Monday, August 3, 2009

Closing Bell 23 July 2009

Closing Bell 23 July 2009

Buying activity during the final hour of trade further strengthened gains in the Indian indices as they ended the day well above the dotted line. The BSE-Sensex ended the day higher by around 380 points, while the NSE-Nifty closed higher by about 125 points. Stocks from the mid-cap and small-cap spaces ended the day on a strong note as well, recording gains of 2.3% and 2.2% respectively. While buying was witnessed across sectors, Bharti Airtel and ONGC emerged as the losers on both the indices. The advance to decline ratio was poised at 3.7 to 1 on the NSE.

Other Asian markets also ended the day on a firm note. The European indices are currently trading mixed. Rupee was trading at 48.44 against the US dollar at the time of writing.

India Cements, through its subsidiary, ICL Financial Services, recently acquired a 53% stake in a Rajasthan based Indo Zinc company at a valuation of Rs 53 m. Upon finding difficulties in going ahead with its proposed greenfield expansion of 1.5 million tonnes (MT) in the state of Rajasthan, India Cements proposes expand its capacity in Rajasthan through the acquisition route. Along with the 1.5 MT cement plant, the company had also announced a 20 MW captive power plant within the state. For this project, Indian Cements has outlined capex of Rs 6 bn, which would be funded by a mix of debt to equity in the ratio of 50:50. The plant is expected to commence operations by FY11. It will now be set up by Indo Zinc, which owns limestone mining leases. The move is a positive one from a long term perspective as it would lead to diversification of revenues across geographies (access to Rajasthan, Madhya Pradesh and Gujarat) and provide access to secured source of the key raw material namely limestone. As India Cements raised its capital holding in the company from 13% to 53%, as per SEBI law it has come out with an open offer to acquire another 20% shares (900,000 equity shares) of Indo Zinc Ltd at a price of Rs 22.5 per share. Cement sector stocks closed firm.

Automobile sector stocks ended in the positive with the major gainers being TVS Motors, Maruti Suzuki and M&M. Maruti Suzuki announced its 1QFY10 results today. The company reported a topline growth of 34% YoY during 1QFY10. This was led by a stellar performance on the exports front which saw a volume growth of 135% YoY. The domestic volumes grew by 10% YoY. During the quarter, Maruti saw a 17% YoY growth in the A2 segment and 25% YoY increase in the A3 segment primarily driven by new launches. On the operating margin front, the company saw a marginal improvement of 0.5% YoY. While raw material costs saw an increase, staff and other expenses decreased as a percent of sales. The net profits reported a growth of 25% YoY during 1QFY10. A 39% YoY growth in operating profits coupled with lower interest costs (down 63% YoY) led to the higher profits.

Inflation numbers for the week ended 11th of July rose marginally to -1.17% during the period as compared to -1.21% a week earlier. It may be noted that this is the sixth consecutive week when the inflation rate is in the negative. For the corresponding week a year earlier inflation stood at 12.13%. The marginal rise in inflation was attributed to growth in the price of primary food articles mainly marine fish, fruits and vegetables. The rise in the price of aviation turbine fuel also contributed to the increase.

The Indian markets continued to push farther into the positive territory during the previous two hours of trade on account of sustained buying activity. Currently, stocks from metals, power and auto sectors are trading higher, while select stocks from telecom, pharma and engineering sectors are trading lower. The overall advance to decline ratio is poised at on 1.8 to 1 the BSE.

The BSE-Sensex and NSE-Nifty are trading firm, up by around 200 points and 70 points respectively. The BSE-Midcap and the BSE-Smallcap indices are also trading higher, up by around 1.7% and 1.6% respectively. The Rupee is trading at 48.46 to the Dollar.

