Closing Bell 13 July 2009

Closing Bell 13 July 2009

Despite the buying activity during the final hour of trade, the markets still ended lower than Friday’s closing mark. The BSE-Sensex ended the day lower by around 100 points, while the NSE-Nifty closed lower by about 30 points. The BSE-Midcap and BSE-Smallcap indices ended the day lower by about 2.8% and 3.4% respectively. Today, buying activity was witnessed in select IT and banking stocks. On the other hand, stocks from the metal, realty and power sectors led the pack of losers. At the time of writing, the overall decline to advance ratio stood at 3.4 to 1 on the BSE.

Most of the other Asian markets ended the day on a weak note today. The European indices are currently trading in the red as well. Rupee was trading at 49.2 against the US dollar at the time of writing.

Auto stocks ended the day on a weak note today led by Hero Honda, Maruti Suzuki and Tata Motors. As per a leading business daily, two wheeler major Hero Honda is targeting a 25% YoY growth in sales volumes during the year. During FY09, the company sold about 3.6 m units. As such, the target it has set out for this year is nearly 4.5 m units. During the April-June quarter (1QFY10), the company sold almost 1.1 m units. This indirectly means that the company will need to maintain the trend in volumes in the remaining quarters. It may be noted that Hero Honda has set out this target at a time when the industry is expecting a growth of about 8% YoY during FY10 (as per company’s management). The company’s plan to achieve this target centers on new model launches. It plans to launch nine models, most of which will debut in the next six months.

Banking stocks ended the day on a firm note led by Axis Bank, ICICI Bank and HDFC Bank. As per a leading business daily, Yes Bank plans to foray in to retail lending segment, by introducing education loans during the beginning of next fiscal year. As of FY09, the bank's retail lending segment comprises only 1.1% of its total advances. It may be noted that 90% plus of the bank’s advances are extended towards large and medium sized corporates. In order to introduce retail products, the bank plans to increase its branch network from 117 (at the end of FY09) to around 250 towards the end of FY10. However, it will also need to increase its current and saving account (CASA) deposit ratio, which stood at about 9% in FY09. This would help it sustain its net interest margins by entering in the highly competitive retail segment.

As per a leading business daily, sixty seven companies have passed board resolutions for raising money from QIPs. It may be noted that this is more than the number of QIPs in the last three years put together. In terms of money raised, more than Rs 600 bn is slated to be raised this year, as against Rs 370 bn in the last three. It is highly unlikely that institutional investors will blindly invest in every company that comes their way. Interestingly, the SEBI formula for pricing QIPs - average of high and low prices of the preceding 2 weeks – will also cause problems because of the recent volatility in stock markets.

Though still in the red, the markets shed some of their earlier losses during the previous two hours of trade on account of buying activity witnessed at lower levels. Stocks from the engineering, metal and power sectors are leading the pack of losers, while select stocks from the pharma, software and energy sectors are trading higher. The overall decline to advance ratio is poised at 4.5 to 1 on the BSE.

The BSE-Sensex and NSE-Nifty are trading weak, down by around 100 points and 45 points respectively. The BSE-Midcap and the BSE-Smallcap indices are also trading weak, down by around 3.1% and 3.5% respectively. The Rupee is trading at 49.17 to the Dollar.

Steel stocks are trading lower led by SAIL, JSW Steel and Tata Steel. As per a leading business daily, Steel production in India is likely to double from its current capacity of 65 m tonnes to 124 m tonnes annually by FY12. As per the steel ministry, the sector is witnessing massive expansion led by both private and public sector companies. In fact, SAIL, India’s largest steel company plans to double its capacity to around 26 m tonnes by FY12, wherein it is estimated to invest around Rs 700 bn. Private Steel producers like Tata Steel and JSW Steel have also lined up huge capacity addition plans. It may be noted that the Indian Steel sector nearly remained unaffected by the global meltdown and the steel consumption grew by around 1% in FY09. As a matter of fact the steel consumption in India is expected to grow by around 2% in 2009 as per the World Steel Association reports.

Media stocks are trading mixed. While TV18 and Zee Entertainment are trading higher, HT Media and NDTV are trading lower. As per a leading business daily, TAM India has revised the growth estimates for television advertising in 2009 to around 10% to 15%. It may be noted that television advertising accounted for around 40% of overall advertising revenues, and grew by 20% in 2008. However, due to the overall slowdown in the economy in the second half of FY09, the growth for the sector had been projected to single digits in 2009. But with the revival in the domestic economy in last few months, television advertising has shown signs of improvement. In fact, the growth between April and June 2009 has been around 50% as compared to the corresponding period last year. This was largely on account of political or social advertising and the IPL.

Persistent selling activity witnessed during the previous two hours of trade led the Indian markets to decline further in the red. Currently, selling activity is led by stocks from the realty, metal and engineering sectors, while select stocks from the pharma and software spaces are bucking the trend. The overall market breadth is negative, with losers outnumbering gainers in the ratio of 5.6 to 1 on the BSE.

The BSE-Sensex and NSE-Nifty are trading weak, down by around 260 points and 60 points respectively. The BSE-Midcap and the BSE-Smallcap indices are also trading weak, down by around 4.1% each. The Rupee is trading at 49.39 to the Dollar.

