Consolidating in a flat territory

Mon, 16 Aug 11:30 am

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After starting today's session on a volatile note Indian indices are trading in a narrow zone. Other key Asian markets are trading flat as well with Hong Kong (up 0.2%) in the green and Nikkei (down 0.7%) in the red. Currently heavyweights in the Sensex are trading flat with stocks from consumer durables and FMCG space leading the gains. However, stocks from health care and IT space are facing the brunt of profit booking.

Currently, the BSE-Sensex is trading flat and is up by around 20 points, while the NSE-Nifty is up by about 9 points. However, strong buying interest is witnessed amongst the mid and small cap stocks as the BSE-Midcap and BSE-Smallcap indices are trading higher by 0.8% and 0.9% respectively. The rupee is trading at 46.73 to the US dollar

Telecom stocks are trading weak with RCom and Idea leading the pack of losers. However, MTNL and Tata Tele Maharashtra are trading in the green. Reliance Communication (RCom) announced its 1QFY11 results recently. Net sales declined 9% YoY during 1QFY11. All the segments declined during the quarter leading to a drop in revenues. The company's wireless business saw its revenues decline by 13% YoY. The global and broadband segments too witnessed a drop of 4% YoY and 1% YoY respectively. Operating margins contracted by 2.4% YoY to 30.7% during the quarter. While the company was able to reduce most of its operating costs in absolute terms, license fee and access charges (as a percentage of sales) increased during the quarter. This along with the decline in sales led to margin contraction in 1QFY11. RCom's net profits dropped by 85% YoY during the quarter. Lower operating income and other income were the reasons behind the sharp fall in profits. Another key reason was the interest expense during the quarter compared to the net interest income seen during the same quarter last year.

Capital goods stocks are trading mixed with Praj Industries and Triveni Eng. trading positive. Suzlon is the biggest loser in the space. According to a leading business daily, private equity fund TPG Capital and a US global energy fund are in talks with Suzlon to acquire up to a 25% stake in its German wind energy subsidiary, REpower Systems. The valuation for the stake is US$ 500 million according to the article. The same however, has not been confirmed by the company. This dilution of holdings is likely to be done at a profit.

Suzlon currently owns a 90.7% stake in Repower. The funds received from the stake sale would help reduce the massive debt of Rs 100 bn that Suzlon currently has. The company recently achieved financial closure of refinancing and consolidation of debt worth Rs 107 bn and has also raised almost Rs 12 bn through a rights issue. Completing this deal will help in improving its balance sheet Moreover, REpower, is still bearing the brunt of the prolonged economic uncertainty in Europe. Customers have been postponing projects and delaying decisions in the region. For the quarter ended June 30, the German company recorded a 29% fall in revenues YoY.

This will be the second time that Suzlon is trying to reduce its holding in an international subsidiary to reduce its massive debt levels and pay back lenders. Earlier it had brought down its holding in another international unit - Belgian gearbox technology firm Hansen Transmissions International from 61% to 26%.