Software stocks are trading mixed. While TCS and Tech Mahindra are trading higher, Mindtree and Financial Technologies are trading lower. Tech Mahindra announced its 1QFY10 results yesterday. The topline of the company grew by 6% QoQ in 1QFY10 led by improved volumes across business segments. Operating margins declined by 1.8% QoQ to 25.2% in 1QFY10, despite cost containment measures and appreciation of the Rupee. This was mainly on account of high base effect as margins improved significantly in the last quarter due to a policy change pertaining to employee cost. Net profits declined by 43% QoQ mainly due to significant rise in interest cost on account of interest outlay on debt raised for funding the acquisition of Satyam during the quarter. Tech Mahindra added 510 employees during the 1QFY10.

Telecom stocks are trading mixed. While Reliance Communications and Idea Cellular are trading higher, Bharti Airtel is trading lower. As per a leading business daily, Reliance Infratel, a subsidiary company of Reliance Communications (RCom) has received Rs 100 bn tower sharing contract from Etisalat Dynamix Balwas. Reliance Infratel will provide the entire tower and related infrastructure along with transmission connectivity to Etisalat for its 15 circles. It may be noted that revenues from tower sharing are considered lucrative as incremental capex on the part of the provider is minimal. Etisalat plans to roll out GSM services in 15 circles in India in next 2 years and will use around 30,000 towers of Reliance Infratel. It is estimated that this contract will generate Reliance Infratel revenues of over Rs 10 bn per year in the form of rentals, which will add to the stability of RCom's revenues.

The Indian markets pared some of their early gains during the previous two hours of trade as selling activity was witnessed at the higher levels. Currently, stocks from the metal, FMCG and IT sector are leading the pack of gainers, while select stocks from the pharma and telecom sectors are trading weak. The overall market breadth is positive, with total gainers outnumbering the losers in ratio of 1.8 to 1 on the BSE.

The BSE-Sensex and NSE-Nifty are trading firm, up by around 170 points and 60 points respectively. The BSE-Midcap and the BSE-Smallcap indices are also trading higher, up by around 1.2% and 1.1% respectively. The Rupee is trading at 48.45 to the Dollar.

Telecom major, Bharti Airtel, announced its 1QFY10 results this morning. The company reported a topline growth of around 23% YoY during the period. This growth was led by mobile service business, which grew by 19% YoY in 1QFY10. In the mobile service business, the growth was led by a strong addition to the subscriber base, while the average revenues per user (ARPU) remained under pressure. The company added 8.4 m subscribers during the quarter. At the end of the quarter, the company's subscriber base stood at 102 m. ARPU declined by 20% YoY, mainly on account of aggressive competitive pricing by new telecom players along with the existing ones. The operating margins remained stable at 40.6% during this period. Stable margins along with the higher interest income helped bottomline grow by 22% YoY. The stock is trading weak, while its peer, RCOM is in the green.

Automobile stocks are trading firm led by Tata Motors and M&M. As per a leading business daily, utility vehicle major, M&M plans to increase its rural presence in order to garner higher revenues from that market category. The company plans a rural push for its latest launch of a pickup truck - the Mahindra Bolero Maxi Truck. The company is a market leader in the pickup range with a market share of 85%, of which 80% comes from the rural markets. It may be noted that rural markets have shown resilience during the economic slowdown. The company plans to increase its reach to 600 dealers from the current 450 and it also plans to use the vast network of Mahindra Group companies in order to provide service at a range of every 50 km. During the current fiscal, the company expects the segment to grow by 15% YoY as compared to industry growth of 12% YoY.

In line with its Asian peers, the Indian markets have opened the day's proceedings on a positive note. Buying is being witnessed across sectors with metal, power and telecom stocks leading the pack of gainers. The overall advance to decline ratio stood at 6:1 on the NSE. As regards global markets, the US and the European markets ended mixed yesterday. The Asian markets are trading firm currently.

The BSE Sensex is trading higher by around 285 points. The NSE Nifty is up 80 points. The BSE Midcap and the BSE Smallcap indices are trading higher by more than 1% each. The rupee is trading at 48.42 to the dollar.

