Market gives thumbs down to RIL's acquisition of EIH stake

The key benchmark indices recovered in the last one hour of trade as robust first quarter June 2010 GDP data triggered bargain hunting after a steep intraday slide in share prices. A government report at 11:00 IST showed the Indian economy expanded at the fastest pace in 2-1/2 years in Q1 June 2010. The market had tumbled in early trade owing to weakness in Asian and European markets.



Bouts of buying and selling pressure were seen thought the session as the BSE Sensex once again fell below the psychological 18,000 level, shortly after regaining that level in late trade. The Sensex fell 60.99 points or 0.34%, up 151.13 points from the day's low and off 44.54 points from the day's high.

Despite the intraday rebound in the key benchmark indices, the broad market depicted weakness. Nine out of 13 sectoral indices on BSE were in the red. The market breadth was weak. Index heavyweight Reliance Industries (RIL) tumbled after the company announced the acquisition of a little over 14% stake in EIH after trading hours on Monday, 30 August 2010.

Intraday volatility was high. The market opened on a weak note, tracking lower Asian stocks. The market extended losses in morning trade. The key benchmark indices extended losses in mid-morning trade as index led heavyweight Reliance Industries (RIL) fell. Weak global stocks offset data showing robust first quarter GDP as the key benchmark indices extended losses in mid-morning trade. The GDP data hit the market at 11:00 IST.

The market weakened further in early afternoon trade. The market staged a mild recovery after sliding to fresh intraday low in afternoon trade. The intraday recovery gathered steam in mid-afternoon trade as European stocks and US index futures came off initial lows. High volatility was witnessed in late trade.

NSE's volatility index, India VIX, a gauge of traders' perception of near-term risks in the market based on options prices, was up 0.6% at 18.47. The index had lost 6.47% to 18.36 on Monday, 30 August 2010. The index had jumped 14.86% to 19.63 on Friday, 27 August 2010, a day after dropping 9.67% at 17.09, on Thursday, 26 August 2010. The index risen 11.36% to 18.92 on Wednesday, 25 August 2010. India VIX is calculated based on the S&P CNX Nifty options prices. India VIX is a measure of the market's expectation of volatility over the next 30 calendar days.

State-run Coal India's initial public offering will begin on 18 October 2010 and close on 21 October 2010, chairman Partha Bhattacharya was quoted by the media as saying on Tuesday, 31 August 2010.

The economy grew at a robust pace in the first quarter, the latest data showed. The gross domestic product (GDP) grew 8.8% in Q1 June 2010. The manufacturing sector grew 12.4%, mining sector expanded 8.9%, construction sector grew 7.5%, and farm sector expanded at 2.8%. Output in the combined sectors -- trade, hotels, transport and communication, jumped 12.2%.

The economy could grow better than 8.5% in the fiscal year that ends in March 2011, Planning Commission deputy chairman Montek Singh Ahluwalia said on Tuesday. Government spending is expected to pick up after the June-September monsoon rains, Ahluwalia said.

The yield on the benchmark 10-year 2020 bond was hovering at 7.93%, lower than Monday's (30 August 2010) close of 7.99%. The yield on the second most traded, 8.13% 2022 bond was hovering at 8.02%, higher than Monday's (30 August 2010) close of 7.97%.

Meanwhile, the government has delayed the implementation of the direct taxes code by one year to 1 April 2012. Earlier, the government had planned to implement the code from 1 April 2011.

Under the Direct Taxes Code Bill, 2010 tabled in the Lok Sabha by Finance Minister Pranab Mukherjee on Monday, 30 August 2010, and referred to the Select Committee of Parliament for scrutiny, the government has sought to raise the income tax exemption limit from Rs 1.6 lakh to Rs 2 lakh while retaining a host of incentives for individuals. While senior citizens (above 65 years) will enjoy a higher exemption of Rs 2.5 lakh, women taxpayers will have no additional relief as they have not been categorised separately.

As for corporate taxes, the levy will be at a flat rate of 30% with no surcharges or cesses. Besides, the tax rate for foreign companies will now be the same as domestic companies. Dividends distributed by companies to parents in a vertical structure will not be subject to double taxation, as the cascading effect of the tax on dividends will be removed.

