Sunday, July 12, 2009

Closing Bell 9 July 2009

The Indian markets witnessed a volatile final hour as alternate bouts of buying and selling led the indices to hover around the dotted line. However, the indices finally settled on a muted note, with the BSE-Sensex ending lower by around 11 points, while the NSE-Nifty closed higher by about 2 points. Today, buying activity was witnessed in stocks from the metal, healthcare and FMCG spaces. On the other hand, stocks from the capital goods and realty space failed to garner the markets participants’ interests. The midcaps ended higher by 0.5% while the small caps ended lower by about 0.2%. The overall decline to advance ratio stood at 1.4 to 1 on the BSE at the time of writing.

Asian markets ended the day on a mixed note today. The European indices are currently trading firm. Rupee was trading at 48.73 against the US dollar at the time of writing.

Steel stocks ended the day on a mixed note. While SAIL ended higher, JSW Steel ended on a weak note. As per a leading business daily, steel major, SAIL has cut prices of its long products primarily used in construction in the range Rs 1,500 to Rs 2,000 per tonne. As the monsoon season has started, the construction activity has slowed down. This has resulted in lower demand for the long steel products. However, the company’s management is not averse to further rate cuts if the markets situation demands so. It may be noted that prices of key raw materials like coking coal have declined as compared to levels of the earlier years. Further, the company has witnessed a fall in demand on account of 10.5% YoY decline in sales during 4QFY09. This move will help SAIL to fill some gap between demand and supply.

As per a leading business daily, Lupin, Matrix Labs and the UK subsidiary of Unichem Laboratories may face an antitrust investigation from the European Union’s antitrust regulator. The regulator believes that the delay in marketing of the generic version of hypertension drug might have led to an infringement of the antitrust law. The regulator also believes that these companies might have entered into an agreement to delay the introduction of the drug in order to avoid the competition. The European market size for the drug is expected to be around US$ 400 m. As such, the regulator is reviewing the probe as companies delay the introduction for variety of reasons. But if charges are proved, these companies may have to pay a fine of up to 10% revenues of their European operations. The stock of Matrix and Lupin ended in the red while Biocon and Cipla ended the day higher.

According to the official data released today, India’s annual rate of inflation has dropped for the fourth week in a row to negative of 1.55% for the week ended June 27. The wholesale price index (WPI) was at minus 1.3% during the previous week. The index has seen a sharp decline in the recent past on account of lower commodities and fuel prices. The negative highs reached in the last couple of weeks are mainly on the back of the high base effect as the rate of inflation was as high as 12.03% during this time last year. This week while the prices of fuel items remained unchanged, products like cast iron casting, steel ingots and other metal products along with some chemicals got cheaper. On the contrary, the prices of food items like pulses, fish, fruits, imported edible oils and vegetables kept surging raising the consumer price index. It is important not to be carried away by this low headline inflation as in reality, the recent hike in fuel prices and surging price of the important consumer goods are signaling high inflation if the high base effect is removed.

Despite some volatility, the BSE Sensex remained in the positive territory during the previous two hours of trade gaining 61 points. The NSE Nifty also traded in the green, up by 20 points. Currently, stocks from the metal, realty and oil & gas sectors are leading the pack of gainers, while select stocks from the auto, capital goods and consumer durables sectors are trading weak. The overall advance to decline ratio is poised at 0.8 to 1 on the BSE.

The BSE-Midcap and BSE-Smallcap indices are also trading firm, up by around 1.0% and 0.3% respectively. The Rupee is trading at 48.80 to the Dollar.

More trouble seems to be in store for Ranbaxy. Readers would do well to recall that the company has been in deep trouble with the US FDA for not complying with quality manufacturing standards. As a result, even those products for which Ranbaxy had managed to bag the 180-day exclusivity by settling patent suits may be launched with a considerable delay. This is all the more prominent in the case of GSK Plc’s ‘Valtrex’ which is scheduled to be launched by Ranbaxy by the end of 2009. These developments have prompted the Canadian generics firm Apotex to sue Ranbaxy whereby if the former wins the case, then Ranbaxy’s 180-day exclusivity window for ‘Valtrex’ will commence irrespective of whether the US FDA gives approval for the ANDA or not. Typically, the 180-day window commences from the date when the generic company launches the product in the US market. Thus, if Apotex wins its case against Ranbaxy it will be a big blow to the latter as the potential to earn higher revenues and profits from this drug will be impacted. However, Ranbaxy is trading in the green.

DLF, India’s largest real estate developer, has sold its stake in a 50-50 joint venture with Mumbai-based Ackruti City for developing a commercial project to a US-based real-estate fund for a sum of Rs 2 bn. The cash-strapped company exited the joint venture as a part of its asset sale programme to raise Rs 55 bn by the end of this fiscal. It must be noted that DLF has exited many big projects in the last couple of months and has already raised Rs 10 bn through asset sale.Such exits will affect the company’s strategy to expand its footprint in India. The stocks from realty sector are leading the pack of gainers on BSE today.

The Indian markets remained volatile during the previous two hours of trade on the back of alternate bouts of buying and selling activities. Currently, stocks from the metals, energy and FMCG sectors are leading the pack of gainers, while select realty and banking stocks are trading weak. The overall market breadth is negative, with losers outnumbering gainers in the ratio of 1.6 to 1 on the BSE.

While the BSE-Sensex is trading higher, up by around 10 points, the NSE-Nifty is trading flat. The BSE-Midcap index is trading higher by 3%, while the BSE-Smallcap index is trading weak, down by around 0.2%. The Rupee is trading at 48.92 to the Dollar.

