All's well that ends well

Thu, 30 Sep Closing

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What seemed like a weak day for Indian markets turned out to be good at the end. The benchmark indices jumped sharply during the closing hour to end the day in the positive territory. Today’s gains were led by stocks from the FMCG and metals sectors. Oil & gas and auto stocks closed with the biggest losses. The overall market breadth was negative with more stocks declining than the ones that closed in the positive.

The BSE Sensex and the NSE Nifty closed with gains of around 110 points (0.6%) and 30 points (0.5%) respectively. Small-cap stocks followed suit, as the BSE Smallcap index closed higher by 0.1%. The rupee was trading at 44.84 against the US dollar at the time of writing this.

Software stocks closed weak today, led by selling in Mahindra Satyam, Tech Mahindra, and HCL Tech. Selling in Tech Mahindra seems a result of reports that the company is looking to announce its plans of merger with the beleaguered Mahindra Satyam in the next 2-3 weeks. Given the weak numbers reported by the latter just yesterday, shareholders in the formed have not seemed to like this news. Anyways, Tech Mahindra is also looking to acquire smaller IT companies with revenues of around US$ 50-100 m. Given the company’s already stretched balance sheet (owing to the debt it took to acquire Satyam), and concerns regarding its organic business, we see it continuing to face some pressure in the times to come.

As far as the broader IT sector is concerned, the current weakness is the direct result of the fear that companies will take a hit on their profits owing to the rupee’s continuous appreciation again the US dollar. The rupee has recently seen its fastest rise against the dollar in the past fifteen months. And given the way the dollars are flowing into Indian stockmarkets, and thus creating an oversupply situation, the rupee’s strength is likely to continue. This would be detrimental to IT companies as a large part of their business is transacted in US dollar terms. As such, the rupee appreciation would mean that their earnings, when converted to rupees will be lesser.

Stocks from the engineering sector also closed weak today. Selling pressure was seen in the heavyweights like ABB, Cummins India, Voltas, and Suzlon. Punj Lloyd close with marginal gains. The company announced earlier today that it has signed an agreement with the Indian unit of Nuvia, a French nuclear engineering company to jointly explore the Indian nuclear energy-related services market in India. As per reports, this venture will focus on providing services to the Indian nuclear energy sector and may expand its offerings to the global market. Both Punj Lloyd and Nuvia will hold 50% stake each in the venture. This news comes like a welcome relief to Punj Lloyd that has been under severe pressure over the past two years when its performance was impacted due to legal tangles faced by its international subsidiary.

ICICI Bank, which has been a laggard in terms of growing its balance sheet over the past two fiscals, is looking at making up for the same this fiscal. The bank is targeting loan growth of 20% to 22% in FY12, marginally higher than the sector target. The bank which, in fact, had to cut down on its retail portfolio over the past two fiscals due to NPA risks, is seeing growth coming in from the corporate portfolio. ICICI Bank has also suffered from lower fee income in recent quarters and hopes to improve its other income contribution as well this year. The stock ended marginally higher today.