Closing Bell 28 July 2009

Closing Bell 28 July 2009

Today’s trading session was marked by considerable volatility. While the Indian markets began the day’s proceedings on a positive note, in the subsequent trading sessions alternate bouts of buying and selling led the indices to oscillate on either side of yesterday’s close. Profit booking in the final hour of trade led the indices to wipe out their gains and end the day into the negative territory. The BSE-Sensex closed lower by around 50 points, while the NSE-Nifty ended the day with marginal losses. However, midcap and smallcap stocks closed on a firm note. The BSE-Midcap and BSE-Smallcap indices ended higher by about 1% and 1.7% respectively. While stocks from the realty and auto sectors emerged as the top gainers, stocks from the banking and FMCG space led the pack of losers. At the time of writing, the overall advance to decline ratio stood at 1.9 to 1 on the NSE.

Most of the other Asian markets ended the day on a positive note today. The European indices are witnessing a mixed trend currently. Rupee was trading at 48.18 against the US dollar at the time of writing.

Grasim Industries announced its 1QFY10 results few hours back. On a standalone basis, the topline grew by 17.6% YoY led by growth in two of its core business segments viz. cement and VSF. During the quarter, the cement segment reported 31.8% YoY growth in revenues, while the VSF business reported 11.1% YoY growth in the topline. The EBITDA margins witnessed marginal expansion of 0.1% as costs grew a tad lower than the topline. While profit before tax grew by 9.1% YoY, the bottomline reported a whopping 68.5% YoY growth. The robust growth in net profits came in on account of extraordinary income that includes profit on sale of the sponge iron business. The stock of Grasim Industries closed lower.

As per a leading business daily, HT Media plans to invest around Rs 800 m during the current fiscal. Of this, Rs 400 m will be spent towards the company’s general capital expenditure plans, while the other half will be invested in its Burda joint venture. It may be noted that the company has recently expanded the reach of its English daily, ‘Mint’ in Chennai. It plans to further expand the daily’s reach in other states as well. Further, it also plans to invest in its radio and the internet businesses, which have yet to break-even. The company had witnessed sales growth of 2% YoY in its recent 1QFY10 results. The stock of HT Media ended in the red during the day’s trading session, while Deccan Chronicle ended firm.

The Reserve Bank of India in its 2009-10 monetary policy review today has indicated a wait and watch stance given that the Indian economy has still not shown clear signs of stability. It plans to maintain a soft interest rate regime until there are definite and robust signs of recovery and hence has left all key rates - repo, reverse repo, CRR - unchanged. The central bank has pegged India's GDP for FY10 at 6.5%, higher than the 5.7% expected in its earlier survey in March. It has also revised inflation target for the end of March 2010 to about 5%, higher than the 4% projection it made during its annual policy in April. This is keeping in view the global trend in commodity prices and domestic supply constraints, especially on the foodgrains front.

The Indian markets moved into the positive territory and recouped their earlier losses during the previous two hours of trade on account of sustained buying activity. Currently, stocks from the auto, construction and power sectors are trading higher, while select stocks from the energy, steel and banking are trading lower. The overall advance to decline ratio is poised at 2 to 1 on the BSE.

The BSE-Sensex and NSE-Nifty are trading firm, up by around 80 points and 15 points respectively. The BSE-Midcap and the BSE-Smallcap indices are trading higher, up by around 1.4% and 2.1% respectively. The Rupee is trading at 48.17 to the Dollar.

Steel stocks are trading mixed. While Tata Steel and SAIL are trading higher, JSW Steel is trading lower. As per a leading business daily, India’s largest steel producer SAIL plans to raise long term debt of up to Rs 65 bn in FY10 in order to fund its capex plans. In fact, it has already raised around Rs 30 bn at an average interest rate of below 9%. It may be noted that SAIL is enhancing its production capacity from the current 14 m tonnes to 26 m tonnes annually by 2014 at an estimated investment of Rs 780 bn. It plans to spend a capex of around Rs 103 bn in FY10 for the same. The remaining amount of the capex during the fiscal is most likely to be funded through internal accruals. SAIL’s debt to equity ratio stood at 0.3 in FY09.

