Monday, August 3, 2009

Closing Bell 27 July 2009

Closing Bell 27 July 2009

The Indian markets remained volatile during the day. Although they opened in the positive, intense selling activity at higher levels led the markets to languish in the red for the rest of day. However, in the final hour of trading session renewed buying activity at lower levels led markets to recoup some of its losses. While the BSE BSE-Sensex closed lower by 12 points, the NSE-Nifty managed to close just above dotted line recording gains of around 2 points. However, stocks from the mid-cap and small-cap spaces ended the day on a strong note, recording gains of 1.4% each. Stocks from the banking, auto and energy sectors were at the receiving end, while stocks from the FMCG and realty sectors garnered investors’ interest. The advance to decline ratio was poised at 1.9 to 1 on the NSE.

Other Asian markets ended the day on a firm note. The European indices are currently trading mixed. Rupee was trading at 48.20 against the US dollar at the time of writing.

Asian Paints announced its 1QFY10 last Saturday. The company has reported an 18% YoY growth led by the decorative paints business. The company has witnessed a 5% expansion in operating margins during the quarter largely due to a fall in raw material costs and other expenditure (as percentage of sales). Net profits clock a robust 66% YoY growth led by 60% YoY growth in operating profits and higher other income. The stock of Asian Paints ended on a firm note.

Energy stocks ended the day lower led by Reliance Industries and ONGC. As per a leading business daily, ONGC has kept on hold the development of its six prospective discoveries that were made in the recent years due to the lack of sufficient infrastructure for development. In fact, three of these six assets lie in isolated areas where there is no infrastructure availability. The company has also not found customers for these discoveries. However, the company plans to develop infrastructure in a gradual manner for these projects going forward. These six discoveries are part of the 66 assets which the company has found in the recent years. The remaining finds are under various stages like production, development, delineation, appraisal and ongoing study. It may be noted that over the last 6 years, ONGC has made around 111 discoveries of which 45 have been put into production. For FY09, ONGC's crude oil production was 6.1 m tonnes, while the natural gas production was 5.75 bn cubic meters. The stock of ONGC closed in the negative.

As per estimates, India has to generate an incremental 10,000 MW capacity per year for the next 10 years to plug the demand supply gap. There is a need to shift the policy goal from energy conservation to energy efficiency and from energy inputs to the effectiveness of energy use and energy services. The Bureau of Energy Efficiency (BEE), which functions under the Ministry of Power, through its star campaign has saved 6,528 m units of power. This is roughly equivalent to three days of national consumption. The government's star campaign urged households to go for star-studded certified energy-saving appliances products and made industries adopt new technologies, helping save electricity worth 1,500 mw in FY09. BEE has set a target of saving 10,000 mw of power during the 11th Five Year Plan. Out of this, 2,100 mw has been achieved so far. It has set a target of 2,600 mw for FY10 and 3,000 mw for FY11.

The Indian markets continued to languish in the red during the previous two hours of trade. However, the overall market breadth remained positive as the total numbers of gainers outnumbered the total numbers of losers by 1.5 to 1 on the BSE. While buying activity is being witnessed in stocks from the realty, FMCG and metal sectors, stocks from the oil & gas and auto spaces are trading weak.

The BSE-Sensex and NSE-Nifty are trading weak, down by around 25 points and 10 points respectively. The BSE-Midcap and the BSE-Smallcap indices are however trading higher, up by around 1% each. The Rupee is trading at 48.23 to the Dollar.

Energy stocks are currently trading weak led by Reliance Industries, GAIL and ONGC. Castrol India announced its results today. During 2QCY09, the company reported a muted 3% YoY increase in revenues. However, on account of an 11% YoY decrease in costs, the company's operating profits increased by a whopping 57% YoY. The reduction in operating costs was largely on account of 12% YoY decline in raw material costs (as a percentage of sales). During the quarter, the company's operating margins expanded by 10.6% YoY to 31%. On account of a strong operating performance, Castrol recorded a 55% YoY increase in profits. As for its 1HCY09 performance, the company recorded a 3% YoY increase in revenues and a 32% YoY increase in profits as compared to the corresponding period in the previous year. It may be noted that during the quarter, the company was able to achieve such a strong operating performance as it held on to its product prices in spite of the sharp decline in input costs. The numbers speak immensely for the brand value attached to the company and its products.

Pharma companies are currently trading firm led by Wockhardt, Cadila Healthcare and Lupin. As part of its corporate debt restructure (CDR) program, pharmaceutical major, Wockhardt had eatlier decided to divest stake in its non-core businesses. However, a leading business daily today has reported that the company has decided to go slow as it has already secured the required funds for payments that are due in the current year. Under the CDR, Wockhardt has to divest its non-core assets at an estimated value of almost Rs 8 bn but the company has been given six years to complete the transaction. It is believed that the company is waiting for higher valuations before it puts such assets on the block. Some of the divestments include a few of its brands in the consumer health division, a 32-acre dairy and milk processing unit in Punjab and part of the 250 acres of land in Aurangabad. In addition, the company's promoter is also planning to divest less than 26% stake in Wockhardt Hospitals. It must be noted that Wockhardt's debt equity ratio is as high as 2.3:1 and the company had already sold its German generics business to raise funds to retire some of its debt.

Heavy selling activity among the index heavyweights led the Indian markets to trade below the dotted line during the previous two hours of trade. Buying activity is being led by stocks from the realty and FMCG sectors, while select energy and auto stocks are trading in the red. The overall market breadth is positive, with total gainers outnumbering the losers in the ratio of 1.8 to 1 on the BSE.

While the BSE-Sensex is trading lower, down by around 10 points, the NSE-Nifty is trading flat. However, the BSE-Midcap and the BSE-Smallcap indices are trading higher, up by around 1.0% and 1.2% respectively. The Rupee is trading at 48.21 to the Dollar.

