Metals and IT drag markets

Thu, 12 Aug 11:30 am

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After starting today’s session on a negative note in the morning Indian indices are still languishing in the red. Other key Asian markets are trading weak as well with Hong Kong (down 1.4%) leading the pack of losers. Currently heavyweights in the Sensex are trading weak with stocks from metals and IT space facing the brunt of selling activity. However, stocks from consumer durables and realty space have provided some cushion and are trading in the green.

The BSE-Sensex is trading down by around 106 points, while the NSE-Nifty is down by about 34 points. Buying interest is muted amongst the mid and small cap stocks as the BSE-Midcap and BSE-Smallcap indices are trading lower by 0.2% and 0.19% respectively. The rupee is trading at 46.96 to the US dollar

Telecom stocks are trading weak with GTL Infrastructure and OnMobile Global leading the pack of losers. However,Idea Cellular is trading flat.Bharti Airtel (Bharti) announced its 1QFY11 results yesterday. Net sales increased 17% YoY during the quarter. The growth was led by a 28.1% YoY growth in the passive infrastructure services. Revenues from the mobile services segment too registered a sharp increase of 16% YoY. This growth was led by an expansion in the customer base. The mobile subscriber base of the company grew 33% YoY to 137 m at the end of 1QFY11. However, average revenue per user (ARPU) declined by 22.7% YoY to Rs 215 during the quarter. This was mainly due to decline in average revenue per minute (ARPM) partially offset by increase in minutes of usage (MoU). While the ARPU and ARPM continued to decline, the rate of decline has come down as operators are no longer trying to aggressively slash tariffs to gain market share. Operating margins declined by 5.2% YoY during the quarter owing to higher network operating and selling and administration costs (as percentage of sales). However, the fall in net profits was excruciating due to higher interest and depreciation costs. In addition, net income was negatively impacted by the acquisition cost related to African operations.

Auto stocks are trading negative with M&M and Exide posting the largest declines. As per a leading business daily India’s largest car manufacturer Maruti could start receiving royalty payments from its parent Suzuki in Japan, instead of paying them. Maruti paid Suzuki an unusually high royalty expense in 1QFY11 of over Rs 1.9 bn (5.9% of sales), impacting its profits. This included some arrears from the previous quarter, on account of royalty being revised. This was because the government removed the cap of 5% on sales in domestic market and 8% on overseas sales. This enabled the Japanese parent to revise royalty rates. Currently royalty expenses and other technical expenses are the second largest cost head for the car maker after raw material costs (78% of sales in 1QFY11).

With growing efforts in place to develop a technology hub in India, which would operational by 2015, the Japanese company could soon start paying royalties to the Indian company. This R&D centre is being started up with an investment of Rs 15 bn and is going to be Suzuki's first R&D centre outside Japan. The first phase of the project is estimated to be completed by 2012. According to PWC, technology hubs are shifting from developed countries to developing countries. In the medium to long term, emerging markets like India and China are going to become R&D hubs for several global automakers. Thus local companies could then start demanding royalty payments from their overseas parents