Saturday, July 4, 2009

Closing Bell 2 July 2009

Closing Bell 2 July 2009

After weathering the alternate bouts of buying and selling activity through the day, the Indian markets closed marginally higher than yesterday’s levels. The BSE Sensex and NSE Nifty ended higher, up by around 13 points and 8 points respectively. The stocks from the mid-cap and the small-cap spaces ended higher, up by around 0.33% and 0.74% respectively. Buying activity was witnessed among the stocks from the metals, realty and healthcare sectors. Engineering and auto stocks were at the receiving end. The overall market breadth was positive, with gainers outnumbering losers in ratio of 1.2 to 1 on the BSE.

Most of the Asian markets ended the day on a weak note. The European markets are also trading weak currently. The Rupee was trading at 47.91 against the US Dollar at the time of writing.

Steel majors like SAIL, Ispat and Jindal Steel are planning to raise the price for various products by 2-5%, on account of growing raw-material prices. Many companies increased their prices in the months of May and June, and the ones that did not are reviewing the situation for the possibility of a price hike. It is worth noting that steel prices fell sharply last year due to a lack of demand on account of the economic slowdown. Domestic companies are seeing a slight revival of demand in the domestic market from sectors like infrastructure, rural housing and automobile. The stocks from steel sector ended the day on a positive note.

The global downturn has had a severe impact on the billing rates for major Indian IT companies like TCS, Infosys and Wipro. Billing rates for new as well as existing clients are estimated to be down by around 30% to 40% touching rock-bottom of US$ 16 per hour. To make matters worse, despite these low billing rates, the companies have not seen any corresponding improvement in the deals inflow. According to Gartner, on account of uncertainty, IT budget constraints and subdued market sentiments, the prices of IT services will keep declining till 2010. Moreover, international companies like Accenture, which are known for delivering premium-priced high-end IT services, are also venturing into low-end IT ventures moreover at a decreased price level. All this will result in a dent in the Indian IT sector, which was growing at a stupendous rate of about 30% before the crisis. Nevertheless, the silver lining in the cloud is that companies have still been able to maintain their topline through proactive cost-containment measures. After trading most of the day in the negative, the stocks from this sector closed in the green.

Economic recession in the developed countries left Indian exports with less takers, resulting in a decrease in merchandise export by 29.2% in May. The Finance Ministry seems to accept that the three stimulus packages have not done much to revive the exports. The Union budget is expected to provide some respite to the sector in terms of fringe benefit taxes and interest subsidies.

The Indian markets slipped into the red during the previous two hours of trade on account of a spurt in selling activity across the index heavyweights. Stocks from the banking, engineering and auto sectors are leading the pack of losers, while select stocks from energy, metals and power sectors are trading firm. The overall decline to advance ratio is poised at 1.3 to 1 on the BSE.

The BSE Sensex and NSE Nifty are trading lower, down by 100 points and 30 points respectively. However, the BSE Midcap and BSE Smallcap indices are trading flat. The Rupee is trading at 47.87 to the Dollar.

Telecom stocks are trading mixed. While Reliance Communications (Rcom) and Bharti Airtel are trading lower, MTNL is trading higher. As per a leading business daily, Rcom plans to outsource the management of its broadband and fixed-line services in an attempt to reduce costs. It is believed that the company is already in discussions with interested parties for this contract, which is likely to be valued over US$ 1 bn and would be finalised in the next three months. It may be noted that Rcom had outsourced the management of its wireless networks across India to Alcatel-Lucent Managed Solutions, a Joint Venture between Alcatel and Rcom last year. This had resulted in Rcom not only saving significantly on costs, but also to achieving operational discipline. Interestingly, Rcom will not be the only company to outsource management of its broadband and fixed-line services as Bharti Airtel has done so recently. Rcom's broadband and fixed lines services segment contributed around 35% of the topline in FY09.

FMCG stocks are trading mixed. While Colgate and GSK Consumer are trading higher, HUL is trading lower. As per a leading business daily, GSK Consumer is planning to sell it's over the counter (OTC) products through modern retail in India. OTC products are marketed under allopathic and ayurvedic categories, wherein allopathic OTCs require a drug license, while ayurvedic ones can be sold without a license. It may be noted that the company already sells its health food drinks brands through modern retail routes. As a matter of fact, modern retail contributed around 4.4% of the sales in CY08 and is estimated to go up to 10% by CY10. Also GSK Consumer's OTC products like Eno and Iodex command a household penetration of 9% and 10% respectively in the Metros. Thus this development will enable the company to increase the sales of OTC products.

Although in the green, the Indian markets remained volatile during the previous two hours of trade on the back of alternate bouts of buying and selling activity. Stocks from the energy, metal and pharma sectors led the indices higher during this period, while select software and engineering stocks are trading weak. The overall advance to decline ratio was poised at 2.1 to 1 on the BSE.

The BSE-Sensex and NSE-Nifty are trading higher, up by around 70 points and 40 points respectively. The BSE-Midcap and BSE-Smallcap indices are also trading higher by around 1.2% and 1.8% respectively. The Rupee is trading at 47.79 to the US Dollar.

