Autos dent the markets

Tue, 23 Feb Closing

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Rising material costs, fears of interest rate hike, and now a recall from a leading manufacturer has dealt a blow to auto stocks that led the losers’ list in today’s trade. Stocks from the oil and gas space also closed amongst the biggest losers today. However, gains were seen in realty and metal stocks, which brought some respite to the overall sentiment.

The BSE Sensex and NSE Nifty closed with gains of around 50 points (0.3%) and 20 points (0.4%) respectively. Mid and small cap stocks however closed in the red. The BSE Midcap and BSE Smallcap indices closed down by 0.6% and 0.9% respectively. On the broader BSE, just one stock gained today for every two that closed in the red.

Among other key Asian markets, while China (down 0.7%) and Japan (down 0.5%) closed in the red, Hong Kong (up 1.2%) and Singapore (up 0.9%) were among the gainers. European markets have also opened today on a mixed note.

Auto stocks were amongst the worst performers today. Major losses were seen in Bajaj Auto and Maruti. Selling in Maruti, India’s largest passenger carmaker was on the back of reports that the company is sort of recalling around one lakh A-Stars for replacing their fuel gaskets. This follows reports of anomalies in the fuel tank of the said cars. In fact, the A-Star is part of Maruti’s ‘global’ car lineup and is also being exported.

IT stocks closed mixed today. While gains were seen in Patni Computers, Wipro, and TCS, selling pressure marked trading in Tech Mahindra and HCL Tech. Earlier, a leading business daily had reported that Indian IT companies are looking at several US$ 1 bn of outsourcing contracts coming their way in 2010. And not just from the international front, some of the large scale contracts are expected to come from domestic businesses as well, including a few from the power sector alone. IT companies are looking at industries like banking & finance, retail, entertainment, and manufacturing as generating many of such large international contracts over the next few quarters.

We see this as part of the long-term offshoring story that India is. With the value proposition for offshoring remaining as strong as ever, a prolonged economic slowdown worldwide will force more companies to lower their costs to remain competitive. One big way they can do so is by offshoring their non-core functions to Indian IT vendors.

Banking stocks also closed mixed today. ICICI Bank and Yes Bank were amongst the leading gainers. On the other hand, stocks that lost out included Indian Bank and Indusind Bank. Gains in ICICI Bank seemingly followed reports that the bank has set a target of growing its advances by 15% YoY during the coming fiscal year (FY11). As reported, ICICI Bank is already seeing lending picking up in the home and auto loans segments. It sees the trend continuing in FY11 as well, as the broader Indian economy shows improved signs of recovery. However, we believe that banks like ICICI Bank will have to weather some pain in the short to medium term. This is given that interest rates are expected to rise on the back of rising inflation. This might act as a dampener for new loans, as interest costs for retail and corporate borrowers will rise.