Engineering stocks lead the rally

Tue, 7 Sep Closing

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After yesterday's strong run, Indian markets traded amidst some volatility today. However, buying in Stocks from the engineering and IT sectors propelled the markets to higher levels during the closing hour of trade. Banking, pharma, and realty stocks closed weak. The overall market breadth was positive as there were 2 gainers for every 1 stock that closed in the negative today.

BSE Sensex and NSE Nifty closed with gains of around 85 points (0.5%) and 25 points (0.3%) respectively. Mid and small-cap stocks followed suit, closing with gains. The rupee was trading at 46.79 against the US dollar at the time of writing this.

Telecom stocks closed mixed today. While gains were seen in Idea Cellular and MTNL, heavyweights like Bharti Airtel and Reliance Communications (RCom) closed in the red. Selling in RCom was a continuation of the weakness that the stock has seen over the past few weeks, ever since it had announced the merger of its telecom tower arm with GTL Infrastructure. Now yesterday, both these parties called off the merger, what could have created India's largest telecom tower company. The merger was annulled after the companies could not come to a definitive agreement on the deal within the exclusivity period that ended on August 31. The deal would have helped RCom reduce its debt by about Rs 180 bn. The company currently has around Rs 330 bn of debt on its books and would now have to scout for new sources of funds. Or else it would have to risk its future expansion, especially in the 3G and broadband spaces.

RCom is paying the price of its aggressiveness to achieve high growth at the cost of profitability. The company thus stretched its balance sheet assuming that a fast growth in the future would take care of its mis-steps. But it has never recovered since then, and its shareholders have lost a lot of money. This just goes to show how investing in aggressive companies with the lure of fast growth, can led investors a bad hand.

Anyways, auto stocks closed strong today, led by buying in Tata Motors, Maruti, and TVS Motor. M&M however closed weak. The company was recently selected as the preferred bidder for the Korean passenger vehicle major Ssangyong Motors (SMO). M&M's management today clarified that the company will be acquired after paying off its debt. As per reports, M&M plans to infuse nearly US$ 400 m as equity to acquire a controlling stake in SMO. These funds would be used to repay all long-term debts, which stood at around US$ 320 m at the end of March 2010. M&M is expecting to bring SMO into its fold by December this year or latest January 2011. As far as the impact of the buyout will have on M&M's balance sheet, we do not see that as much of a problem. The company has cash balance of about Rs 27 bn (about US$ 600 m; consolidated). However, we would get more clarity only as things progress.

Private sector banking stocks closed weak today, led by selling in Yes Bank and HDFC Bank. ICICI Bank also closed in the red. Earlier during the day, the bank's management indicated that it expects loan growth to pick up pace during the second half of the current financial i.e., post September 2010. The company also sees no difficulty for it to raise deposits to meet the rising credit offtake in the Indian economy. The company is now in process of growing its balance sheet size after cutting it down by around 15% during FY09 and FY10. These years saw the bank losing its market share in retail products such as home loans, auto loans and credit cards to private and public sector peers. But the bank's management has finally drawn its attention to the much deserved areas - those of low cost deposits and franchise. Although seemingly time consuming, this approach could have saved ICICI a lot of the post-Lehman blushes, if implemented earlier. Nonetheless, better late than never.