As per a leading business daily, Zee Entertainment's flagship Hindi general entertainment channel (GEC), Zee TV has topped the list with the highest viewership for the week ended 28 June, according to the viewership rating agency, TAM Media Research. The channel's gross rating points (GRP) were 243.1, ahead of Colors (242.8 GRPs) and Star Plus (218.5 GRPs). It may be noted that advertisers slot their TV advertisements on the basis of these ratings. The Hindi GEC genre accounts for nearly 50% of the Rs 80 bn TV advertising revenues annually. In fact, the bulk of this revenue is generated by the top players namely Star Plus, Zee TV and Colors. Zee TV accounted for around 19% share of the Hindi GEC space during FY09. However, sustaining these ratings is highly difficult considering the changing views and preferences of the target consumers. Media stocks are currently trading firm.

As per a leading business daily, Reliance Industries (RIL) is expected to move Supreme Court for over its gas supply dispute with RNRL. It may be noted that the Bombay High Court has ordered RIL to supply gas at a price around 44% lower than current prevailing gas prices. RIL has been asked to enter into an agreement with RNRL to supply 28 m metric standard cubic meter (mmscmd) of gas per day, at a fixed price of US$ 2.34 for a period of 17 years. Further, government rules also mention that the company should supply the gas to other sectors on a priority basis. These rulings give RIL little room for discretion. The stock of RIL is trading marginally lower.

The Indian markets have opened the day's proceedings on a negative note as a rise in petrol prices has led to inflation worries. Energy stocks are leading the pack of gainers. Telecom, power and metal stocks are also witnessing buying activity. The overall advance to decline ratio stood at 1.3: 1 on the NSE. As regards global markets, the US and the European markets ended higher yesterday, while the Asian markets are also trading in the green currently.

The BSE Sensex is trading down by around 25 points. The NSE Nifty is down 10 points. The BSE Midcap is trading down 1%, while the BSE Smallcap index is trading flat. The rupee is trading at 47.7 to the dollar.

Hindalco Industries is planning to trim its overseas operations and also restructure its capital expenditure plans in India in an effort to stabilise operations. The company is closing its sheet mill at Rogerstone in the UK and two more Novelis mills in Canada. Hindalco is also looking to recast it capital expenditure of Rs 250 to Rs 300 bn over the next four years. With slowdown being witnessed in demand, the company is expecting a savings of 15-16% on its capex by planning additional capacity with the same capex. The company during FY09 saw a drop of 85% YoY in its consolidated net profits. This was mainly on account of Novelis, whose net loss had widened to US$ 1.9 bn from US$ 117 m recorded during FY08. The group already has a consolidated debt of US$ 5.2 bn and any further debt could pressurise its balance sheet. Further, on account of lower LME prices coupled with a fall in demand for aluminium, the company is witnessing challenging times. Metal stocks are trading firm.

As per a leading business daily, Tech Mahindra's open offer which ended yesterday got a poor response from the investors. The company had bought a 31% stake of new equity in Mahindra Satyam in April, and on June 12 launched an open offer to buy upto 20% in the open market at Rs 58 a share to take its stake to 51%. The poor response was on account of the market price being higher at Rs 70 as compared to the offer price. Tech Mahindra now has an option to go for a second round of preferential allotment of shares to gain a majority stake in Mahindra Satyam. The money raised would be infused into the acquired company to strengthen its balance sheet. Tech Mahindra has just around Rs 5.5 bn of cash on its books but needs to pay up around Rs 28 bn for picking up a 51% stake. This may put pressure on its balance sheet. Software stocks are trading mixed.

Fuel prices hiked, not freed

There are no signs of the much anticipated deregulation of fuel prices. The government has instead hiked the prices of transport fuels - petrol by Rs 4 per litre and diesel by Rs 2 per litre. However, the prices of domestic LPG and Kerosene have been left unchanged.

With global crude prices climbing again, this move comes as no surprise. The public sector oil marketing companies (OMCs) - Indian oil, BPCL and HPCL- are unable to recover their input costs. In fact, they were likely to run up an under recovery bill of Rs 700 bn per year. This hike will save them around Rs 130 bn.

It may be noted that this is a partial measure. The OMCs will still incur under recoveries of Rs 2 per litre on petrol and Rs 1.62 per litre on diesel. Moreover, the prices of Kerosene and LPG have been left untouched as it has a more direct impact on the common man. Under recoveries on these fuels amount to Rs 15 per litre and Rs 93 per cylinder respectively. In fact, as per a leading business daily, Petroleum Secretary R S Pandey himself has called this an 'ad-hoc' measure. We believe the ideal solution is for the government to genuinely deregulate fuel prices and let market forces determine the price levels. Simultaneously, it should provide targeted subsidies to the genuinely needy. To its credit, the government is taking some concrete steps towards this. It has begun the Unique Identity project, to be headed by Mr. Nandan Nilekani.

However, India's top oil & gas producer ONGC, in its analyst meet, said that it is unrealistic to expect complete deregulation. They should know, after all they foot a part of under recovery bill.

India outsources to itself
The cliché of US companies outsourcing their call centre jobs to India is so widespread that there are several Hollywood movies made on this theme. With the US in recession though, it may all be changing. As per the Wall Street Journal, India's call centers are increasingly signing up Indian clients. Although, India outsources business to the tune of US$ 12 a merely 2.4% of the worldwide figure of US$ 500 bn, it is expected to contribute almost 15% of the pie by 2020.

It may be noted that US outsourcing to India was powered mainly by the relatively lower wages here. Interestingly, the outsourcing originating from within India is based on the difference in wages between urban and rural India. We believe this is a classic case of 'comparative advantage' - the ability of a person to produce a good or service at a lower marginal cost and opportunity cost than another person. Given the cost of living in the Indian metros, this trend is likely to continue.