Realty, power stocks weigh on indices

Mon, 20 Jun 11:30 am

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Indian stock market continue to trade in the red backed by selling pressure in heavy weights over the last two hours of trade. Stocks from the realty and power space are trading weak while stocks from the consumer durables space are trading firm.

The BSE-Sensex is trading down by 34 points while NSE-Nifty is trading 11 points below the dotted line. BSE Midcap and BSE Small cap indices are both down by 0.2%. The rupee is trading at 44.67 to the US dollar.

FMCG stocks are trading weak led by Paper Products and Archies Ltd. As per a leading financial daily, input costs continue to hurt FMCG companies. To protect their margins, besides price increases, these companies are reducing their operational costs by slashing their advertisement spending. As per reports, last fiscal year gross margins of FMCG companies came in lower due to input costs inflation. However, as a result of lower advertisement and staff costs these companies were able to maintain their operating margins at 15.8%.

It may be noted that HUL which is the biggest spender on advertisement in the consumer goods space marginally reduce its advertisement spending in 4QFY11. Dabur was also seen to reduce its spending. Moreover, the management of Dabur indicated that the company would not go overboard on its spending if inflation remained high. It may be noted that most FMCG companies are looking at volume growth but not at the cost of their profitability. Going forward, FMCG companies would have to strike a balance to maintain margins and ad spends, as demand could soften further due to high inflation.

Auto stocks are trading weak led by Escorts and Force Motors. As per a leading financial daily, Indian two wheeler manufacturers are planning to enter the African market with a string of new, price-competitive products. This is because they believe that Africa has the potential to drive growth this financial year. This is because of low penetration, poor infrastructure and rising disposable income levels. Bajaj Auto, Hero Honda and TVS are all looking to set up assembly plants in the continents to boost their manufacturing. As of now the African market is dominated by Chinese bike manufacturers. To take them on, the Indian two wheeler manufacturers are looking to offer better quality products at competitive prices. In fact the bike manufacturers have already launched their entry level bikes to boost their foothold. However, the entry in the continent is not expected to be a profitable venture. For example, Bajaj Auto, the largest exporter to Africa, earns 6% margin after factoring export benefits of 8%. This is after being in the market for three years and increasing prices considerably in the last few years.