followed suit. The BSE Midcap and BSE Smallcap indices closed up by around 0.9% and 1.3% respectively.

IT stocks led the gainers' pack today. Strong buying was witnessed in heavyweights like Infosys, Wipro, and TCS. Mid size players like Mphasis and NIIT Tech also closed with good gains. Earlier a leading business daily had reported that global IT major IBM is looking for acquisitions in India apart from other emerging markets. The company has a horde of liquid cash, currently around US$ 20 bn, and is thus looking to deploy some of it in buying out a mid-size peer in the region. IBM has a target of doubling its profits over the next five years, and thus can't do without adding a fast growing entity to its wings. Till date, the company has made two acquisitions in India - Daksh eServices BPO in 2004, and an IT infrastructure services firm Network Solutions in 2005. This announcement comes in contrast to what other big Indian IT companies are doing with their excess cash currently - nothing! While some like Infosys have been hounded for not making any acquisition to aid its future growth, others like TCS have been pretty slow as well.

Realty stocks closed mixed today. While gains were seen in DLF and Unitech, selling pressure marked trading in Ackruti City and Parsvnath. Stocks from this sector have been among the most volatile over the past few months. This is especially owing to fears that the RBI is setting base for higher interest rates, given the rising inflationary pressure within the economy. While the RBI has already done some tinkering with the rates, it doesn't seem to be done as yet. Higher interest rates will have a negative impact on realty demand given that customers are yet to come out of the slowdown blues. We see small realty companies as being the worst hit as consolidation intensifies within the sector. The sector is reeling under oversupply, especially in the commercial real estate space. Now if interest rates were to rise from here on, which they are most likely to, this will act as nail in the coffin for players that still have stretched balance sheets.

Anyways, fresh inflation data got released today, and it did not paint a rosy picture. As measured by the wholesale price index, India's inflation touched 10.16% during May 2010. This rise in inflation is largely due to strengthening consumer demand apart from supply side issues that have led to rising prices of food and fuel. All eyes are now set on the RBI as to what it does with its interest rate stance.

Stocks from the power sector closed strong. Major gainers here included Reliance Power, Tata Power, and NHPC. NTPC also closed with marginal gains. This was despite one adverse ruling from the electricity regulator that the company faced yesterday. As reported, the Central Electricity Regulatory Commission (CERC) has ruled in favour of shifting to a tariff-based competitive bidding regime for future power projects from January 2011. The regulator has cited better price discovery and lower power tariffs as the reason for shifting to this route of bidding. Now, this comes as a shocker for NTPC, which has been lobbying hard for continuation of the cost-plus tariff structure for PSUs. Problems in fast decision making is one of the biggest reasons NTPC has been slow in bagging projects offered through the competitive bidding route. And given that future projects will be allotted this way, NTPC could find it at the losing end.