Thursday Market Report: Small rally likely, but may not be sustainable

The market opened with modest gains this morning, upbeat on the economic recovery across the world. However, profit-taking, along with a steep rise in the weekly food inflation numbers, kept the indices range-bound and they closed lower for a third day.

The market opened up, then fell and stayed down through most of the day, breaking the support of 20,200 to close at 20,184.74, a loss of 116.36 points. The Nifty closed at 6,048.25, down 31.55 points. This is a seven-day closing low for the two indices. The three-day drop in the Sensex shows that the rally, which began on 10 December 2010, is losing strength. The next support for the Sensex lies at 20,000 (Nifty at 5,990). The indices are consistently making lower lows and lower highs. Also, institutional investors seem to be reluctant to commit money at current levels. On 5th January foreign institutional investors pulled out Rs240.30 crore and domestic institutions were also net sellers. It has been a slow and laboured rally from 10th December, but now the bulls are losing grip.

The market opened with gains of nearly 100 points this morning, tracking positive global cues. However, choppiness ahead of the release of the weekly food inflation numbers drove the indices into the red in the first hour itself. While the market was range-bound in negative terrain, a sharp spike in the weekly food inflation data pushed it lower in noon trade.

The market lacked conviction and stayed in a narrow range in the post-noon session, touching the day's low. It closed slightly higher after a minor recovery, but a negative close all the same.

The bellwether Sensex touched an intraday high of 20,425.85 in initial trade and a low of 20,107.17. The Nifty swung between a high-low of 6,116.15 and 6,022.30.

Declining stocks outnumbered the gainers. The Sensex had 19 losers against 11 gainers, while the Nifty closed with 33 decliners and 17 advancers. The broader indices underperformed the Sensex with the BSE Mid-cap index tanking 1.18% and the BSE Small-cap index declining 1.04%.

The top performers on the Sensex were Hindalco Industries (up 1.70%), TCS (up 1.39%), NTPC (up 1.33%), Bharti Airtel (up 0.96%) and Reliance Industries (up 0.94%). The major losers were Sterlite Industries (down 3.80%), Bajaj Auto (down 3.60%), ONGC (down 3.17%), Cipla (down 3.05%) and Maruti Suzuki (down 2.99%).

BSE IT (up 0.47%) and BSE TECk (up 0.37%) were the only gainers in the sectoral space. BSE Realty (down 2.41%), BSE Capital Goods (down 1.88%) and BSE Auto (down 1.59%) ended at the bottom of the sectoral table.

Soaring vegetable prices led to a sharp rise in food inflation at 18.32% for the week ended 25th December, from 14.44% in the previous week. The development could prompt the Reserve Bank of India to tighten monetary policy to check further escalation in commodity costs. The number is close to the high 19.90% of a year ago.

Asian markets ended mixed on Thursday as the surge in the value of the dollar boosted Japanese stocks, while Chinese stocks ended lower on profit booking. Jitters ahead of quarterly corporate earnings reports also played on investor sentiments.

The Hang Seng gained 0.12%, the KLSE Composite rose 0.14%, the Nikkei 225 surged 1.44%, the Straits Times advanced 0.78% and the Taiwan Weighted was up 0.42%. On the other hand, the Shanghai Composite declined 0.51%, the Jakarta Composite tumbled 1.25% and the Seoul Composite fell 0.24% in trade today.

Back home, in a bid to boost clean energy generation in the country, the government has amended the Power Tariff Policy, which mandates that states should source at least 3% of their total power purchases from solar energy by 2022.

As per the amendment, the power purchased by the state electricity boards or other state utilities will be complemented by solar specific Renewable Energy Certificate (REC) mechanism, through which solar power generation companies will sell certificates to the buyers.

Renewable energy major Suzlon (down 1.56%) has bagged a $191 million deal from UK-based Vedanta Group to set up, operate and maintain 150MW of wind farms for Hindustan Zinc, a Vedanta Group company.

