Closing Bell 7 July 2009

Closing Bell 7 July 2009

After witnessing a massive sell off yesterday, the Indian markets ended the day on a positive note. However, they were accompanied by severe volatility throughout the day. The BSE-Sensex ended the day higher by around 130 points, while the NSE-Nifty ended the day higher by 40 points. However, at the time of closing, the overall decline to advance ratio stood at 1.3 to 1 on the BSE.

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 48.52 against the US dollar at the time of writing.

Stocks directly or indirectly related to the two most focused areas of the Union Budget - Aam aadmi and infrastructure - gained the market participants’ interests today. The BSE-Auto index ended the day higher by about 3.8% followed by BSE-FMCG Index with gains of 3.7%. The BSE-Capital Goods Index and the BSE-Power Index were close behind, recording gains of about 1.6% and 1% respectively. The top gainers amongst the stocks forming part of the BSE-100 Index were Marico, IRB Infrastructure, Voltas, Exide Industries and Torrent Power.

A leading business daily reported that Chennai Petroleum Corporation (CPCL) is planning to invest over Rs 70 bn over the next five years. Out of these funds, about 50% is intended to be spent on a residue update facility. In addition, it is also planning to acquire nearly 400 acres of land around Chennai. This will be part of its refinery expansion plan. CPCL is investing Rs 5 bn for raising the capacity of its Manali refinery by 1 m tonnes (MT). The project will be completed by the end of 2009. The refinery can now process 9.5 MT of crude oil. It will also invest another Rs 8 bn at its Ennore port. While this capex will help the company augment its volumes and move towards a better product slate, the key driver remains the movement of global gross refining margins. The stock of CPCL ended the day on a firm note, while its peer group company MRPL closed on a weak note.

Telecom stocks ended the day on a firm note led by Idea Cellular, Tata Teleservices and Bharti Airtel. While the Union budget did not have any direct impact on the telecommunications sector, there were a few measures mentioned that would help the industry indirectly. One of the highlights of the budget, the 144% increase in spending under the National Rural Employment Guarantee Scheme, will help telecom players to target more customers from the rural markets in the long run. And this would hold strong for companies that have a pan-India presence. In addition, the government also extended the exemption of countervailing duty (CVD) on accessories, parts and components that were imported for manufacturing mobile phones by one year. This would indirectly keep the cost of handsets low and increase affordability of mobile connections.

Though the markets continued trade in the green, a lot of volatility was witnessed during the previous two hours of trade on account of alternate bouts of buying and selling activity. Currently, stocks from the FMCG, auto and telecom sectors are leading the pack of gainers, while select stocks from the steel, banking and energy sectors are trading weak. The overall decline to advance ratio is poised at 2.6 to 1 on the BSE.

The BSE-Sensex and NSE-Nifty are trading firm, up by around 100 points and 30 points respectively. The BSE-Midcap is trading higher by 0.3%, while the BSE-Smallcap index is trading lower by 0.8%. The Rupee is trading at 48.59 to the Dollar.

Power stocks are trading mixed. While NTPC and Tata Power are trading lower, Reliance Infrastructure is trading higher. As per a leading business daily, the government has ruled out any possibility of putting a cap on the number of ultra mega power projects (UMPPs) allotted to a single company. The Power Ministry plans to base the allotment of the number of UMPPs on the capability of the company to execute the projects. It may be noted that in recent past, concerns have been raised over the number of UMPP allotted to a single company, as each high capacity project requires an investment of about Rs 200 bn. This is a positive development for the companies engaged in setting up UMPPs as they would be eligible for additional allotment of UMPPs.

Textile stocks are trading mixed. While Arvind and Raymond are trading lower, Century Textiles is trading higher. As per a leading business daily, Raymond has offered a voluntary retirement scheme (VRS) to over 300 employees at its Thane plant in order to rationalise costs. The VRS has been offered across the board, including to the managerial staff. This move by the company is aimed at making it competitive and cost effective. It may be noted that the employee strength at the Thane plant is around 6,000 employees. The company also has a state-of-the art manufacturing unit at Vapi. Interestingly, it has been observed that recently many textile companies from Mumbai are shifting their manufacturing base to smaller cities as it helps them save on cost. In fact, as per Fitch ratings per-employee wage cost in Mumbai is around four times that of smaller cities.

Although trading firm, the Indian markets lost ground during the previous two hours of trade as selling activity intensified among the stocks from the realty, energy and metal sectors. However, select FMCG and auto stocks are trading firm currently. The overall market breadth is negative, with losers outnumbering gainers in the ratio of 2 to 1 on the BSE.

The BSE-Sensex and NSE-Nifty are trading firm, up by around 80 points and 20 points respectively. However, the BSE-Midcap and the BSE-Smallcap indices are also trading weak, down by around 0.3% and 1.5% respectively. The Rupee is trading at 48.53 to the Dollar.

The BSE-Auto index is trading higher, up by around 3.2% and the pack of buying is led by Maruti Suzuki, M&M and Bajaj Auto. The Union Budget 2009-2010 doled out some positives for the industry in the way of extension of in-house R&D benefits and abolition of FBT (Fringe Benefit Tax). The higher allocation towards road development programme, thrust towards road infrastructure and higher agricultural credit outlay will boost demand for vehicles including commercial vehicles, passenger vehicles and tractors. Further, the measures also include higher allocation to the defence sector, which will prop up investment in new vehicles.