As per a leading business daily, Indian software majors are likely to witness an overall hit in the revenues and margins from the export business during the June 2009 quarter. This is expected on account of lower volumes, downward pressure on billing rates and an appreciating rupee. However, the new contracts by the clients will give some cushion. Further, on account of change in the business outlook, IT firms are also likely to report more contracts. Though software industry's export business in the key geographical locations remains under pressure on account of lower volumes and volatile exchange rates, all eyes await the outlook and performance review by software major, Infosys in their June quarter earnings expected tomorrow. Software stocks are currently trading mixed.

Steel stocks are also trading mixed. While Tata Steel is marginally lower, SAIL is trading higher on the bourses currently. As per a leading business daily, Tata Steel plans to save around Rs 20 bn on account of cost cutting measures during the current fiscal in its Indian operations. This comes on the back of frugal manufacturing practices and falling prices of key raw materials mainly coking coal. The cost cutting move is as per Tata Steel's regular objective to enable efficiencyTata Steel's regular objective to enable efficiency in the manufacturing activities. As such, it had saved around Rs 8 bn during FY09 through focusing on performance improvement. The reduction amounted to US$ 47 per tonne and 20% higher than their targeted reduction. However, on a proportionate basis, the reductions were not in line with the topline and further aided by the higher raw material prices, the company's margins declined by 3.1% YoY during FY09.

The Indian markets have opened the day's proceedings on a positive note. IMF has revised the GDP growth of India upwards to 5.4% in 2009 from 4.5% projected in April this year. In 2010, the Indian economy is expected to grow at a much faster rate of 6.5%. While banking, pharma, auto and power stocks are trading firm, selling is being witnessed in engineering and software stocks. The overall advance to decline ratio is at 1.2:1 on the NSE. As regards global markets, the US markets ended flat yesterday as buying was witnessed at lower levels. The European markets ended lower, while the Asian markets are also trading down.

The BSE Sensex is trading higher by around 60 points. The NSE Nifty is up 20 points. The BSE Midcap and the BSE Smallcap indices are trading flat currently. The rupee is trading at 49.00 to the dollar.

FMCG stocks are trading firm. As per a Ficci-Technopak report, the FMCG sector is expected to touch US$ 47 bn by 2013 and US$ 95 bn by 2018 due to the implementation of the proposed Goods and Services Tax (GST) and opening of Foreign Direct Investment (FDI). The report suggests that the government needs to rapidly implement GST to replace the multiple indirect taxes currently levied on FMCG products. This would have several benefits, including uniform, simplified and single-point taxation and reduced prices.

Further, in order to reduce counterfeits, the enforcement of the Trade Mark and Copyright Laws is also needed. Counterfeit products account for almost 5% of the industry and poses serious challenges to its growth. FMCG companies had been demanding simplified tax structure since quite some time. The process for the smooth introduction of the Goods and Services Tax (GST) will come in effect from 1st April, 2010. Also, higher rural focus, lower penetration and rising consumerism would continue to aid the sector's growth.

As per a leading business daily, on account of rising delinquencies, the Indian banks have asked the Reserve Bank of India (RBI) to relax provisioning norms for home loans and other assets. RBI norms stipulate that if a borrower defaults on any loan facility, all other facilities taken by this borrower should be treated as bad loans. Once a loan is classified as a bad account, the bank has to set aside 10% of the outstanding loan as a provision. This not only affects the net profits of the bank but also leads to higher NPA ratio. And the current economic slowdown has worsened the situation further. This will also impact the credit growth as money available for disbursement as capital is blocked. Growth in loans of Indian banks has slowed from around 27% in November to about 15% in June this year. Banking stocks are trading mixed.

S&P worried over India's rising deficit
The Finance Minister's 'no comments' in the recent budget on how he will be lowering India's fiscal deficit in the years to come has made rating agency S&P quite concerned over the country's outlook. As a matter of fact, as the FM disclosed during his budget speech, India's fiscal deficit (excess of government expenditure over its income) is likely to touch a level 6.8% of GDP by the end of FY10. Moreover, on including off-budget items such as fertiliser and oil bonds, the deficit figure will stand at about 12% of GDP.

"We continue to believe that such high levels of government deficits are unsustainable in the medium term, although we weren't surprised by the number itself," said S&P in a statement.

Currently, the agency has given a rating of BBB- which is one step away from the 'junk' status. Any downward revision on this rating could lower India's appeal with foreign investors (which we are anyways not complaining much about!). However, S&P has added that it expects its India outlook to stabilise at the current levels provided the country manages to reduce its deficit burden in the medium term. This is also keeping in mind that a faster than expected economic recovery would help India to achieve faster fiscal consolidation through higher revenue growth.

Auto numbers - India good, China fabulous
India's 14% YoY growth in total auto sales for the month of June 2009 paints a rosy picture when compared to the ailing auto markets of developed nations. As per the Society of Indian Automobile Manufacturers (SIAM), the growth in vehicle sales has been on the back of new model launches, and cheaper and easier financing options. Passenger vehicle sales stood at 140,000 units during the said month, recording a growth of 8% YoY. On the other hand, two-wheeler sales stood at almost 707,000 units and witnessed a growth of 17% YoY.

While these numbers can be considered good, wait till you read the growth rates China is clocking in its auto industry. As per Bloomberg, China's passenger vehicle sales stood at almost 873,000 units in June, a whopping growth of 48% YoY. Total auto numbers for the month stood at 1.1 m units. This is believed to be the biggest jump in auto numbers in over three years. Reasons such as tax cuts and government subsidies have been attributed for the same. It may be noted that China is now the world's biggest auto market (a feat it achieved during the first half of 2009), surpassing the US's 63-year reign.