Market drifts lower on weak global stocks

The key benchmark indices edged lower in a choppy trading session as weak global stocks weighed on investor sentiment. Index heavyweights Reliance Industries (RIL) edged higher. The market breadth was negative, compared with a strong breadth earlier in the day. The BSE 30-share Sensex was down 81.73 points or 0.4%, up close to 35 points from the day's low and off close to 120 points from the day's high. Banking and metal stocks fell. Sterlite Industries reversed losses after reporting Q2 result. Auto stocks bucked the weak market, with shares of commercial vehicles major Tata Motors hitting a record high.



Stocks were volatile as traders rolled over positions in the derivatives segment from the near-month October 2010 series to November 2010 series ahead of the expiry of the October 2010 contracts on Thursday, 28 October 2010. The market recovered from an initial slide caused by weak Asian stocks. The market failed to sustain higher level in early trade. The market once again came off lows later.

The key benchmark indices declined, soon after hitting fresh intraday highs after RBI Deputy Governor Subir Gokarn said surging food prices are structural and will put upward pressure on inflation and interest rates. The market recovered from lower level, soon after hitting a fresh intraday low in early afternoon trade. The selling pressure intensified in afternoon trade as the market weakened once again. The market came off the day's low in mid-afternoon trade. The market again weakened 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 down 3.79% at 20.55. 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.

Bond yields rose after RBI's Gokarn said persistent price increases in commodities for which there are less effective substitutes will raise the potential rate of inflation over a period of time (with other things remaining equal). "This means that actual inflation or interest rates will be higher than they would be in the absence of such increases," said Gokarn, whose brief at the central bank includes monetary policy.

The yield on the most traded 8.13%, 2022 bond was hovering at 8.15%, compared with Monday's (25 October 2010) close of 8.11%. The yield on the benchmark 10-year bond was hovering at 8.18%, compared with Monday's (25 October 2010) close of 8.14%

"When we take into consideration the impact of structural food price shocks such as the ones India is experiencing, the policy implications become complex," Gokarn said. Production of pulses was not keeping pace with demand, he said. "Rise in income has increased the share of proteins in peoples' diet. Rising affluence has also led to an increase in demand for proteins and nutrition," said Gokarn, adding one option would be to import pulses through contract farming.

Gokarn said the conventional view suggested monetary tools would have no impact in combating a rise in food prices due to temporary supply disruption. "However, if the economy is at or close to capacity utilisation, even temporary price shocks can aggravate inflation expectations, which may justify monetary response even though shock is temporary and will die out before the actions take effect," he said.

Finance Minister Pranab Mukherjee today, 26 October 2010, said steps to mop-up liquidity in India, as part of inflation-fighting measures, must not affect economic growth. He said the economy is on the path to regaining the growth momentum seen before the global economic slowdown. The Reserve Bank of India has taken steps to moderate demand to levels which India's economy can support in the light of high inflation, Mukherjee said.

India's economy is seen growing by 8.5% to 9.7% in the 2010/11 fiscal year and monetary tightening should ensure the pace of recovery is not hit, the finance ministry said in a report released on Tuesday, 26 October 2010. The report also said measures to temporarily ease liquidity were consistent with the Reserve Bank of India's (RBI) policy stance of containing inflation and anchoring inflationary expectations. "It has to be ensured that monetary tightening does not adversely affect the pace of recovery at this stage," the Finance Ministry wrote in the report.

European stock markets were trading weaker on Tuesday, 26 October 2010 with banks and industrials leading the decliners. The key benchmark indices in UK, Germany and France were down by 0.24% to 0.78%.

Sweden's central bank on Tuesday raised its repo rate by a quarter of a percentage point to 1%, but said a weak recovery overseas meant that the rate won't need "to be raised so much in the coming years." A hike by the Swedish Riksbank had been expected by many economists.

