Closing Bell 8 July 2009

Closing Bell 8 July 2009

Though still in the red, the markets pared some of their earlier losses during the previous two hours of trade on account of buying activity witnessed at lower levels. Currently, stocks from the construction, engineering and software sectors are leading the pack of losers, while select stocks from the cement, energy and auto sectors are trading firm. The overall decline to advance ratio is poised at 3 to 1 on the BSE.

The BSE-Sensex and NSE-Nifty are trading weak, down by around 225 points and 75 points respectively. The BSE-Midcap and the BSE-Smallcap indices are also trading weak, down by around 1.9% and 2.1% respectively. The Rupee is trading at 48.80 to the Dollar.

Steel stocks are trading mixed. While SAIL is trading higher, Tata Steel and JSW Steel are trading lower. As per a leading business daily, Tata Steel, India’s leading steel producer, has reported a growth in its sales volumes by around 22% YoY during 1QFY10 on account of robust demand from construction and auto sectors. Tata Steel managed to sell around 1.4 m tonnes (MT) of steel during the quarter, while the production stood at around 1.6 MT. It may be noted that during the month of June 2009, the company registered sales of around 0.5 MT, mainly led by a 30% growth in long products used in construction and a 12% growth in flat products used in auto and consumer durables. This comes as a positive development for the company as it will enable it in achieving its target of 25% YoY growth in volumes during FY10 .

Engineering stocks are trading mixed. While Alfa Laval and Blue Star are trading higher, Suzlon and L&T are trading lower. Suzlon Energy has announced that it has bagged three new orders adding up to 114 MW (megawatt). Of the three orders received, two are from Chinese companies - Datang Power Generation and Honiton - while the third one is from India’s KS Oils. It may be noted that Suzlon’s Chinese subsidiary will supply 39 sets of 1.25 MW capacity to Datang Power Generation by 3QFY10 and 40 sets of 1.25 MW capacity to Honiton. The company has also received a repeat order for 10 sets of 1.5 MW turbines from KS Oils. The order backlog of the company stood at nearly Rs 79 bn for 1,463 MW of installations as on June 25, 2009.

The Indian markets continued to trade in the red during the previous two hours of trade on the back of sustained selling activity during the period. Currently, stocks across sectors are trading weak led by heavy selling in the realty and banking stocks. However, select cement and auto stocks are trading firm. The overall market breadth is negative, with losers outnumbering gainers in the ratio of 4.5 to 1 on the BSE.

The BSE-Sensex and NSE-Nifty are trading weak, down by around 350 points and 100 points respectively. The BSE-Midcap and the BSE-Smallcap indices are also trading weak, down by around 3.3% each. The Rupee is trading at 48.94 to the Dollar.

Pharma stocks are trading mixed. While Wockhardt and Sun Pharma are trading weak, Dr. Reddy's is in the green. As per a leading business daily, Sun Pharma's US subsidiary, Caraco Pharma has cut its workforce by 350, representing more than half of the total 667 employees. The move has been propelled by the recent US FDA action of seizing Caraco's drugs on repeatedly violating manufacturing standards that has led the facility to remain idle. The US FDA had put an immediate halt on distribution of the drugs manufactured in Caraco's Detroit facility, thereby leading to a cost overrun. Given that Caraco had reported a considerable drop in profits in FY09, this move is likely to help the company lower its costs going forward. While revenues from products manufactured at Caraco's Detroit facility have been hampered, revenues from products manufactured by Sun Pharma in its facilities in India and marketed by Caraco have not been impacted.

As per a leading business daily, Pantaloon Retail plans to raise up to Rs 10 bn through issue of shares to qualified institutional investors. As such, the company has received shareholders' nod for the same. The company expects to utilise the proceeds in order to lower its debt levels and fund its future growth. The company's FY09 debt is estimated at around Rs 32 bn translating into a debt to equity ratio of 1.2. However, the same is expected to rise to 1.4 times by the end of FY10. The company plans to open around 18 central stores and 45 Big Bazaars in the next one year. The move will help the company to fund its expansion plans and lower the debt burden. However, equity infusion will dilute earnings per share going forward. The company's move to restructure business and expand it is likely to augur well from a long term perspective, once there is a revival in the economic cycle. In the medium term, however, apart from the slowing economy, ambitious expansion plans are likely to continue taking its toll on the company's earnings. The stock, along with its peer, Shopper's Stop is trading weak.

