Sensex, Nifty still indecisive: Tuesday Closing Report

The Nifty is sill waiting for a breakout. The medium-term trend is down

The market, which was volatile throughout the session, settled in the red on selling pressure in heavyweights. Although the intraday high on the Nifty was almost the same as yesterday, the index made a higher low today. The benchmark is waiting for a breakout. However, we see the medium-term trend  down. The National Stock Exchange (NSE) saw a volume of 55.40 crore shares and the advance decline ratio of 711:1014.
The Indian markets will remain closed on Wednesday for a local holiday.
The Indian market witnessed a flat opening in the absence of any local triggers. In the global arena, US markets settled with marginal gains overnight following a late recovery and the Asian pack was in the green in morning trade today but concerns about corporate earnings kept a tab on the gains.
The Nifty opened one point lower at 5,716 and the Sensex resumed trade at 18,804, up 11 points over its previous close. Volatility, ahead of the F&O derivatives expiry on Thursday, was seen since the opening of trade, which kept the indices in and out of the red in the first hour of trade. But despite the volatility, select buying led the benchmarks to their intraday highs in early trade. At the highs, the Nifty rose to 5,721and the Sensex went up to 18,813.
The market slipped into the red around 10.00 am on selling pressure in consumer durables, IT, oil & gas and auto stocks. The benchmarks continued to remain in the negative in noon trade as a lower opening of the key European markets added to the woes back home.
The indices dropped to their lows in post-noon trade on selling in auto, fast moving consumer goods and technology stocks. At the low the Nifty went back to 5,681 and the Sensex retracted to 18,689.
The market closed off the lows on a minor bounce back in late trade. The Nifty finished trade at 5,691, down 26 points (0.45%), and the Sensex settled 83 points (0.44%) lower at 18,710.
Among the broader markets, the BSE Mid-cap index fell 0.23% and the BSE Small-cap index declined 0.25%.
The BSE Capital Goods index (up 0.90%) was the only sectoral gauge to settle in the green today. The top losers were BSE Consumer Durables (down 0.98%); BSE IT (down 0.88%); BSE Metal, BSE Fast Moving Consumer Goods (down 0.84% each) and BSE Power (down 0.82%).
Seven of the 30 stocks on the Sensex closed in the positive. The main gainers were Larsen & Toubro (up 1.91%); ICICI Bank (up 0.53%); Coal India (up 0.18%); Hindustan Unilever (up 0.16%) and Dr Reddy’s Laboratories (up 0.13%). The key losers were Jindal Steel (down 2.43%); Hero MotoCorp (down 1.90%); Hindalco Industries (down 1.56%); Infosys (down 1.42%) and TCS (down 1.29%).
The top two A Group gainers on the BSE were—L&T Finance Holdings (up 3.24%) and Bayer Corporation (up 3.23%).
The top two A Group losers on the BSE were—Jaiprakash Power Ventures (down 3.73%) and GMR Infrastructure (down 3.64%).
The top two B Group gainers on the BSE were—Indo Count Industries (up 19.96%) and Peninsula Land (up 19.93%).
The top two B Group losers on the BSE were—Jaihind Projects (down 19.91%) and Xchanging Solutions (down 19.71%).
Out of the 50 stocks listed on the Nifty, 12stocks settled in the positive. The top gainers were BPCL (up 1.91%); L&T (up 1.74%); Siemens (up 1.01%); IDFC (up 0.72%) and Coal India (up 0.46%). The major losers were Jindal Steel (down 2.57%); Hero MotoCorp (down 1.98%); Kotak Mahindra Bank (down 1.97%); Lupin (down 1.68%0 and Hindalco Ind (down 1.52%).
Markets in Asia settled mixed as the quarterly earnings season in the region is expected to come under pressure following the global slowdown. Fresh worries from Europe after ratings agency Moody’s Investor Services on Monday cut ratings of five Spanish regions on deteriorating liquidity positions also weighed on the investors.
The Hang Seng climbed 0.68%; the KLSE Composite gained 0.18%; the Nikkei 225 rose 0.04% and the Straits Times advanced 0.17%. On the other hand, the Shanghai Composite tanked 0.86%; the Jakarta Composite fell 0.26%; the Seoul Composite declined 0.76% and the Taiwan Weighted settled 0.48% lower.
At the time of writing, the key European indices were down between 0.83% and 0.92% and the US stock futures were in the negative, indicating a lower opening for US stocks. 
Back home, foreign institutional investors were net buyers of stocks totalling Rs241.68 crore on Monday whereas domestic institutional investors were net sellers of equities amounting to Rs137.88 crore.
Mumbai-based turnkey construction major Hindustan Construction Company has secured a third contract worth Rs373 crore from the Delhi Metro Rail Corporation. The order is for design and construction of a 2.2 km twin tunnel between Shalimar Baug and Netaji Subhash Place stations on the Mukundpur-Yamuna Vihar corridor under phase III of the Delhi Metro. The contract is scheduled for completion in 36 months. HCC settled 1.17% lower at Rs16.85 on the NSE today.
Elecon Engineering Company has procured domestic orders aggregating Rs17.13 crore from NMDC and Rs 7.19 crore from Tecpro Systems. While NMDC’s order is for supply, erection and commissioning of machines for its projects at Bacheli and Kirandul, the one from Tecpro Systems is for the Harihar project. Elecon Engineering gained 0.71% to close at Rs49.60 on the NSE today.
SAIF India IV FII Holdings, Mauritius has increased its stake in Hyderabad-based Pennar Industries from 7.74% to 9.85%. The overseas investment entity has hiked the stake by acquiring shares from the open market. Pennar Industries closed 0.56% higher at Rs27.15 on the NSE.


