India off to a strong start

Wed, 23 Dec 10:30 am

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The Indian markets have started on a positive note. The benchmark indices opened above the breakeven mark and have managed to progress deeper into the positive territory since then. Asia is currently trading in the green with China (up 0.5%) leading the pack of gainers. The US markets closed higher by 0.5% yesterday.

Currently, in India, heavyweights from the BSE-Sensex are trading in the green with software and auto stocks leading the pack of gainers. The BSE-Sensex is trading higher by 153 points, while the NSE-Nifty is up by 47 points. Buying interest is also being witnessed among mid and small-cap stocks as the BSE-Midcap and BSE-Smallcap indices are trading higher by 0.9% and 1.1% respectively. The rupee is trading at 46.84 to the US dollar.

Energy stocks have opened the day on a positive note. Gainers here include Castrol and Reliance Industries. The government usually issues oil bonds to oil marketing companies (OMCs) - Indian Oil, BPCL and HPCL - to compensate for their under recoveries on the sale of petroleum products. However, it has not issued any bonds for the last three quarters. As per a leading business daily, the government is considering giving direct cash subsidy before the end of FY10. It may be noted that the OMCs will report huge losses at the end of the financial year if they do not receive any subsidies. The three firms currently lose Rs 3.5 per litre on petrol, Rs 2.4 per litre on diesel, Rs 18.1 per litre on kerosene and Rs 250.7 per LPG cylinder. In fact, they are projected to lose Rs 450 bn in revenues during FY10. This sorry state of affairs stems from the fact that fuel prices in India are kept artificially low due to socio political reasons. In our view, as long as this root cause remains, someone has to bear the brunt. The candidates by default are the OMCs. Interestingly, the exact quantum of subsidy remains a bone of contention between the oil ministry and the finance ministry. In fact, an expert committee has been constituted to decide on how to handle the subsidy issue.

Steel stocks have opened the day on a positive note. Gainers here include SAIL and JSW Steel. As per a leading business daily, steel companies are increasingly focusing on retail outlets. JSW Steel is looking at ramping up its retail chain to 600 outlets from the current 96 in a few years. Essar Steel plans to open about 70 company-owned hypermarkets in addition to its existing 83 outlets. In our opinion, the retail sales channel helps tap latent demand and aids revenues. The front-end presence also helps the company’s brand. Interestingly Tata Steel, which pioneered the concept of steel retail chains in India with Steeljunction, has reduced its focus on this channel. In the last four years, it has set up just five outlets.