As per a leading business daily, ITC plans to focus on its high margin agri business in order to increase its margins and net profits. It may be noted that earlier the company had been contemplating exiting its non profitable divisions. Subsequently, it exited from the some commodity relates businesses which were not profitable namely those with products like non-basmati rice, course cereals and pulses. It currently plans to focus on the sourcing of raw materials for the high margin commodity segment. For this, the company is leveraging its e-Choupal network, set up in rural India to source the raw materials and sell finished products in the markets. Currently, the company has 6,500 e-Choupals and plans to increase the number to 20,000 by 2012. During 1QFY10, ITC's revenues from the agri business declined by 49% YoY, while the net profits reported a growth of 31% YoY on account of its continuous effort of increasing profitability from the segment. The segment contributes around 10% to ITC's total consolidated revenues. The stock is trading marginally higher.

Pharma stocks are trading mixed. While Fresenius Kabi is trading firm, Ranbaxy and Glenmark Pharma are in the red. Ranbaxy had announced its 2QCY09 results last Friday. The revenues declined by 1% YoY due to the adverse impact on its US business (that declined 41% YoY in dollar terms) on the back of the ongoing issues with the US FDA. The European markets were also impacted and declined by 12% YoY on account of price regulation and currency devaluation in the Romanian markets. However, the emerging markets performed well during the quarter. Operating margins tanked to 3% during the quarter on the back of a substantial increase in raw material and staff costs as a percentage of sales. This resulted in a net loss for the quarter to the tune of Rs 1 bn (excluding extraordinary profits on account of reversal of the forex loss reported in 1QCY09). Going forward, Ranbaxy expects the branded and emerging markets to continue to help it offset difficult conditions in the developed markets. However, solving the issues with the US FDA will be the key in getting the company's growth back on track.

In line with its Asian peers, the Indian markets too have opened the day's proceedings on a positive note. Buying is being witnessed across sectors with FMCG, engineering and telecom stocks leading the pack of gainers. The overall advance to decline ratio is poised at 2.7:1 on the NSE. As regards global markets, while the US markets ended higher led by better-than-expected corporate results, the European markets ended in the red last Friday. The Asian markets are trading firm currently.

The BSE Sensex is trading higher by around 40 points. The NSE Nifty is up 5 points. The BSE Midcap and the BSE Smallcap indices are trading higher by 1%. The rupee is trading at 48.12 to the dollar.

Bharat Forge announced its 1QFY10 results last Friday. The topline reported a drop of 44% YoY led by decline in both, the domestic and the export business. Exports saw a 52% YoY decline, while the domestic sales saw a drop of 38% YoY. However, on a sequential basis, some improvement was seen. The topline did improve to report a 23% QoQ growth. On the operating margins front, the company witnessed a decline by 3.6% YoY due to higher staff costs as a percent of sales. Excluding the exchange loss, the net profit declined by 84% YoY led by a 52% YoY fall in the operating profits and lower other income. The company is witnessing some recovery in the US and the European markets. It also has plans for restructuring its subsidiaries and rationalisation of manpower costs. While on a year to year basis, the performance was impacted due to the unprecedented downturn, with auto sales now seeing an improvement the management expects the scenario to improve. Auto ancillaries stocks are trading higher.

Godrej Consumer Products (GCPL) is planning to acquire a 100% stake in Godrej Sara Lee (GSL). Godrej Sara Lee, is a 49:51 joint venture company between two wholly-owned subsidiaries of Godrej & Boyce and Sara Lee Corp. GSL is the market leader in household insecticides, air care and hair cream in India. It has popular brands like GoodKnight, JET, HIT, AmbiPur, Brylcreem and KIWI. Globally, Sara Lee has announced that it would like to sell off its household and body care division. GCPL had earlier decided to acquire a 49% holding in GSL by merger of Godrej ConsumerBiz Private (GCBPL) and Godrej Hygiene Care Private (GHCPL) into itself. The company now plans to acquire the remaining 51% stake. The deal size is estimated to be around Rs 8.5 to 9 bn. The proposed consolidation would strengthen the position of GCPL in the FMCG market and give it the strategic flexibility and scale to pursue growth opportunities. It will also provide cost and operational synergies and widen the brand portfolio considerably. FMCG stocks are trading in the positive territory.

The next few quarters are likely to be a tough period for the Reserve Bank of India (RBI) when it comes to maintaining a balance in its monetary policy. With India's fiscal deficit widening to 6.8% of gross domestic product (GDP) and government borrowings likely to rise to Rs 4.5 trillion, the central bank is in for a challenge on how to gravitate within its interest rate spectrum.

As you know, maintain the right level of interest rates to propel growth and at the same time keep inflation under control is the prerogative of the RBI. And how successful will it be in doing this balancing act remains to be seen.

Most economists expect the RBI to maintain a status quo on interest rates (and not increase rates) given that we still remain unclear about the sustainability of an economic recovery. Further, factors such as poor monsoons and slow credit growth cannot be ignored.

During the month of June, the monsoon deficit figure stood as high as a 48%, the lowest in nearly 15 years. As for data related to the credit growth, the same is believed to have come down to 16% YoY in the month of June, which is again the slowest in a few years.

Proponents of a cut in interest rates further cite the declining inflation as a major reason. As a matter of fact, the wholesale price index (WPI) inflation rate has been in the negative zone for about six weeks and as per the latest available data, it stands at a negative 1.17% (or deflation). The central bank is thus expected by some to cut rates further to help revive demand and bring the country out of deflation, which is considered even worse than inflation.

So, how will RBI do a balancing act? We will not hazard a guess here. There are, in fact, too many variable factors that the bank needs to take into account before announcing its next policy action.