Economy & Nation Exclusive
Steel industry on the path of a deeper decline

Global demand remains weak due to an uncertain economy, putting pressure on the profit margins of steel makers

Posco, a South Korea-based company, Asia’s third-biggest steelmaker and the world’s fourth-biggest steel producer by 2011 output according to rankings by the World Steel Association, cut its 2012 sales forecast for the third time this year after quarterly profit missed analyst estimates due to a poor demand and decline in prices. Standard & Poor’s Ratings Services (S&P) also cut Posco’s rating. S&P expects Posco to encounter continued tough steel industry conditions in the region over the next 12 to 18 months as a result of slowing demand amid significant overcapacity.

Macroeconomic uncertainties make it unlikely that the global slowdown in demand for steel will turn around quickly. The recovery is expected to be delayed as the global economy remains gloomy due to fiscal crisis in advanced economies.

This is the case with other companies of the same sector in India, as well. The steel industry’s profitability, which had risen sharply from FY04, is on its way down, according to a recent report from Credit Suisse. In the past eight years, there has been a remarkable surge in mining as well as smelting operating profits, but pressures have emerged on both smelting and mining profits, and are likely to continue going forward. There has been a remarkable surge in iron ore and coking coal prices, which seems to be unwinding now. The slowdown in the Chinese economy and the debt crisis in Europe have restrained the demand growth and profit margins have declined.

As per the Credit Suisse report, over the past years the dramatic increase in profitability was due to cheap raw materials, either through direct ownership (e.g., SAIL and Tata Steel), or just geographical proximity aided by tariff barriers (most Indian steel makers). For Indian firms smelting margins were weak despite import duty protection, and Free Trade Agreement (FTA)-related imports have now brought domestic prices closer to international benchmarks, says the report. Indian steel equities are down, but are not cheap and with rising leverage below the operating line, run the risk of book value erosion.

“In the last four years, however, steelmaking margins, or smelting margins have come down sharply, hurt by the erosion of end-demand, and the lagged commissioning of capacity increases planned during the period of shortage. Over the past few months, as iron ore and coking coal prices have crashed, there are fears anew about the impact on the steel industry of the Chinese economy moving away from investment, and towards consumption.,” says the report.

The sheer scale and growth of Chinese steel demand was the root cause of the remarkable rise in iron ore and coking coal prices over the past five to six years. This is because supply takes a while to come up. The premium of steel prices in India over global prices has started to erode so much so that even without the import duty impact, Indian prices are barely higher than global prices. This has a structural implication on steel company profitability in India.

