Market tracks weak global equities; Sensex sheds 336 points

Sharp fall in US stocks overnight and surging crude oil prices weighed on the market sentiment today, triggering a broad based decline in blue chips. Asian markets which opened before Indian markets were weak. European markets which opened after Indian market were in red

Banking, capital goods, realty and auto stocks fell. All the sectoral indices on BSE were in red. The market breadth was weak.

On Wednesday, 21 May 2008, the US Federal Reserve cut its 2008 US economic growth forecast and signaled that mounting concerns over inflation would make further interest rate cuts unlikely, driving the three major US indexes down over 1.5%. Oil prices surged to a record high above $135 per barrel on Thursday, 22 May 2008, stoking fears of global inflation.

The 30-share BSE Sensex lost 336.05 points or 1.95% at 16,907.11. Sensex lost 379.78 points at day’s low of 16,863.38 touched in late trade.

The broader based S&P CNX Nifty was down 92.2 points or 1.8% at 5,025.45. Nifty May 2008 futures were at 5024, at a discount of 1.45 points as compared to spot closing of 5025.45.

The BSE clocked a turnover of Rs 5,742 crore, lower than a turnover of Rs 7,126.12 crore on Wednesday, 21 May 2008. NSE's futures & options (F&O) segment turnover was Rs 45,076.17 crore, which was higher than Rs 39,481.17 crore on Wednesday, 21 May 2008.

The market breadth was weak on BSE with 1,040 shares advancing as compared to 1,684 that declined. 67 remained unchanged.

Among the 30-member Sensex pack, 29 declined while 1 advanced.

The BSE Mid-Cap index declined 98.80 points or 1.38% to 7,049.25 and BSE Small-Cap index declined 125.14 points or 1.42% to 8,663.84.

BSE Bankex (down 3.06% at 8,375.89), BSE Realty index (down 2.68% at 7,693.34), BSE Capital Goods index (down 2.4% at 13,341.91), BSE Power (down 2.12% to 3,232.82), BSE Auto index (down 2.05% at 4,684.83) underperformed Sensex.

BSE Oil & Gas index (down 1.89% to 11,216.54), BSE FMCG index (down 1.74% at 2,440.04), BSE Metal index (down 1.36% to 17,152.95), BSE TecK index (down 1.23% to 3,489.01), BSE Consumer Durables index (down 1.04% to 4,632.70), BSE PSU index (down 0.94% to 7,653.82), BSE IT index (down 0.79% to 4,418.23), BSE Health Care index (down 0.41% at 4,228.08), outperformed Sensex.

As per the provisional figures on NSE, the foreign institutional investors (FII)'s sold shares worth Rs 537.35 crore while domestic funds bought shares worth Rs 415.16 crore today, 22 May 2008.

Banking stocks declined. ICICI Bank (down 3.39% to Rs 880.40), HDFC Bank (down 2.4% to Rs 1,379.90) and State Bank of India (down 3.28% to Rs 1,607) edged lower.

Realty stocks fell. Indiabulls Real Estate (down 3.43% to Rs 512.50), Unitech (down 3.1% to Rs 273.85) and DLF (down 2.17% to Rs 620.70) edged lower.

Capital goods stocks declined. Larsen & Toubro (down 2.57% to Rs 2,916.80), Bharat Heavy Electricals (down 1.33% to Rs 1,748.05) and Suzlon Energy (down 5.62% to Rs 291.60) edged lower.

Auto stocks declined. Tata Motors (down 3.98% to Rs 661.45), Maruti Suzuki India (down 1.79% to Rs 800.50), Hero Honda Motors (down 0.03% to Rs 788.50) edged lower.

India’s largest tractor maker by sales Mahindra & Mahindra (M&M) declined 2.2% to Rs 652.35. It has reportedly signed a term sheet with Kinetic Motors to acquire a majority stake in the company. According to reports, M&M is looking to acquire 76% stake in Kinetic Motors valued at about Rs 120 crore. A deal could fructify in the next two months if the due diligence proceeds smoothly, the reports added.

India’s largest private sector firm by market capitalisation and oil refiner Reliance Industries declined 1.89% to Rs 2,617.35.

India's largest state-run oil exploration firm in terms of revenue Oil and Natural Gas Corporation (ONGC) declined 1.53% to Rs 924.35. It is reportedly planning to sell 30% to 40% each in two blocks in Vietnam to share the risks and drilling costs. ONGC owns 100% in the two deepwater exploration blocks. The buyer has not yet been finalised, the reports added.

India's largest drug maker by sales Ranbaxy Laboratories declined 1.14% to Rs 498.25. It has reportedly struck two deals with group companies. Ranbaxy has sold some land and building for Rs 90 crore to a group company. It has also picked up 24.91% stake in Shimal Laboratories, another promoter family company, for Rs 93.4 crore, the reports added.

Reliance Infrastructure (down 3.97% to Rs 1,322.95), Reliance Communications (down 3.16% to Rs 584.65), Ambuja Cements (down 2.61% to Rs 104.30), Jaiprakash Associates (down 2.65% to Rs 246.10), ITC (down 2.36% to Rs 223.05), HDFC (down 2.29% to Rs 2,626.70) edged lower from the Sensex pack.