Britain's economy grew by 0.8% in the third quarter, the Office for National Statistics said Tuesday. That follows an expansion of 1.2% in the second quarter.

Asian stocks were mixed on Tuesday ahead of the outcome of the next Federal Reserve meeting early next month. The key benchmark indices in Singapore, Hong Kong, Indonesia, China and Japan fell by between 0.11% to 0.62%. The key benchmark indices in South Korea and Taiwan rose by between 0.19% to 0.44%.

The Japanese cabinet Tuesday approved the budget for a 5.1 trillion yen ($63 billion) economic stimulus package. The package includes yen 238.8 billion worth of front-loaded public works contracts, as well as the yen 4.851 trillion extra budget. The budget is the first in 11 years to be funded without the issuance of new government bonds, and instead will tap extra tax revenues and leftover cash from the fiscal 2009 budget.

Trading in US index futures indicated that the Dow could slide 18 points at opening on Tuesday, 26 October 2010. US stocks edged higher on Monday, 25 October 2010, on growing expectations that the Federal Reserve will take steps to boost the US economy. In macro news, September existing-home sales rose more than expected

Closer home, in a bid to check companies from abusing preferential share warrant allotment norms to favour promoters, the Securities and Exchange Board of India (Sebi) has put in place stringent conditions for such allocations. The Sebi board on Monday, 25 October 2010, also doubled the investment limit for retail investors in an initial public offer (IPO) to Rs 2 lakh from Rs 1 lakh and approved the IPO norms for insurance companies. However, it has deferred a decision on overhauling the corporate takeover norms as it needs more time to study the proposals of a panel.

If any promoter or any promoter group entity has previously subscribed to the warrants of the company but failed to exercise the warrants, these promoters won't be eligible for issue of equity shares or convertible securities or warrants for a period of one year from the date of expiry of the currency/cancellation of the warrants. The board further decided that if any member of the promoters have sold shares in the previous six months, then the promoters/ promoter group would not be ineligible for allotment on preferential basis it said.

The focus of the market is currently on the second quarter September 2010 results. The results announced so far have been encouraging. The combined net profit of a total of 539 firms surged 80.5% to Rs 41,039 crore on 20% growth in sales to Rs 2,25,989 crore in Q2 September 2010 over Q2 September 2009.

Higher volumes and price hike will aid earnings growth of most auto firms in Q2 September 2010 though analysts will closely eye operating profit margins and outlook on margins in the face of rising metal prices. Banks are seen reporting decent-to-strong earnings growth on the back of pick-up in credit offtake. Manufacturers of base metals are also seen reporting strong Q2 results on the back of higher metal prices. Increase in product prices will offset higher input costs for consumer staples firms in Q2 September 2010. But, cement firms will report dismal results due to a sharp fall in cement prices during the monsoon season.

While global liquidity remains ample, a section of the market is worried that a strong equity issuance pipeline over the next six months will soak liquidity from the secondary equity markets. Indian companies are estimated to raise about Rs 80000 crore from equity and debt issue over the next three to six months. State-run Power Grid Corp, Steel Authority of India and Indian Oil Corp are some of the companies that are planning large share sales in coming months.

Inflows into secondary equity markets could be hit in the immediate short term due to diversion of funds to the mega Rs 15000-crore Coal India initial public offer (IPO), which was concluded on 21 October 2010. A large sum of money is blocked in the IPO, which was subscribed more than 15 times. Pressure on fund outflows will ease in late October 2010 or early November 2010 as Coal India begins to refund excess subscriptions received towards its initial public offering.

Foreign funds have made heavy purchases of Indian equities this year. Net equity inflow in 2010 now stands at a record $24.74 billion, above last year's $17.45 billion, as per data from the Securities & Exchange Board of India (Sebi). The Sebi data includes FII inflow through primary and secondary market route.

A sizable chuck of FII inflow this year is from India-focused exchange traded funds as well as long-only funds.