As per a leading business daily, private oil retailers may receive a government subsidy for selling fuels in the domestic markets. So far, such subsidies were available only to PSU oil marketing companies (OMCs). In India, retail fuel prices are regulated by the government, due to which fuel is sold at a price lower than its input cost. The government then provides subsidies to these PSU oil marketers. However, the private players are left at a cost disadvantage to the PSU OMCs. This has led some private players to shut down their retail fuel outlets, when crude prices were at their peak. If it goes through, this development will help private oil marketers like Reliance Industries, Essar Oil and Shell to access government subsidy. However, this move will further increase the government’s deficit burden. Energy stocks are trading weak.

Power stocks are also trading weak led by Reliance Power and Tata Power, while NTPC is marginally lower. As per a leading business daily, NTPC has signed a Memorandum of Understanding (MOU) with the Chhattisgarh government for setting up a 4,000 MW of power plant in the state. As per the agreement, NTPC will supply around 50% of the power to the state in return for the land parcel and water. The plant will have five units of 800 MW each. The project will not be an Ultra Mega Power Plant (UMPP), but will be developed with super critical modern technology, which will be environment friendly. The project cost is estimated at around Rs 200 bn and is expected to be completed during the 12th Five Year Plan (2012-2017). It may be noted that the projects will be developed in the coal-rich Raigarh district, which will help NTPC source sufficient amount of coal, which is the most critical requirement for any coal based power project.

In line with its Asian peers, the Indian markets too have opened the week’s proceedings on a negative note. The overall decline to advance ratio stood at 5:1 on the NSE. Except for select software and energy stocks, selling is being witnessed across sectors. Power, engineering and steel stocks are leading the pack of losers. As regards global markets, the US markets ended mixed, while the European markets ended lower on Friday. The Asian markets are also trading down currently.

The BSE Sensex is trading lower by around 160 points. The NSE Nifty is down 55 points. The BSE Midcap and the BSE Smallcap indices are trading lower by 2% each. The rupee is trading at 48.91 to the dollar.

As per a leading business daily, Tata Motors is planning to extend the shutdown of Jaguar Land Rover's (JLR) UK plants. It is also looking at staff layoffs in order to cope up with the slump in the world car market. JLR employs some 15,000 people in the UK. The UK carmaker had reported an annual loss of US$ 522 m last year. The company had taken measures, such as extending its Christmas break to two weeks, moving to a four-day week and laying off around 2,000 temporary staff earlier. The company is trying to convince the government to provide a loan guarantee that would unlock a £340 m advance from the European Investment Bank (EIB). The EIB has agreed, but cannot dispense the cash until the government agrees to repay it if JLR goes under. Despite all these problems, Tata Motors is optimistic of JLR making profits in two years. Auto stocks are trading down.

The department of biotechnology (DBT) is planning to set up the National Biotechnology Regulatory Board to specify and regulate development of drugs and vaccines from natural sources such as humans, animals or micro-organism. Biologics are medicines and therapies developed from organic molecules derived from plants, proteins, tissues and cells. At present, both pharmaceutical products and biologics are regulated by the Drug Controller General of India (DCGI). The central drug quality regulator gives pre-clinical approvals for experimenting and developing both types of drugs. The new guidelines will apply only upto the pre-clinical stage and not on clinical trials. The global biotech drug market is estimated to be around US$ 65 bn. According to an industry estimate, the market for biotech drugs grew by 18% YoY in 2008. DBT now spends close to US$ 200 m annually to develop biotech resources in the country. Biotechnology is an emerging sector and according to domestic biotech companies such as Biocon, Wockhardt and Panacea Biotec, there is a need to have a proper regulatory mechanism in place. This would lead to greater focus in the biotech segment and would pave the way for Indian pharma companies focusing on biotechnology to launch more such drugs in the market given that biotech drugs provide a more accurate treatment than chemical drugs.

From liquidity crunch to liquidity glut

We have seen in the past few months just how swift financial and economic changes can be. A recent Mint report throws light on how one such change has taken place in the liquidity scenario in the country, wherein things have gone from a huge liquidity crunch to a flood of liquidity in the banking system. As per the report, the CEOs of most large banks in India are facing a lot of pressure on account of the fact that even though the government has injected big amounts of liquidity in the system, loans to the commercial sector have seen a big decline in 4QFY09. In effect, leaving banks grappling with the excess funds they are holding.

Banks have been facing a lot of pressure from the RBI as well as the government to cut loan rates. The policy rate has come down from 9% in September to 3.25% now. Another big source of liquidity has been the cut in CRR (cash reserve ratio), from a high of 9% in September 2000 to 5%, thus infusing an additional Rs 1.6 trillion into the system. But banks have been extremely reluctant to cut their lending rates so far, which now stand at about 11% to 12.25% (PLR or Prime Lending Rate). If this huge glut in liquidity were to continue and credit demand does not pick up anytime soon, you may soon see borrowing costs and deposit rates come down further going forward.

First speed-breaker to ambitious road plans

Just last week we spoke about how the minister for road transport and highways, Mr. Kamal Nath, has announced plans to spend almost Rs1,000 bn for construction of 12,000 km of highways in the current financial year. We also spoke of how this could give a big fillip to many sectors catering directly or indirectly to this sector. But whether these plans could be relied upon was the big question. Now, reports of the first impediment to these plans have already come in.

Some restrictive bidding norms that the government has put in place threaten to put a big spoke in the wheel as they block investment of at least Rs 100 bn in roads and highways. One of these norms is that an application for a bid would be disqualified if an investor or its associates holds at least 5% in another company, which is applying for the same project. But many of the companies that intend to bid for road projects have common investors who hold more than 5% in them and this is holding them back. The time it takes for the government to resolve this issue and have a relook at these restrictive norms will determine how much of a delay takes place on this account.