Auto stocks are trading mixed. Tata Motors and Ashok Leyland are trading higher, while Maruti is trading lower. Ashok Leyland announced its 1QFY10 results last evening. The company’s topline declined by 52% YoY in 1QFY10 led by a significant fall in volumes during the quarter. The volumes declined by 58%YoY during the quarter. Operating profits declined by 90% YoY mainly on account of higher staff and other expenses (as % of sales) during the quarter. Operating margins declined by 5.2% to 1.3% in 1QFY10. The company’s net profits declined by 84.6% YoY, lower as compared to operating profits mainly due to an eight fold jump in other income during the period.

The Indian markets moved further into the negative territory during the previous two hours of trade on account of continuous selling activity among the index heavyweights. However, the overall market breadth is positive, with total gainers outnumbering the losers in the ratio of 1.6 to 1 on the BSE. Selling activity is led by stocks from the banking and software sectors, while select realty and auto stocks are trading firm.

The BSE-Sensex and NSE-Nifty are trading weak, down by around 90 points and 30 points respectively. However, the BSE-Midcap and the BSE-Smallcap indices are trading higher, up by around 0.5% and 1.2% respectively. The Rupee is trading at 48.19 to the Dollar.

Automobile stocks are trading mixed. While Tata Motors is trading firm, Ashok Leyland and Maruti Suzuki are in the red. Tata Motors announced its standalone 1QFY10 results yesterday. The company's topline declined by 8% YoY during the quarter, on the back of lower volumes and realisations. Volumes were down by 4% YoY during the period. The total domestic volumes were lower by a mere 1.4% YoY, while the export sales were hit by a 43% YoY decline. The company's domestic market share in the commercial vehicle segment has increased to 67.4% (from 61% in 1QFY09) during the quarter as sales improved by 1.1% YoY. Operating margins improved sharply by 3.2% YoY to 11.2% on account of lower raw material costs as a percentage of sales. Despite higher operating margins, net profit growth was lower at 7% YoY (excluding the extraordinary items for both periods) on account of higher interest (up 126% YoY) and tax expenses (up 81% YoY).

As per a leading business daily, the hotel industry, which was struggling of late on account of lower occupancies, plans to increase room rates in the range of 5% to 10% before the start of peak season-beginning in September. The companies expect demand in corporate travel to increase on the back of encouraging financial performance of most companies. For instance, ITC Hotels and Hotel Leelaventure expect room volumes in the corporate travel sector to show signs of improvement. It may be noted that the economic slowdown has impacted the industry, pressuring them to lower rates in the range of 30% to 40% in the first half of this calendar year. The pickup in demand is a positive sign for the hospitality industry as it will increase their occupancy levels. Hotel stocks are trading weak led by Taj GVK and EIH.

The Indian markets have opened the day's trade on a cautious note. Buying is being witnessed across metal, energy, engineering and select auto stocks. However, banking, FMCG and pharma stocks are trading in the red. The overall advance to decline ratio is poised at 2.2:1 on the NSE. As regards the global markets, the US and the European markets ended in the positive yesterday. The Asian markets are trading firm currently.

The BSE Sensex is trading lower by around 20 points. The NSE Nifty is down 15 points. The BSE Midcap and the BSE Smallcap indices are trading flat. The rupee is trading at 48.23 to the dollar.

