Closing Bell 1 July 2009

Closing Bell 1 July 2009

Although the Indian markets witnessed some volatility during the previous hour, they managed to end the day well above yesterday’s closing level. The BSE-Sensex ended with gains of about 150 points, while the NSE-Nifty ended higher by about 50 points. Stocks from the mid-cap and small-cap spaces ended the day on a positive note as well, recording gains of 1% and 0.3% respectively. Apart from stocks from the consumer durables space, buying activity was witnessed in stocks across the board, led by the realty, banking and auto spaces.

Most of the other Asian markets ended the day on a firm note today. The European indices are currently trading in the green as well. Rupee was trading at 48.00 against the US dollar at the time of writing.

Auto stocks ended the day on a firm note led by Tata Motors and M&M. Maruti Suzuki announced its sales for the month of June 2009 today. The company reported a 23% YoY increase in sales as against the same month last year. While sales in the domestic market grew by 10% YoY, exports witnessed a growth of 175% and formed about 18% of total unit sales. The company registered its highest ever export sales during the month (over 13,000 units). A reason for the same is increased exports to European economies. It may be noted some European countries have been offering incentives to customers who switch to environmental friendly cars. Further, the overall increase in volumes was largely driven by its A2 segment (comprising of the Alto, Wagon R, Zen Estillo, Swift, A-Star and Ritz) which grew by 22% YoY and formed about 62% of total sales during the month. On the other hand, its A3 segment (consisting of SX4 and DZiRE) witnessed a 5% YoY increase in volumes. This segment formed about 8% of total volumes during the month.

Sugar stocks ended the day on a firm note led by Balrampur Chini and Bajaj Hindusthan. In a move that will help in reducing sugar prices, which is stoked on account of supply constraints, a leading business daily has reported that the sugar industry is expecting the government to extend its duty-free raw sugar import policy by one year. This move will indirectly help in encouraging imports. A few months back, the government had removed duty as tight supplies were leading to higher sugar prices. It may be noted that sugar manufacturers were earlier allowed to source raw sugar from overseas at zero duty. But in turn, they had to export the same amount of refined sugar within a period of three years. As sugar production for the coming year is expected to be lower, this move would reduce the demand-supply gap.

As per a leading business daily, the six core industries – crude oil, petroleum products, coal, electricity, cement and finished steel – have registered a growth of 2.8% YoY during the month of May 2009. Apart from crude oil and refinery production, all other sectors registered a positive growth. It may be noted that the core sector performance has a weightage of 27% in the IIP. As per the World Bank economist, IIP is likely to remain in the positive territory as the manufacturing sector (especially the textile, auto and cement sectors) will help in keeping the IIP growth afloat.

The markets continued to trade in the positive territory during the previous two hours of trade on account of sustained buying activity in the index heavyweights. Currently, stocks from the energy, construction and banking sectors are garnering the investor’s interest, while select stocks from the aluminium, pharma and power sectors are trading weak. The overall advance to decline ratio is poised at 1.1 to 1 on the BSE.

The BSE-Sensex and NSE-Nifty are currently trading higher, up by around 60 points and 30 points respectively. The BSE-Midcap index is trading higher by 0.3%, while the BSE-Smallcap index is trading lower by 0.3%. The Rupee is trading at 47.99 to the Dollar.

Pharma stocks are trading mixed. While Lupin and Ranbaxy are trading higher, Cipla and Wockhardt are trading lower. As per a leading business daily, Indian Pharma major, Lupin had acquired the global rights for ‘AllerNaze’ an intra nasal steroid (INS) from Collegium Pharmaceuticals, a US based company. As far as the deal goes Lupin will pay the US based company a down payment apart from milestone payments. While Lupin has not disclosed the size of the deal, the milestones to be paid would be based on the sales that will be generated. It may be noted that the company initially plans to sell the product in the US markets and will launch it in other countries by 2011. US, Japan and Europe are the major markets for INS. In fact, the INS market in the US alone generates sales of over US$ 2.5 bn annually. This is a positive move by the company as it will enable it grow its revenues especially from its branded business which also enjoys higher margins.

Software stocks are trading mixed. While Infosys and HCL Tech are trading higher, TCS and Wipro are trading lower. As per a leading business daily, TCS plans to incur a capex of Rs 13 bn in FY10. This is likely to be used to expand its domestic capacity so as to increase its offshore revenues. The company is looking at off-shoring more work to India in order to reduce costs. As a matter of fact, the offshore revenues as a percentage of revenues increased from around 42% in FY08 to 44% in FY09. It may also be noted that the IT sector is witnessing a major slowdown globally and is not likely to grow much in FY10. Also,the US government’s opposition to outsourcing is not a very good sign either. Thus, the company’s move of increasing its focus on the domestic IT market and shifting more jobs to offshore locations can be viewed as a step towards increasing revenues and profitability. Moreover, such expansion plans signal an optimistic view on the Indian IT job market, which has been hit badly by the downturn.

The Indian markets remained volatile during the previous two hours of trade on alternate bouts of buying and selling being witnessed on the bourses. Stocks from the metal, power and energy sectors are weighing heavy on the indices. However, select realty and FMCG stocks are trading in the green. The overall decline to advance ratio was poised at 2.1 to 1 on the BSE.

The BSE-Sensex is down by around 10 points, while the NSE-Nifty is currently trading flat. The BSE-Midcap and BSE-Smallcap indices are trading lower, down by around 0.2% and 0.7% respectively. The Rupee is trading at 48.09 to the Dollar.