Global emerging-market equity funds drew record inflows in the third week of October 2010 as investors sought growth in developing nations and the dollar weakened, according to global fund tracker EPFR Global. The funds took in $3.8 billion in the week ending 20 October 2010. Year-to-date inflows to global emerging-market equity funds exceed the record $44.2 billion for the whole of 2009.

Asia ex-Japan, Latin America and EMEA equity funds posted inflows ranging from $327 million to $981 million in the week ending 20 October 2010. Dedicated BRIC (Brazil, Russia, India and China) equity funds had their best week since February 2010, but were again eclipsed by Frontier equity funds, which pulled in $150 million, a 145-week high. Turkey equity funds saw inflows for the eighth week.

The BSE 30-share Sensex was down 81.73 points or 0.4% to 20,221.39. The Sensex rose 41.56 points at the day's high of 20,344.68 in mid-morning trade. The index fell 113.82 points at the day's low of 20,189.30 in afternoon trade.

The S&P CNX Nifty was down 23.80 points or 0.39% to 6,082.

The BSE Mid-cap index fell 0.42%. The BSE Small-cap index was up 0.22%.

Most sectoral indices on BSE declined. The BSE Metal index (down 1.21%), banking sector index Bankex (down 0.84%), PSU index (down 0.77%), Healthcare index (down 0.62%), and Power index (down 0.58%), underperformed the Sensex. The BSE Consumer Durables index (up 1.99%), Auto index (up 0.86%), FMCG index (up 0.5%), IT index (down 0.05%), Capital Goods index (down 0.22%), Realty index (down 0.26%), and Oil & Gas index (down 0.34%), outperformed the Sensex.

The market breadth was negative, compared with a strong breadth earlier in the day. On BSE, 1,580 shares declined while 1,418 shares advanced. A total of 94 shares remained unchanged.

Among the 30-share Sensex pack, 17 fell while the rest advanced.

BSE clocked turnover of Rs 4910 crore, higher than Rs 4,812.93 crore on Monday, 25 Monday, 25 October 2010.

Index heavyweight Reliance Industries (RIL) rose 0.56%, with the stock gaining for the fifth straight day. Reliance Industries is reportedly expected to achieve peak output of 80 million standard cubic metres per day (mmscmd) from its KG-D6 block in about 12 months, bringing down the delay in its ramp-up by a year. Currently, natural gas production from the block is stagnant at 60 mmscmd.

Auto stocks rose in a weak market on expectations of strong Q2 results. Car maker Maruti Suzuki India rose 3.59% and was the top gainer from the Sensex pack. The company announces its Q2 results on Saturday, 30 October 2010.

Commercial vehicle maker Tata Motors rose 0.61% to Rs 1,191.80. The stock hit record high of Rs 1197 today. Among other auto stocks, Hero Honda Motors, Ashok Leyland, M&M, TVS Motor Company rose by between 0.03% to 4.52%.

High beta metal stocks fell on profit taking. Hindalco Industries, Steel Authority of India, National Aluminum Company and Hindustan Zinc fell by between 0.35% to 1.56%.

Tata Steel fell 2.62% after the world's largest steelmaker ArcelorMittal reported profit in the third-quarter but warned the rest of the year will be tough, forecasting lower prices and weak demand.

Jindal Steel & Power fell 1.34%. Consolidated net profit rose 11% to Rs 894.24 crore on 25% rise in net sales to Rs 3077.95 crore in Q2 September 2010 over Q2 September 2009. The results hit the market during trading hours today.

Copper maker Sterlite Industries fell 0.09% to Rs 172.20 recovering from the day's low of Rs 168.70. Company's consolidated net profit rose 5.12% to Rs 1008.03 crore in Q2 September 2010 over Q2 September 2009. The results hit the market during trading hours today.

Bank stocks fell on profit taking. India's largest private sector bank by net profit ICICI Bank fell 0.93%, with the stock snapping last three days' gains.