FMCG major Dabur announced its 1QFY10 results yesterday. The consolidated net sales grew by 22% YoY during 1QFY10 on the back of strong performance in the consumer product division, where sales grew by 25% YoY. The overseas business division recorded an impressive growth of 52.9%, led by a robust performance in GCC, Egypt, North Africa and South Asia. The Consumer Healthcare division saw a 12.5% YoY growth, while the foods segment witnessed a 22% YoY increase. The operating (EBITDA) margins improved to 16% due to the impact of lower raw material prices (as a percentage of sales). However, the consolidated ad spends as a percent of sales increased by 180 basis points to 15.3%. Net profits grew by 29% YoY while net profit margins expanded by 0.8%. Growth was aided largely by higher sales and improved operating margins. The company has completed the Fem Care acquisition during the quarter. According to the management, despite the overall gloomy scenario in the economy, the consumer spending on FMCG continues to remain strong. Further, the entire growth reported by Dabur is volume driven. The company expects the growth to continue, both from rural and urban areas. FMCG stocks are trading mixed.

GAIL is planning to invest Rs 80 bn to expand its pipeline network. Of this, Rs 76 bn would be invested in constructing a 2,050-km pipeline from Jagdishpur to Haldia. The project will be executed in two phases, with Part-IA of Phase-I of the project scheduled to be completed by December 2011, while Part-IB will be completed by March 2011. The second phase of the project is expected to be completed by December 2013. The company aims to raise Rs 20 bn from the domestic market this fiscal. The company would raise another Rs 150 bn in the next couple of years through external commercial borrowings. The company had a debt-equity ratio of 0.12:1 and it could leverage its balance sheet further. GAIL owns and operates a network of over 7,100 km of natural gas high-pressure trunk pipelines with a capacity to carry 155 metric million standard cubic metres a day (mmscmd) of natural gas across the country. During the 11th Plan period, GAIL plans to build 5,000 km of pipelines at an estimated investment of Rs 280 bn. Following this expansion, GAIL would have a capacity to carry 300 mmscmd of gas. This will help the company to meet the gas demand which is slated to increase by 12% on a compounded basis to reach 283 mmscmd by FY12 from the current demand of about 179 mmscmd. Energy stocks are trading firm.

Today, the RBI will be releasing its first quarter review of the 2009-10 monetary policy and it will be interesting to know what the central bank will focus on and whether interest rates will remain unchanged. With FY09 being one of the worst years for the global economy and also having impacted the Indian economy significantly, the RBI had to resort to various stimulus packages to ward off any slack in demand and consumption and ease up liquidity. One such move was the reduction in the repo rate by 425 basis points to 4.75% in 6 moves since October 2008. This time around it appears more likely that the RBI will keep its rate unchanged. What it means is that the possibility of rates being lowered could be low as the economic situation has not worsened further than what it had in the previous year. At the same time, the RBI may not want to increase the rates either unless a more consistent picture of a recovery emerges.

But inflation will continue to remain on the RBI's radar and as reported in leading business dailies, Goldman Sachs expects the RBI to raise its inflation target for the end of March 2010 from 4%. This is hardly surprising given that with money beginning to slosh around in the financial system, inflation was bound to gradually rear its head. Readers would do well to recall that inflation which had touched a high of 12% in August 2008 cooled off considerably since then to dip into the negative as the economy slowed down. But this has been at the wholesale level. At the consumer level, high prices continue to pinch hard . The errant monsoons have not helped either and the RBI will be kept on its toes when it comes to making a decision. Over to you, Mr. Subbarao!

Problems being faced by the shipping industry

While the economic slowdown in India has had an impact on almost all industries, the shipping industry in particular has been in even more trouble. As reported in a leading business daily, the main problem being faced by this industry is shortage of funds to purchase new vessels despite both new and second-hand ships being available in the global shipping market. Problems have been further compounded by the fact that nearly half the shipping fleet needs to be replaced in the next three years, as it would have exceeded the international age norms. The sorry state of finances in the global markets means that getting access to cheap funds is no longer easy as it was before the crisis erupted.

Also, the softening freight rates have further undermined the revenue potential for this industry. At the end of the day, shipping is a global industry and its prospects are closely tied to the level of economic activity in the world. This means that the fortunes of this industry will start to appear brighter once signs of a sustainable recovery surface in the global economy. Till such time then Indian shipping companies will have to find various ways of riding out the storm. It certainly won't be easy.