Metals, realty drive today's losses

Tue, 24 Aug Closing

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Indian markets traded amidst high volatility today. Stocks from the realty and metal sectors closed with the biggest losses. FMCG and pharma stocks however bucked the trend and closed with marginal gains. The overall market breadth was negative as there were 2 losers for every 1 stocks that closed in the positive today.

The BSE Sensex and NSE Nifty closed with losses of around 100 points (0.5%) and 40 points (0.7%) respectively. Midcap cap stocks followed suit, as the BSE Midcap index closed up by around 0.3%. The BSE Smallcap index closed marginally weak. The rupee was trading at 46.90 against the US dollar at the time of writing this.

Metal stocks closed weak today. The BSE-Metal index closed down by around 2%. Leading the losers pack were stocks like Hindalco, Sterlite, and Hindustan Zinc. Selling in Sterlite followed reports that the government has rejected environment clearance to the company's US$ 1.7 bn bauxite mining project in Niyamgiri hills of Orissa. This rejection came in light of the environment ministry's observations that the company was involved in serious violations of the Environment Protection Act, Forest Conservation Act, and the Forest Rights Act. The decision pertains to one mining site in Orissa where Sterlite already operates an alumina refinery fueled by bauxite imported from elsewhere in India. This decision comes like a double whammy for the Vedanta Group (that owns Sterlite). The group is already facing regulatory hurdles in its bid for control of Cairn India. This potential deal has been valued at a mammoth US$ 9.6 bn and can give the group a slice of India's oil reserves.

Realty stocks continued to remain weak, as the BSE-Realty index dropped by around 3%. HDIL, Sobha Developers, Unitech, and DLF led the losses from the sector. The selling in these stocks seems a result of profit booking after some gains recorded in the past few weeks. These companies are yet to recover from the slowdown that engulfed them since early 2008. This is suggested by the financial performances reported by some of the leading companies from the sector for the quarter ended June 2010. As per a leading business daily, these companies are still seeing a slow improvement in demand for homes. This is even when there has been a marginal pick-up in demand for office space.

Anyways, these companies have their own greed to blame for the slow recovery in home demand. This is given that these companies have raising property prices before real demand actually came in. As per reports, residential prices in Mumbai and the National Capital Region of Delhi have increased by 20-30% since March, and have reached new highs! This has made even the RBI wary of banks lending too much to the sector. The very proof of such negative sentiment is the RBI's refusal to grant licenses to real estate players. Even if that means going slow on the government's financial inclusion plans. We believe that unless we have a more regulated real estate market, such a cautious approach is warranted.

Power stocks also faced all-round selling pressure. Key losers included the likes of Neyveli Lignite, CESC, and Tata Power. However, NTPC and PTC closed with gains. Earlier, an Economic Times report suggested that fuel supply uncertainty is likely to hurt the profitability of power companies going forward. This includes uncertainty with respect to availability and pricing of both the key fuel sources - coal and gas. Even in the recently concluded June quarter, companies like NTPC and Tata Power faced pressure on this account. Given that these companies, and most others from the sector, are pursuing aggressive capacity addition targets for the next 5-10 years, they need to do something urgently to take care of the fuel issue. Or their plans might face serious execution issues.

Auto stocks closed mixed today. While gains were seen in Ashok Leyland and Bajaj Auto, selling pressure marked trading in Maruti and M&M. As per reports, M&M is eyeing a majority stake in the Indian arm of the US based Vayugrid. Vayugrid has a presence in the alternate energy industry and also has presence in micro-finance.