India's largest bank by net profit and branch network State Bank of India fell 1.84%, with the stock snapping last three days' gains. The bank revised the Benchmark Prime Lending Rate upwards by 25 basis points (bsp) from 12.25% per annum (p.a.) to 12.50% p.a. effective from 21 October 2010. The bank has also raised base rate by 10 bps from 7.50% p.a. to 7.60% p.a. effective from October 21, 2010.

India's second largest private sector bank by net profit HDFC Bank fell 0.56%. The bank's net profit rose 32.68% to Rs 912.14 crore on 14.37% rise in total income to Rs 5770.70 crore in Q2 September 2010 over Q2 September 2009. The private sector bank announced the results after trading hours on 19 October 2010.

UltraTech Cement fell 0.16% as net profit tumbled 81.8% to Rs 116 crore in Q2 September 2010 over Q2 September 2009.

Among other cement stocks, ACC, Ambuja Cements and Birla Corporation of India fell by between 0.56% to 1.43%.

Some high beta realty rose on renewed buying. Omaxe, Lok Housing, DLF, Unitech rose by between 0.22% to 1.5%.

FMCG major Hindustan Unilever (HUL) fell 2.21%, on disappointing Q2 results. Profit after tax before exceptional items grew by 6.8%. There were exceptional gains of Rs 40 crore in Q2 September 2010, compared with an exceptional costs of Rs 135 crore in Q2 September 2009. The company announced the Q2 result during market hours on Monday, 25 October 2010.

Despite a significant rise in input cost, increase in cost of goods sold (COGS) was contained at 20 basis points (bps) through buying efficiencies and cost savings programmes, Hindustan Unilever (HUL) said in a statement. Competitive levels of advertising along with investment to drive emerging categories, led to 90 bps increase in advertising spends. Advertisement & promotion (A&P) increased by 30 bps to 13.8% of sales in Q2 September 2010 over Q2 September 2009. Increase in COGS, higher investment in A&P and higher cost of packaging moulds to support the step up in innovation activity, led to a 170 bps year-on-year decline in operating margin, HUL said.

HUL said net sales grew 10.7% during the quarter, driven by strong underlying volume growth of 14% in domestic consumer business. Growth was broad based across Home and Personal Care (HPC) and Foods -- ahead of the market in aggregate, HUL said.

Commenting on the results, HUL Chairman Harish Manwani, said, "Our domestic consumer business has delivered double digit underlying volume growth for the third quarter in a row. This has been led by bigger and better innovations supported by strong execution in the market. We continue to strengthen our core business while at the same time leading market development in emerging categories."

Other FMCG stocks rose. United Spirits, ITC, Marico rose by between 1.3% to 3.29%.

Capital goods stocks fell on profit taking. Thermax, Siemens, Punj Lloyd, BHEL and ABB fell by between 0.7% to 1.4%.

But, India's largest engineering and construction firm by sales Larsen & Toubro rose 0.34% to Rs 2040.70, off the day's low of Rs 2014.50.

Idea Cellular fell 2.99% after consolidated net profit fell 18.4% to Rs 179.74 crore on 22.5% rise in net sales to Rs 3636.65 crore in Q2 September 2010 over Q2 September 2009.

Among other telecom stocks, Reliance Communications and Bharti Airtel fell by between 1.73% to 2.42%.

Cals Refineries clocked the highest volume of 2.17 crore shares on BSE. K Sera Sera (1.17 crore shares), REI Agro (75.45 lakh shares), Delta Corp (75.34 lakh shares) and Dena Bank (71.45 lakh shares) were the other volume toppers in that order.

Jindal Poly Films clocked the highest turnover of Rs 150.84 crore on BSE. Raymond (Rs 128.89 crore), Tata Steel (Rs 123.42 crore), Orchid Chemicals (Rs 104.63 crore) and State Bank of India (Rs 98.58 crore) were the other turnover toppers in that order.