IT stocks continue their stronghold

Fri, 22 Oct 11:30 am

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After starting today's session on a positive note, Indian indices have stayed in positive territory. Other key Asian markets are mainly trading positive with both China and Japan up 0.5%. Currently, heavyweights in the Sensex are trading mixed with stocks from the IT and consumer durables space seeing buying interest. However FMCG and metal stocks are trading weak.

Currently, the BSE-Sensex is trading up by around 42 points, while the NSE-Nifty is up by about 4 points. However, there has been some buying interest amongst the mid and small cap stocks as the BSE-Midcap and BSE-Smallcap indices are trading higher by 0.6% and 0.7% respectively. The rupee is trading at 44.47 to the US dollar.

Auto stocks are trading positive with Escorts, and Cummins India leading the gains. According to a leading business daily, Tata Motors, faces the prospect of a churn in its vehicle distribution network. Its foreign competitors in the auto space have lured away two of its top dealers by offering them better margins. A slow movement in sales of Fiat Auto, whose vehicles are distributed in India by Tata Motors, may also have contributed to the exits. Its partner for over ten years, Pune-based BU Bhandari Auto, will now distribute products of German car-maker Volkswagen, which is eyeing a larger market share in India. Delhi-based dealer A-One Motors will focus on distribution of cars from Honda, BMW and Rolls-Royce.

These two dealers together contribute 5-6% of Tata Motors’ passenger car sales, according to auto industry execs. Tata Motors sold 1.3 lakh units for the period from April-September 2010. The company, while confirming the exit of the two dealers, stated that it has added 10 new dealers over the past 6 months taking its total dealership network to 247. However, multinational companies like Volkswagen, BMW, Nissan and Audi, which are ramping up their India presence, are poaching dealers of Tata Motors, Hyundai and Maruti-Suzuki to access central locations in major cities. These players are offering 6-8% of the price of a car against 3-4% being given by Indian majors.

Metal stocks are trading mixed with Jindal Saw leading the gains. Hindustan Zinc declared its 2QFY11 results. Net sales grow 21% YoY in 2QFY11, led by a growth in average prices of zinc and lead as well as an increase in volumes. During 2QFY11, the company’s operating margins contracted by 8.2% YoY owing to almost all operating cost heads seeing a rise (as a percentage of sales). Net profits grew by just 1% YoY during 2QFY11. This is mainly on account of HZL’s margin contraction at the operating level. A steep rise in depreciation expenses also played spoilsport. Further, the exceptional item during the current quarter pertains to the amount the company has incurred on account of a voluntary retirement scheme that the company has put into effect. This too contributed to the poor show on the bottomline front.