FMCG, realty lead the surge

Fri, 24 Sep Closing

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After two days of weakness, Indian markets gained today, led by buying in stocks from the realty and FMCG sectors. IT and power stocks however performed the worst today. On the broader BSE, almost two stocks gained for every one that closed in the negative.

The BSE Sensex and NSE Nifty closed with gains of around 185 points (0.9%) and 50 points (0.9%) respectively. Midcap and smallcap stocks followed suit, as the BSE Midcap and BSE Smallcap indices closed up by around 1% each. The rupee was trading at 45.28 to the US dollar at the time of writing this.

Realty stocks led today's rally. The BSE-Realty index closed with around 1.8% gains, propelled by buying in stocks like Sobha Developers, DLF, and Unitech. The Wall Street Journal carries a column on how the Indian banking sector has entered a high risk phase via lending to realty companies. The report states that Indian banks' lending to the real estate sector has grown at an average annual growth rate of 40% over the past four years. What's even more concerning is that this pace of growth is nearly twice the rate of overall credit growth! Currently, Indian banks' exposure to the realty sector stands at around US$ 21 bn. And this does not even include lending to home buyers but is entirely the amount lent to builders. Also interestingly, many of these builders are unlisted or have poor public credit ratings.

The situation looks worse in light of the fact that these borrowers, i.e., real estate builders have not seen a revival in demand, especially given they themselves have jacked up prices of properties. And as per Deepak Parekh, the chairman of India's leading lender for housing HDFC, "If the developers don't lower the prices and clear the existing stock, there could be a problem very soon." Amidst this thus, it will be interesting to see how the banks fare with their realty loan assets, which might indeed become huge liabilities in the future. Anyways, banking stocks closed strong today, led by gains in ING Vysya Bank, HDFC Bank, and IDBI Bank.

Power stocks also closed strong today, led by GVK Power, PTC, and Tata Power. Like all companies looking to raise funds or unlock value and thus receiving buying interest, today's gains in the power trading major PTC was on the back of reports that the company is looking to file documents for the IPO of its finance arm. PTC Financial Services (PFS) is looking to file its offer document with SEBI by mid-October. PTC has a 77% stake in PFS and is planning to retain a 51% holding post the IPO. Other key investors in the company include Goldman Sachs and Macquarie, which hold 11.5% each. As reported, PFS is looking to raise around Rs 10 bn to fund power projects.

Stocks from the IT sector had a mixed day today. While gains were seen in HCL Tech and Infosys, selling pressure marked trading in Tech Mahindra and TCS. A leading business daily has reported that the Indian IT sector might see some consolidation in the coming quarters. This is given that mid-size companies are finding it hard to sustain businesses on the back of slowdown in the US and European markets. However, we are not sure of this given that the large IT companies that have hordes of cash, might not be interested in buying out their peers in the similar businesses. And given that there aren't many small and mid-size Indian IT companies that are doing much extraordinary work like product development, consolidation might not be a buzzword.