India’s largest aluminium maker by sales Hindalco Industries rose 0.2% to Rs 197.65.

Ispat Industries clocked the highest volume of 4.32 crore shares on BSE. IFCI (3.13 crore shares), Nagarjuna Fertilisers and Chemicals (1.11 crore shsres), Reliance Natural Resources (1.09 crore shares) and Cybermate Infotek (99.73 lakh shares) were the other volume toppers in that order.

Reliance Capital clocked the highest turnover of Rs 225.63 crore on BSE. IFCI (Rs 201.77 crore), Cairn India (Rs 189.47 crore), Reliance Power (Rs 180.57 crore) and Reliance Industries (Rs 176 crore) were the other turnover toppers in that order.

In Asia, key benchmark indices in Hong Kong, China, South Korea, Singapore and Taiwan were down by between 0.08% to 1.89%. However Japan’s Nikkei was up 0.37%.

European markets were weak. Key benchmark indices in Frnace andd Germany and UK were down between 0.04% to 0.49%.

Earnings downgrade amid rising input and interest costs, high inflation and drying up of global liquidity due to credit crisis remain major concern for the Indian stock market. Inflation based on the wholesale price index rose 7.83% in 12 months to 3 May 2008, higher than previous week's annual rise of 7.61%, government data released on 16 May 2008, showed. It was the highest since an annual reading of 7.93% on 6 November 2004.

Further, a steep increase in upward revision in inflation rate for the week ended 8 March 2008, to 7.78% from the provisional 5.92%, came as a rude shock to marketmen. According to retail brokerage Sharekhan, the steep upward revision in inflation rate is a cause for concern, as prices of many commodities have not been updated for varied periods. Moreover, a sharp fall in the rupee against the dollar in the past few days has heightened concerns about inflation. This is because the fall in rupee will raise cost of imports which in turn will result in further rise in inflation.

In a bid to rein in inflation, the Reserve Bank of India, on Tuesday, 29 April 2008, raised cash reserve ratio (CRR) by 25 basis points to 8.25%, to suck out excess liquidity in the banking system, in its annual monetary policy review.

With parliamentary elections scheduled next year (May 2009), the government may leave no stone unturned in its attempt to tame inflation. This is bad news for commodity scrips such as cement and steel. Cement maker ACC said earlier this months that its margins will be hurt by a decision to hold its prices for 2 to 3 months that was taken after the government asked cement firms to help contain price pressures. The government recently imposed export tax on basmati rice and some steel products, and cut import duties on key inputs like ferro alloys and metallurgical coke. The government had earlier banned export of cement and non-basmati rice. On 7 May 2008, the government ordered suspension in futures trading in channa, refined soyoil, potato and rubber for four months.

Meanwhile, as per a recent study by CLSA, large amount of foreign currency convertible bonds (FCCBs) issued by Indian companies are coming up for redemption in the next 18-24 months. After recent stock market volatility many FCCBs are at risk of not converting i.e. if the stock market remains subdued, it will stop the bond holders from opting for an equity conversion as it will be easier for them to buy the stock from the open market instead of paying the agreed premium.

When the FCCBs come for redemption, some of these companies may have to take on more debt to redeem the FCCB, thereby raising interest outgo. In the event FCCBs don't get converted, companies have the option to lower the conversion price in line with the market, leading to higher equity dilution. If companies decide to issue fresh FCCBs to finance redemption of FCCBs, it will be at lower premium than earlier.

With the rupee tumbling against the dollar in the last few days, the government may ease restrictions on overseas corporate borrowing when it, together with the RBI, reviews the external commercial borrowing (ECB) policy later this month, reports suggest. Last year, the government had imposed restrictions on ECBs in a bid to check in surge in rupee against the dollar. There are many Indian corporates who will eagerly seek cheap overseas funds if the RBI re-opens the ECB tap, analysts reckon.

The structural growth drivers of the Indian economy remain intact – India’s economy is expected to witness a decent-to-strong growth for a long period of time due to favourable demographics. Acceleration in infrastructure creation will be another driver of strong growth in India’s economy. A CLSA report says India’s infrastructure development is set to accelerate, backed by greater private sector participation and improved finances of government and public sector enterprises. Rating agency Crisil in its outlook for Indian economy for the year through March 2009 has stated that the overall growth scenario is expected to remain strong with investment as the main driver.

Given the continued inflow to unit linked insurance plans (Ulips) and equity linked savings schemes (ELSS) of mutual funds, stock-specific buying will continue depending on fundamentals of individual stocks. Insurance firms are now a major player in the Indian stock market given the huge mop up in Ulips in recent years. It was buying support from domestic funds which had aided the recent recovery on the bourses.

Meanwhile, as per recent reports, ELSS which offer tax benefit are catching the fancy of small savers. ELSS funds saw their collective assets jump more than nine times to about Rs 16000 crore in three years ending March 2008. In 2005 the investment limit eligible for income tax breaks was raised ten times to Rs 1,00,000 rupees for ELSS funds. Systematic investment plan (SIP) are said to be driving inflows into ELSS funds.