Piramal Healthcare announced its 1QFY10 results yesterday. The revenues grew by 16% YoY in 1QFY10 driven by the domestic branded formulations, pathlabs and global critical care businesses. While the domestic formulations business grew by a healthy 26% YoY, revenues from custom manufacturing fell by 16% YoY. The operating margins reduced by 1.1% to 19% due to increase in raw material costs and other expenditure (as percentage of sales). While net profits registered a growth of 25% YoY, the same was largely due to the extraordinary expenses and forex loss reported last quarter. Thus, excluding this impact, net profits declined by 15% YoY. While the performance of the custom manufacturing business has been subdued in the last three quarters, the management expects revenues to pick up in the latter half of the year. Pharma stocks are trading mixed currently.

As per a leading business daily, Tata Power has raised US$ 335 m through issue of securities in international markets. The Global Depository Receipts (GDRs) were priced at US$ 22.6 each. The company plans to use the proceeds to fund capital expenditure of its existing power plants, projects under implementation and other future projects. The company had already tied up Rs 181 bn as debt and other loans from various financial institutions. In all, Tata Power has outlined a capex of Rs 500 bn to set up additional generation capacities of around 10,500 MW over the next 5-6 years. This shall take the company's capacity to 12,861 MW by 2013, from the current levels of 2,368 MW. It is also planning to strengthen its power transmission and distribution systems in Maharashtra with an investment of over Rs 10 bn in a few years. With India facing a demand supply gap in the power sector, the expansion plans would aid the company in meeting the growing needs. The government is planning to add 68,000 MW of generation capacity over the next 5 years. However, challenges with respect to shortage of coal, implementation and execution remain. Power stocks are trading firm.

Although Indian equities had reached very attractive valuations earlier this year, no one really expected the recovery to be this strong and this quick. However, there are some who prepared for this rally and have reaped rich dividends. One of them is Sanjiv Duggal, who manages about US$ 6 bn in Indian stocks at HSBC Holdings Plc's Halbis Capital Management in London.

As per Bloomberg, Duggal's US$ 4.6 bn Indian Equity Fund, which targets overseas investors, rose a whopping 78% this year, the best-performing Indian equity fund with assets of more than US$ 500 m.

He continues to believe that the Indian economy's inherent growth potential remains intact. He expects FY10 results for India Inc. to grow by less than 10% but FY11 to witness a growth of 15% to 20%. These earnings are now made more attractive due to stability the new government will provide. As a result, as he says, "One could argue that India's trading multiple could be higher." In fact, valuations are in line with 10 year averages and lower than 5 year ones.

Also, as Mr. Ajit Dayal, Director at Quantum Advisors Pvt. Ltd. also adds - "India is neither a US (a big borrower and consumer) nor is it a China (a big producer of goods for export that created jobs and boosted China`s economic growth). So, while I remain nervous about where the world is, I continue to believe that India has a good chance of being less impacted than most other countries in the world. And while the market has reacted very negatively to the budget (silly, in my opinion) and is nervous about the monsoon (we should be), the trend of India`s GDP remains upward."

But despite all these positive vibes that emanate for India, it is pertinent that you do not lose sight of the fact that the world is still a very uncertain place to invest in. And given that, as Ajit says, "India is still hostage to flows of short term money from hedge funds," it is important that you do not give in to the greed that might lead the markets to high levels in the short term.

In such a scenario, what should you do? Invest in companies with strong business models and visionary managements, but only after you have kept aside enough cash for emergencies and to live comfortably.

Is Indian IT looking at better times?
India's four major IT companies - TCS, Infosys, Wipro, and Tech Mahindra - have already announced their June quarter results. And to say the least, the performance has been good, especially given the continued weakness in worldwide technology spending. These companies' combined sales and profits have grown by 9% YoY and 12% YoY respectively during the quarter.