Markets in tune with weak global cues

Wed, 9 Dec Closing

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Undoing most of the gains reaped yesterday, the benchmark Indian indices languished in the red for the entire session today. While the BSE Sensex closed lower by around 105 points (down 0.6%), the NSE Nifty lost around 35 points (down 0.7%). Weakness was also seen in the BSE Midcap index that closed 0.6% lower. However, the Smallcap index managed to buck the trend and closed 0.4% higher. The BSE auto and technology indices were the only gainers today with gains of 0.7% and 0.8% respectively.

Other Asian indices largely closed in the negative today while the European indices have also opened in the red. The rupee was trading at Rs 46.63 to the dollar at the time of writing.

Regulators globally have acknowledged the farsightedness of the RBI in terms of ensuring Indian banks preparedness to counter economic stresses. Other regulators in Asia had also tightened the norms to make provisions for higher NPAs after the Asian crisis. But the provisioning stance remained reactive to shifts in the business cycles. That is, they tended to be low ahead of crises and rise sharply as losses mount.

The Reserve Bank of India, in its 2QFY10 monetary review, had asked banks to ensure that they have 70% loan loss coverage ratio. While many banks have coverage close to the regulatory norm, many large lenders like SBI, ICICI Bank and Canara Bank had levels much below the prescribed norm. Banks had sought some flexibility in computing coverage ratio to include technical write-offs made by them for bad loans. While the same may be accommodated, we believe that Indian banks could stay globally competitive if they comply with better governance.

Telecom stocks that have had a good run on the bourses for the past few sessions seemed to be on the profit booking counter today. India's telecom tower industry which is set for a wave of consolidation has seen several small and medium sized firms opting for mergers or alliances to take on larger rivals and hasten rollouts in the face of rising demand. India's position as the fastest growing wireless market in the world has attracted several global players such as UK's Vodafone Plc, Japan's NTT DoCoMo and UAE's Emirates Telecommunications Corp (Etisalat). While the recent investor optimism about telecom stocks has been on the back of the impending 3G auctions, we believe that the new entrants could face stiff competition in terms of margin retention going forward.

After several Indian textile companies having forayed into multi-national joint ventures and unrelated businesses that burdened their balance sheets with heavy leverages, many are on a corrective mode these days. Home textile major Alok Industries is one of them. Two years after it entered the realty space by signing one of the largest land deals in the country, Alok Industries has decided to withdraw from this segment by 2012. It plans to come out of its realty projects by then and concentrate on the core textile business. The company wants to bring back the investment made in realty to partly pay its existing debt, which is around Rs 70 bn. It may be noted that Alok Infrastructure, the wholly-owned subsidiary of Alok Industries, had inked a deal worth Rs 11 bn with the Ashok Piramal group's Peninsula Land for the Dawn Mills at Lower Parel in Mumbai in 2007. However, the unsustainable debt burden has forced the company to reorganize its business. We believe that this move will help the company improve its growth and margins going forward. The stock of Alok Industries closed 6% higher today while its peer Welspun India closed marginally in the red.