Banking, realty drive today's gains

Fri, 13 Aug Closing

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Indian markets traded amidst strength today, led by stocks from the banking and realty sectors. Stocks from the metal sector however closed with the biggest losses. The overall market breadth was balanced, with one gainer for every stock that closed in the red.

The BSE Sensex and NSE Nifty closed with gains of around 95 points (0.5%) and 35 points (0.7%) respectively. Midcaps and smallcaps followed suit, as the BSE Midcap and BSE Smallcap indices closed up by around 1% and 0.6% respectively.

Among other key Asian markets, except Hong Kong (down 0.2%), others like China (up 1.2%) and Japan (up 0.4%) closed strong today. European markets have opened in the red.

Software stocks closed mixed today. While gains were seen in Patni Computers and HCL Tech, selling pressure marked trading in TCS and Infosys. We heard recently how the US Parliament approved the hike in H1B visa fee by US$ 2000 per visa, a move that was likely to impact Indian IT companies. As reported earlier today, Infosys's CEO has said that the impact would definitely be felt on IT companies' profits. Infosys agrees that the US has taken such a step considering the weak employment situation in out there. But it has also clarified that this is a clear targeting of Indian IT companies, who are supposed to be taking away the American jobs. On the contrary, these companies are in fact creating more jobs in the US. Anyways, the company has also clarified that the impact won't be felt on the visas of existing onsite employees, but just on the new visa applications.

Power stocks also closed a mixed bag. Key gainers here included the likes of PGCIL and NTPC. On the other hand, stocks like Neyveli Lignite and Tata Power closed weak. Selling in Tata Power was on the back of a weak set of 1QFY11 numbers reported by the company yesterday. On a consolidated basis, the company grew its sales by 7% YoY during the quarter. Standalone sales however dropped by 7% YoY. This was despite an 8% YoY growth in volume sales of electricity. This decline in standalone sales can be attributed to lower fuel costs that the company passed on to its customers in the form of lower tariffs. The company also produced more power using cheaper RLNG (as against oil), which led to lower fuel costs and subsequently lower tariffs.

The company's consolidated operating margins fell to 20.4% during the quarter, led by higher power purchase costs (as percentage of sales). Consolidated net profits declined by 43% YoY. This was on account of weaker margins, a large forex loss, and higher depreciation. The company incurred a (marked-to-market) forex loss of Rs 1.5 bn during the quarter. This was due to restatement of its forex loans (taken for the Mundra UMPP) due to depreciation of the rupee against the US dollar. On excluding this forex loss, net profits are still down around 15% YoY during the quarter.

PSU engineering major BHEL closed weak today. Other key losers from the sector included Suzlon, Thermax, and Punj Lloyd. A leading business channel today published an interview with BHEL's chief, Mr. BP Rao. He was reacting to the government's recent notification of imposing a 10% import tax on power equipments for big projects in order to help level the playing field between domestic and foreign manufacturers. Ironically, the tax would reverse the policy of zero import duty on equipments for the ultra mega power projects introduced to meet India's severe power shortages. While Mr. Rao heaved a sigh of relief on the government's latest announcement, we believe this step won't be in a positive direction for opening up the sector for international competition. Companies like BHEL are already sitting on huge order backlogs and have defaulted on timely execution in the past. So we are not sure what made the company's chief happy on hearing this announcement!

Textile stocks have had a dream run in recent days with several factors working in their favour. The lofty valuations being sported by textile mill land auctions and acceptance of a proposal for interest subsidy under the TUF scheme are the prime reasons. The stock of Raymond and Arvind gained as much as 20% and 4% in today's trade. The performance of both the companies this quarter has been much better than expectations. Arvind, in particular, reported 108% YoY growth in bottomline during 1QFY11. This was backed by lower interest costs and higher operating margins. Most of the upside came in from higher volume off-take due to enhanced capacities in denim as well as shirtings. The improved realisations offset the higher cost of cotton. The company also had an extraordinary gain of Rs 700 m this quarter through sale of land in Ahmedabad. It hopes to realize another Rs 400 m during the remaining quarters of the fiscal.