In line with the global peers, the Indian bourses opened in the negative territory. Currently, stocks from the realty, metal and engineering sectors are witnessing investor's fury. The overall decline to advances ratio is poised at 5 to 1 on the NSE. As regards the global markets, the US and the European markets ended lower yesterday. The Asian markets are also trading down currently.

The BSE-Sensex and NSE-Nifty are trading lower, down by around 380 points and 110 points respectively. The BSE-Midcap and the BSE-Smallcap indices are also trading weak, down by around 3.2% and 2.9% respectively. The BSE-Realty index is the worst performer, down almost 7%. Rupee is trading at 48.87 to the US dollar.

As per the market research firm Gartner, the Indian domestic IT market is expected to grow by around 14% this year. This is lower than last year's growth of 16% to 18%. The firm also expects the worldwide IT spending to fall by 6% YoY to touch US$ 3.2 trillion in 2009. Weak IT spending because of the economic situation combined with the effect of exchange rate movements has resulted in Gartner lowering its 2009 forecast from its first quarter 2009 projections. In March, Gartner had forecasted 2009 IT spending to decline by 3.8% YoY. The computing hardware segment spending is projected to decline by 16.3% YoY, while, the software segment will show a 1.6% YoY drop. In order to cope with the global slowdown, the Indian IT majors have increased their focus on the domestic markets and are also now focusing on new services like Engineering Services Outsourcing. Software stocks are trading mixed.

As per a leading business daily, the chairman of State Bank of India (SBI) expects interest rates to stabilise or harden in six months. The increase in business activity will result in higher loan growth during 2QCY09. The RBI has cut its main lending rate by 425 basis points since last October to lift a slowing economy. In response, the state-run banks have reduced their rates by 1.5% to 2%. Growth in loans of Indian banks has slowed from around 27% in November to about 15% in June this year. The recent budget has passed the mantle to banks for facilitating infrastructure funding, financing PPP projects, SME funding, loans for education, export oriented industries as well as interest waiver to farmers. Hence, the sector has a lot to look forward to for its growth in this fiscal. More importantly, allocating a sizeable Rs 1 trillion to IIFCL and allowing it to refinance 60% of bank loans to critical sectors is expected to go a long way in enhancing the banking sector's contribution in economic growth. The stocks from the banking sectors are trading lower.

It is clear from the Union budget 2009-2010, that India's borrowing programme will gather further pace. In fact, the government plans to borrow almost Rs 4 trillion from the markets in FY10, a jump of 50% over last year. Normally, the immediate impact of a greater demand for credit is higher interest rates.

However that is unlikely to happen in the short term at least, as per one of the most respected voices in finance. A leading business daily quotes Mr. Deepak Parekh, the chairman of HDFC, "There is sufficient liquidity so far in the market. I don't think it (rate) is going to harden that much at least in the next three to four months."

In fact, Mr. Parekh believes that short term interest rates are actually going to fall as the supply of credit is way above the demand for it. "I expect the rates to go down by at least 50 basis points (0.5%) over next six months", he adds.

The long term yields are another matter though. The deficit figures are likely to keep them moving upwards . However, we should also pay attention to the 'second-order effect' as Charles Munger, Vice Chairman of Berkshire Hathaway, would say.

The 'second-order effect' in this case would be what economists term as the 'crowding out effect' – the government soaking up resources (here credit) that the private sector needs. Lower disbursal of credit to the private sector would nullify the greater disbursal to the government.

Thus, things are as uncertain even in the field of fixed income as they are in the stock markets. But most likely, interest rates are likely to head up over the next few years, at least till the time the government brings its house in order by reducing its deficit.