The wind farms will be set up in Karnataka, Rajasthan, Tamil Nadu and Maharashtra. The first phase of the project will involve a capacity of 50MW and it is expected to be completed by March 2011. The second and final phase of 100MW will be progressively completed by September 2011.

Omnitech Infosolutions (down 6.43%), a business availability and business continuity services provider, has acquired Avensus Netherland BV for $9 million. Avensus offers managed IT services and security, storage and virtualisation solutions to BFSI, healthcare, and government sectors. The company will pay $4.8 million as an upfront payment and the rest will be a deferred payment and earnout which shall be paid over a period of three years.

India's largest power producer, National Thermal Power Corporation (NTPC), (up 1.33%) is conducting a feasibility study in the Maldives to set up solar power projects. The move is expected to enhance the thermal power generator's green footprint.

Meanwhile, NTPC plans to add 105MW of electricity capacity through five solar power projects in India in the next 2-3 years.




6 years ago

NTPC might be feeling the pinch of unclaimed dues from SEBs which are finding the going difficult with electricity at Rs 3 per kWh supplied to them by former. Then how it can join hands with anil to erect a high cost power plant producing electricity at unbelievable cost of Rs 17 per kWh? Governments should soon scarp all solar electricity projects massive investment in which will surely go down the drain in this country where energy is used to be supplied free for votes and where electricity thieves go scot-free. Can somebody file a PIL against solar electricity power plants in India to save public money?



In Reply to alok 6 years ago

My personal opinion is that there must be more research on using the renewable and practically inexhaustible energy of the sun which is given to us free. The trick is to convert it into electric or other easily transmissible form of energy. Prototype power plants should also be built to try to provide energy without too much cost to the consumer. The venture must not end up as a maneuver by promoters to fleece people by charging high premiums for the energy.


6 years ago

Sensex etc are becoming meaningless numbers as money value is being eroded by inflation. Unless interest rates are always at least a few percentage points above the inflation rate,money gets misdirected to unproductive assets like gold and real estate pushing up their prices for speculative profits. The government has been pandering to corporate interests by artificially keeping interest and money value low forgetting the aam aadmi .

Overcapacity to exert further pressure on cement prices: Fitch

New Delhi: Rating agency Fitch today said the continued overcapacity in the cement sector will exert further pricing pressure on the commodity in 2011, leading to squeezed margins for the manufacturers, reports PTI.

"The widening demand-supply gap is expected to affect capacity utilisation levels of cement companies. We expect further pricing pressure in the wake of the lower capacity utilisation," the rating agency said in a report today.

Cement firms are facing pricing pressure since May 2010 due to the over-capacity situation. The price of the commodity in the retail market is now hovering around Rs250 per bag of 50 kg in Mumbai, Rs210 in Delhi, Rs255 in Chennai and Rs240 in Kolkata, respectively.

India's installed cement manufacturing capacity stood at 291.3 million tonnes per annum (mtpa) in FY'10. Around 34 mtpa capacity addition is expected to take place in FY'11 taking the tally to 325.2 mtpa. Demand, on the other hand, is expected to rise by 17 mtpa to 217.6 mtpa in FY11.

"We forecast around 10% demand growth and over 12% capacity addition in 2011. The overcapacity is likely to result in pricing and consequently margin pressures for most cement companies," it said.

The southern region with large demand-supply gap, which is likely to widen further, will witness particularly heavy pricing pressure, followed by the west and east, the rating agency added.

Cement firms' revenues were weak in the June-September 2010 on account of lower prices and are expected to remain subdued with the prices declining.

"Furthermore, raw material and freight costs have also been on a rising trend further affecting the profitability of the cement companies. We expect profitability to remain under pressure in 2011 with prices and costs remaining largely at current levels," Fitch said.

The rating agency did not paint any rosy picture for FY' 12 and FY' 13, either projecting around 68 MT more cement making capacity addition in FY'12 and FY'13 together. The cumulative demand growth, projected during the two fiscals, is only 50 mtpa.