FMCG stocks are trading firm led by Marico, P&G and HUL. As per a leading business daily, HUL has introduced monthly inventory management as against an earlier system of annual planned purchases of raw materials. This move is intended to combat increased price volatility. It will help the company to reduce input costs by buying the materials at various price levels during the year. This will in turn help in maintaining margins and avoid price hikes that finally lead to decrease in the market share on account of intense competition. It may be noted that HUL has been deploying various strategies to regain its market share by the cutting prices, re-launching brands and re-adjusting grammages. During 4QFY09, HUL had witnessed a decline in its market share due to lower volume off take as price hikes resulted in down trading.

The Indian markets have done a U-turn in today's session after the 850 points decline witnessed yesterday post the Union Budget announcement. Engineering, steel and banking stocks are witnessing buying activity. The overall advance to decline ratio stood at 1.8: 1 on the NSE. As regards global markets, the US markets ended mixed while the European markets ended lower yesterday. The Asian markets are witnessing a mixed trend currently.

The BSE Sensex is trading higher by around 175 points. The NSE Nifty is up 25 points. The BSE Midcap and the BSE Smallcap indices are trading higher by 1% each. The rupee is trading at 48.47 to the dollar.

As per a leading business daily, pharma major Wockhardt is in talks with a few MNCs to sell two of its best-selling brands Protinex and Farex. The two brands have annual sales of around Rs 800 m. In July 2006, Wockhardt had acquired Dumex India, which owned Protinex and Farex, from the Dutch pharma group Royal Numico for an undisclosed amount. Wockhardt is taking this step in order to pay its outstanding liabilities. Wockhardt's main liabilities include loans of Rs 15 bn, foreign currency convertible bonds (FCCBs) of US$ 110 m and external commercial borrowings (ECBs) of US$ 250 m. The company is also facing derivative losses of close to US$ 300 m. The company is evaluating various non-core businesses which it plans to divest in the next 6-12 months so that its debt can be retired. Pharma stocks are trading firm.

Cement stocks are trading higher. The budget proposals have provided a huge boost for infrastructure spending, thereby creating an opportunity for higher cement demand. Housing and provision of basic amenities to the urban poor have been enhanced to approximately Rs 40 bn. An additional Rs 20 bn has been provided for Rural Housing Fund (RHF). Allocation towards the National Highway Development Programme has also increased by 23% over FY09 budgeted estimates. The increased focus on infrastructure development would raise demand for cement and key construction material. This will thus increase volumes of cement manufacturers such as ACC, Ambuja Cements and Madras Cements. The industry has lined up huge capacities to cater to the demand for the commodity. The fresh capacities announced till date will add 60 MT to the existing capacity of over 200 MT. While the near to medium term growth prospects for the sector seem challenging, the long term growth story remains intact. This is mainly on account of government initiatives in the infrastructure and housing sectors that are likely to be the main drivers of growth for the industry in the long run.

The Union Budget may not have met the major expectations of the stock markets. It may also not have really stood out in terms of having any significant positive impact on any section of the industry. But the real concern is the fiscal deficit as a percentage of GDP. The deficit zoomed to 6.2% in FY09 as the global economic slowdown impacted India's pace of growth, as a result of which stimulus measures had to be undertaken. What's more, this number is not likely to come down anytime soon. In fact, the FM has indicated that the fiscal deficit will form 6.8% of GDP in FY10, which has begun to send flutters across the country.

While infrastructure development has been stressed upon in the budget and very rightly so, the fact remains that the government does not have much headroom in terms of raising resources for the same. Further borrowings will only exacerbate an already difficult situation. In light of this, while the government's focus on restoring India's growth to 9% of GDP may be laudable, the million dollar question is - will the fiscal deficit really allow India to grow the way it had done in the past? Readers would do well to recall that during the last two years when India had been logging in growth rates of 9% plus, the fiscal deficit situation had been under control at a little above 3%. Hence, for India to replicate its growth story, the fiscal deficit will have to be brought down.

Surprisingly, no measures were announced by the FM in terms of how the government was planning to bring this down. With not much being done in terms of reducing subsidies and the credit crunch keeping interest rates high, the non-plan expenditure is only set to gallop. This has left little room to focus on infrastructure development, education and healthcare even though the FM has emphasized the importance of the same. Printing more money is not an option as that will only fuel higher inflation going forward. The FM's silence on the FDI front also does not bode well given that the same can play a significant role in enhancing the performance of the economy in the long term.

India's rising deficit means that the possibility of its rating being downgraded cannot be entirely ruled out. If this happens, borrowings will have to be done at higher interest rates, which will further exert pressure on government finances. We do not want to sound like doomsayers, but the Government will need to quickly develop some blueprint which clearly specifies its strategy of bringing this deficit down. While one understands that the deficit may not reduce overnight, a clear direction will go a long way in upholding the credibility of the government. We hope the Finance Minister is listening!