The minimum alternate tax (MAT) will continue to be calculated on book profits and not gross assets, as proposed in the August 2009 DTC draft. While this rate has been increased a bit to 20%, the blow has been softened by allowing companies to carry forward MAT credit to 15 years from the current 10 years.

The applicability of the existing profit-linked tax incentive scheme has been extended to units being set up in special economic zone (SEZ) till 31 March 2014, provided the SEZs are notified before 1 April 2012. However, with respect to SEZ developers, the profit-linked incentive scheme would continue only if the SEZ is notified on or before 31 March 2012. All other new SEZ developers and units would be entitled to investment-based incentive scheme.

The good news for investors in the stock market is that the DTC bill has maintained the benefit of zero tax on long-term capital gains on sale of shares held for a period exceeding one year. Short-term capital will now be charged at 50% of the base rate, i.e., 5%, 10% or 15%, depending on the applicable slab rate for individuals and 15% for corporates. Short-term gains are currently taxed at 15% for all investors.

It has also been clarified that profit on sale of shares by foreign institutional investors (FIIs) will be charged under the head capital gains. Hitherto, the law was vague as to whether such gains are capital gains or business income. Also for FIIs, regardless of any tax-friendly treaty, long-term capital gains on listed equity will be exempt but treaty benefit of short-term capital gains currently available in relation of certain tax-friendly jurisdictions, while not having been withdrawn, may attract anti-avoidance provisions.

European stocks came off initial lows on Tuesday, 31 August 2010. Stocks in Germany came off initial lows after improved economic data. The DAX index was down 0.79%. The seasonally-adjusted number of German unemployed people declined by 17,000 in August 2010, leaving the unemployment rate unchanged at 7.6%, Germany's labor office reported Tuesday. Economists had forecast a slightly larger decline of 20,000, while the unemployment rate matched forecasts.

In UK, the FTSE 100 was down 0.91%, having recovered from a more than 1% fall earlier in the day. Net lending to individuals in Britain rose by 300 billion pounds ($462.6 billion) in July 2010, for an annual growth rate of 0.8%, unchanged from June 2010, the Bank of England reported on Tuesday. Mortgage approvals totaled 48,722, up slightly from 48,562 in June and in line with the previous six-month average of 48,456. Consumer credit increased by 200 million pounds after a 100 million pound decline in June. Consumer credit grew at a 0.2% annual rate after a flat reading in June. In France, the CAC 100 index was down 1.03%.

Japanese stocks led decline in Asian stocks on Tuesday, 31 August 2010, as investors continued to fret about the yen's strength. The yen gained against major rivals despite Monday's additional monetary easing by the Bank of Japan. The Nikkei 225 Average fell 3.55%. The key benchmark indices in Hong Kong, China, South Korea, Singapore, Taiwan, and Indonesia, were down by between 0.23% to 1.61%.

The Bank of Japan announced new stimulus measures after an emergency meeting Monday as the yen's surge to 15-year high forced policy makers to find ways to support the nation's slowing expansion. The central bank decided to further ease monetary policy by expanding a low-interest loan program for financial institutions by 50% to $355 billion.

US index futures were off initial lows. Trading in US index futures indicate that the Dow could fall 32 points at the opening bell on Tuesday, 31 August 2010.

The BSE 30-share Sensex lost 60.99 points or 0.34% at 17,971.12. The Sensex lost 212.12 points at the day's low of 17,819.99 in afternoon trade. The index declined 16.45 points at the day's high of 18,015.66 in early trade.

The S&P CNX Nifty declined 13.05 points or 0.24% to 5,402.40.

The BSE Mid-Cap index fell 0.58% and the BSE Small-Cap index slipped 1%. Both these indices underperformed the Sensex.

The market breadth, indicating the health of the market, was weak. On BSE, 1993 shares declined while 922 shares advanced. A total of 112 shares remained unchanged.

BSE clocked a turnover of Rs 4676 crore, higher than Rs 4437.05 crore on Monday, 30 August 2010.

The BSE FMCG index (up 1.58%), Auto index (up 0.83%), IT index (up 0.03%), Healthcare index (down 0.1%), Bankex (down 0.28%), outperformed the Sensex.

The BSE Capital Goods index (down 0.73%), PSU index (down 0.78%), Power index (down 0.88%), Metal index (down 1%), Realty index (down 1.71%), Oil & Gas index (down 1.95%) and Consumer Durables (down 2.32%), underperformed the Sensex.