Software stocks are trading mixed. While Infosys and Wipro are trading firm, TCS is in the red. As per a leading business daily, IT majors TCS, Wipro and Infosys are scouting for around Rs 20 bn defence deals. As such, the Indian Air Force and the Army are seeking to modernise their processes in order to bring efficiency and cut time and costs. This is a positive development for the domestic IT majors as it will help them improve their domestic presence. Further, IT majors have been under pressure as IT spend in the developed nations has reduced. TCS, for instance, will largely benefit as it is already working on several IT projects with the defence forces over a decade and has specified expertise and credibility in these areas.

As per a leading business daily, Hero Honda has reported its sales volumes for the month of June. The company’s volumes were up 23.7% YoY during the month. For 1QFY10, Hero Honda’s volumes were higher by around 25% YoY. Given the company’s huge base, it has been able to achieve higher growth as compared to the industry and thus, has increased its market share in two wheelers to a high of 59% in the process. It may be noted that Hero Honda has been aggressive in expanding its reach to the rural consumers. Currently, it has the highest sales points and is much ahead of the second largest two-wheeler manufacturer namely Baja Auto. In fact, the company has almost doubled its sales network to around 3,900 sales points as compared to 2,000 at the end of FY06. The company, along with the peer Bajaj Auto, is trading firm.

The Indian markets have opened the day on a cautious note with some amount of volatility being witnessed. Auto, engineering and power stocks are leading the pack of gainers. The overall advance to decline ratio stood at 1.8:1 on the NSE. As regards global markets, the US ended in the red as the June Consumer Confidence index fell to 49.3 from a revised 54.8 in May. The European markets ended lower too yesterday, while the Asian markets are also trading mixed currently.

The BSE Sensex is trading higher by around 40 points. The NSE Nifty is up 25 points. The BSE Midcap and the BSE Smallcap indices are trading flat. The rupee is trading at 48.09 to the dollar.

Hindalco announced its FY09 results yesterday. The standalone topline declined by 5% YoY on account of fall in the LME prices of aluminium and copper. The revenues of the copper division declined by 11.9% YoY. The aluminium segment accounted for 42% of the company's total revenues during FY09 as compared to 37% in the previous fiscal. Segmental revenues were higher by 6.4% as compared to FY08. The operating profits declined by 10.7% YoY, causing EBITDA margins to contract by 1% during the fiscal. The standalone bottomline saw a fall of 22% YoY led by higher interest charges, depreciation and taxes. On a consolidated basis, the topline grew by 9.4% YoY while the bottomline declined by 84.9% YoY during the year. The board has recommended a dividend of Rs 1.35 per share (dividend yield of 2%). Aluminium stocks are trading down.

India's current account recorded a surplus of US$ 4.7 bn during 4QFY09 as against a US$ 1.5 bn deficit last year. The current account balance saw this turnaround after two years mainly due to lower trade deficit and surplus invisibles. The exports saw a drop of 24% YoY due to economic slowdown. The imports declined by 27% YoY led by decline in import oil and commodities bill. The invisibles declined by 7% YoY in the fourth quarter due to a slow growth in the software sector, while the services increased by over 45% YoY. However, the country's capital account balance remained in the negative at US$ 4.4 bn during 4QFY09. The portfolio investment declined by 26% YoY as the foreign institutional investors pulled out of the Indian equity markets due to the liquidity crisis. The fiscal deficit also shot up to Rs 907 m for April-May period, constituting 27.3% of the full-year target of Rs 3.3 trillion.

India can grow at 7% provided monsoons turn up well
If the chairman of the Prime Minister's Economic Advisory Council is to be believed, the Indian economy has the potential to grow at 7% during the current fiscal FY10. Mr. Suresh Tendulkar has noted that a favorable monetary environment coupled with the stimulus package by the government will ensure that GDP growth comes in higher than the 6.7% jump witnessed in FY09. On the former, i.e., the monetary environment, he has opined that although the Indian central bank has cut interest rates by some 4.25% between October 2008 and April 2009, they are now getting reflected gradually in bank rates, a good sign for the economy.

However, his prediction has come with a caveat that the monsoons should not fail. If they do fail, then the growth might come in considerably lower. A point of view that we cannot help but agree with.

Despite the fact that share of the agriculture sector in the country's GDP has been coming down over the years, we still have a huge chunk of our population depending on agriculture for its livelihood and hence, if monsoon plays truant, it might affect consumption patterns of this set of people thus leading to a cascading effect on the overall economy. It will be fair to say that a couple of percentage points could be easily shaved off India's GDP growth rate if monsoons come in way below the long-term average trend.

It seems like the big boys of private equity are on a comeback trail in India and China. As per The Wall Street Journal, Carlyle Group, one of the world's biggest private equity firms has stated that it has raised around US$ 1 bn for a new fund that will invest in fast growing companies in the emerging markets of India and China. It has further said that the appetite among pension funds and financial institutions for these two economies is on the rise. And there could be perhaps no better time to start a dedicated fund of this sort.

Although both the Asian nations under discussion did not get as badly impacted from the financial crisis as their western counterparts, it did test the mettle of quite a few companies and hence, the firms that have been able to pass what could be counted as one of their sternest tests in recent times, would be on the radar of investors like the Carlyle Group.

It is not as if Indian and Chinese capital markets did not have a brush with the mindset of foreign investment firms like those from the private equity group. During the peak of the last bull-run, easy money coming from hedge funds and investment banks had pushed valuations to very exorbitant levels and with this hot money being pulled out quickly in the aftermath of the crisis, valuations have once started looking reasonable from a long-term perspective.