The report mentions that the Chinese steel production is unlikely to fall from current levels and growth is likely to be slow going forward, as it has been for the past few quarters. Further, the pressure on utilisation keeps rising because of steady commissioning of new capacity. In the past few years Chinese regulators have reacted to surging exports by raising barriers, the agenda being to keep steel prices low so steel-using industries (e.g., heavy machinery, ship-building) could become more competitive globally. This time, however, the need to maintain high utilisations may supersede such concerns.

Worryingly, domestic oversupply concerns are still real and can only further hurt local profitability. The reset on Chinese demand growth expectations have hurt raw material prices, and the continuing capacity growth is creating an overhang on already weak smelting margins. Despite some of the highest steel prices globally, smelting margins for Indian firms have been disappointing.

Steel creates its own demand, this combined with the fact that given its permanence, especially in its use in heavy infrastructure/real estate, there can be long periods of ‘digestion’ of steel use, causing a demand downturn. From a pricing perspective, there is a non-linear impact—when regions with a concentration of raw materials start to see a surge in economic activity, costs start to go up (currency, wages, other operating costs), pushing up the cost curve sharply. When this reverses, the cost curve deflates as rapidly.

Credit Suisse expects that in early years the decline in per-capita steel use globally going forward may not be steep, but even a flattening of demand could have a disastrous effect on both smelting and mining margins of steelmakers.


Lupin records 25% growth in net sales despite challenging conditions in US and Europe

The 3rd largest pharma company in India recorded yet another strong quarter and has managed to expand business in Europe despite challenging conditions

Lupin, the fifth largest and fastest growing generics player in the US and third largest company by sales in India, reported good earnings results for the quarter ended 30 September 2012. Its net sales were up 25% year-on-year (y-o-y) at Rs1,754.48 crore. This was particularly helped by an increase in US sales, which grew from $122 million to Rs144 million, an 18% growth. Despite recession in Europe, it managed to grow its business by 36%. Its operating profit grew 37% y-o-y from Rs348.98 crore to Rs478.18 crore. Its net profit grew slower, at 20% y-o-y to Rs321.94 crore.
According to the Moneylife database, we found out that Lupin had been growing at a really high trajectory in the past three quarters. For instance, its average y-o-y growth rate in net sales in the last three quarters (including the reporting quarter) was 35% while its operating profit y-o-y growth rate for the same period was far higher at 134%. However, this quarter, both have come down to a quite a bit. It remains to be seen how much longer they can sustain this impressive run of numbers. The company is quoting at a market capitalisation of almost 13 times its operating profit, which is slightly towards the premium side and a return on equity of 31%. 
Material costs, salaries have increased, but not much. Material cost increased by 5.4% while salaries increased by less than a percent. This shows the commitment of controlling cost by the company. Capital expenditure stood at Rs127.70 crore during the quarter. Commenting on the results, Dr Kamal K Sharma, managing director, Lupin, said “We have had a record first half, driven by strong operating performance and sustained growth across all our business segments. Our growth momentum continues.” However, challenging conditions in US and Europe continue to remain and the company’s operating working capital cycle has increased to 87 days from 78 days. If the conditions worsen, this number could worsen.
During the quarter, The company received approval for three products from the US Federal Drug Administration (US FDA). One is to market a generic version of Teva Branded Pharmaceuticals (Teva) Nordette Tablets, an oral contraceptive for the prevention of pregnancy in women. The other is to market Irbesartan, an angiotensin II receptor antagonist for the treatment of hypertension and nephropathy in Type-2 diabetic patients. 
Lupin also filed two ANDAs during the quarter. Cumulative ANDA filings with the US FDA now stand at 178 with the company having received 65 approvals to date. The third US FDA approval is the generic version of Forest’s Lexapro Tablets used for acute and maintenance treatment of major depressive disorder in adults and adolescents.
The company is a significant player in the Cardiovascular, Diabetology, Asthma, Paediatric, CNS, GI, Anti‐Infective and NSAID space and holds global leadership positions in the Anti‐TB and ephalosporin segment. 
The stock closed down 1.25% to Rs562.70 on Bombay Stock Exchange (BSE) today.


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