From the 30-share Sensex pack, 20 stocks declined while only 5 of them managed gains.

Reliance Communications (down 3.61%), Jaiprakash Associates (down 3.54%), Jindal Steel & Power (down 2.11%), DLF (down 1.82%), were the leading Sensex losers.

Index heavyweight Reliance Industries (RIL) lost 3.05% to Rs 918.85. RIL after trading hours on Monday, 30 August 2010, said it has acquired a 14.12% stake in hotel firm EIH from Oberoi Hotels and certain other promoters of EIH for a total consideration of about Rs 1021 crore. RIL said it has full faith and would support the management of EIH and there will be no change in the management, operation or control of EIH. The deal price works out to Rs 184 a share.

Shares of EIH slumped 7.13% to Rs 139.95, off the day's high of Rs 180.80. The counter clocked a huge volume of 91.30 lakh shares on BSE, compared with an average daily volume of 4.53 lakh shares in past two-weeks.

Banking majors recovered from day's lows. India's leading private sector bank by market capitalisation ICICI Bank rose 0.95% to Rs 977.30, off the day's low of Rs 956.30. India's largest commercial bank by branch network State Bank of India was down 1.30% at Rs 2764.85, off day's low of Rs 2744.80.

Canara Bank, Allahabad Bank, Karnataka Bank, Bank of Baroda and IDBI Bank, rose by 0.04% to 1.99%.

Oil & Natural Gas Corporation (ONGC) fell 0.42% after the company said UK-based Cairn Energy Plc will require its consent to complete the proposed sale of a stake in its unit Cairn India. Cairn India fell 1.20%.

HPCL (down 1.40%), BPCL (down 1.23%) and Indian Oil Corporation (down 0.27%), were the other losers from the oil and gas sector.

Select auto stocks rose ahead of monthly sales data disclosure starting Wednesday, 1 September 2010. Mahindra & Mahindra (up 2.85%), Ashok Leyland (up 2.15%), Maruti Suzuki (up 1.68%) and Tata Motors (up 1.61%), rose.

India's biggest motorcycle maker by sales Hero Honda Motors was flat Rs 1791.80, bouncing back from the day day's low of Rs 1670. The stock had fallen earlier on reports that the Munjal family and private equity firm KKR are in talks to buy out Japan's Honda Motor's stake in the company. The report said that the Munjal family will buy out 20% of Honda's stake, while KKR will buy the remaining 6%. In response to the report, Honda Motors, however, said it has no plans to sell its stake in Hero Honda at this time.

Hero Group said said the television report was incorrect and speculative. The Hero Group and Honda Motor have for years enjoyed a very cordial and fruitful relations and there has been no change in the relationship in any manner, it added.

FMCG stocks bucked the weak trend on defensive buying in a choppy market. ITC, Hindustan Unilever, United Breweries, Tata Global Beverages, Marico, Colgate Palmolive India, United Spirits, Dabur India and Britannia Industries rose by 0.46% to 9.43%.

Investors buy such defensive stocks in a falling market as financial fortunes of these companies are not much dependent on business cycles - these firms offer growth, as well as dividend income, even in an economic recession.

High beta realty stocks declined in a falling market. Peninsula Land, Mahindra Lifespace Developers, DLF, HDIL, Orbit Corporation, Anant Raj Industries, Ansal Properties & Infrastructure, Parsvnath Developers, Sobha Developers, Indiabulls Real Estate, and Unitech fell by 0.34% to 3.93%. Beta is a measure of a stock's volatility in relation to the key benchmark index. Higher the beta of the stock, higher will be the volatility in the stock price, and hence, riskier the investments. The beta of the index or the market is pegged at 1.

Cals Refineries clocked a highest volume of 1.46 crore shares on BSE. Birla Power Solutions (1.40 crore shares), FCS Software (1.32 crore shares), Prakash Steelage (1.31 crore shares) and Piramal Healthcare (92.02 lakh shares), were the other volume toppers on BSE in that order

Piramal Healthcare reported a highest turnover of Rs 449.21 crore on BSE. Prakash Steelage (Rs 278.82 crore), Reliance Industries (Rs 243.23 crore), SKS Microfinance (Rs 144.54 crore) and EIH (Rs 139.30 crore), were the other turnover toppers on BSE in that order.