Market may scale new highs, but broking stocks may make you broke

Broking stocks are staring at a bleak future, with a decline in revenues on account of a shift in volumes from cash to derivatives and poor penetration in retail stock investing

Experts have forecast a good year for the stock market. But even as the Sensex climbs to new highs, the picture doesn't look so bright for shareholders of brokerages firms which operate at the heart of the stock market, according to analysts tracking these companies.

Consider this: Since 1 January 2008 up to 5 January 2011, the stocks of major brokerages have fallen by more than 50%. Motilal Oswal Financial Services is down by 55%, Edelweiss Capital is trading down by 72% and India Infoline has plummeted a whopping 79%. Similarly, Indiabulls Financial Services has tanked by 77% and Geojit BNP has fallen by 62% in the period. It is interesting to note that during the three-year period, the BSE benchmark index-the Sensex-has remained flat.

All leading brokerage firms have been performing poorly over the last three years, even as the market is headed higher. The recent quarterly results of these firms show no signs of revival. The total revenue of Motilal Oswal Financial Services in the September 2010 quarter stood at Rs8.95 crores, a sharp decline of 61% over the previous corresponding quarter. India Infoline, which is not as dependent on broking income, still saw September quarter revenues decline by 6% compared to the year-ago quarter.

The main reason for decline in revenues of brokerage firms has been the change in revenue mix and poor penetration of retail stock investing. Despite powerful economic growth and a rising stock market, the retail investor community has not been enthusiastic about stock investing. This is partly due to the inadequate developmental role of the regulator and stock exchanges and too many cases of malfeasance by the broking community.

Moneylife has written a series of stories on the diminishing investor population, with analysis and commentary on various issues such as price manipulation, the role of market regulators, and so on. The reports pointed to the comments by union minister of state for finance, Namo Narain Meena, in response to a question in Parliament, that the Indian capital market is narrow, shallow, illiquid and concentrated in the hands of a few individuals located at a few centres. (Read, 'Different Strokes: Where are the investors?' )

Sardar Sukh Dev Singh Dhindsa, member of parliament, had raised a question in parliament about the number of client identities and PAN identities that traded actively in the market on the National Stock Exchange (NSE), in April-June 2010, and accounted for 50%, 60%, 70%, 80% and 90% of the total trading turnover on average, on a daily basis, in the cash equity market and in the F&O (futures & options) segments. The minister said in his reply that 30.90 lakh investors traded on the NSE's cash market in the three months, but 90% of the investment came from only 1.92 lakh investors-in other words, trading volumes of the bulk of investors are trivial and irrelevant. The number drops to a fourth (41,654) when you consider 80% of the turnover. And, finally, 50% of the turnover came from a shockingly low 451 investors, of which 156 were proprietary traders. He further stated that 106 participants account for half the derivatives market turnover. The minister's comment suggests that the market being very narrow, tracking price manipulation should be easy.

Poor market penetration has combined with the change in market structure itself. Even those who are trading regularly have taken to options, which results in low revenues for brokerage firms.

According to Aditi Thapliyal, analyst - banking and financial services, Execution Noble, "The main reason for the fall in broking stocks is muted growth in the cash segment of the market, with a majority of the volumes coming from the futures and options segment, which is a very low margin business."

This was echoed by Apurva Shah, head of research at Prabhudhas Lilladher, "There are multiple factors for the poor performance of these stocks. The major one is volumes, which are growing, but the commission pool remains very low. Also, there is not much margin from options trading."

Another analyst feels that the low retail participation is also a reason for the low performance of these stocks. "There is very low retail participation, which has taken toll of the stocks of brokerage firms. Currently, there is more participation by foreign investors. Equity investment, which is the main driver for these stocks, is largely under-penetrated in India. May be after a quarter, we would see some improvement," said the vice-president of research at a leading brokerage firm, who requested not to be named.

According to Mr Shah, "It is tough to say if these stocks will perform anytime soon as the cash segment remains mired in low volumes. In the near future there won't be any change. Long term we can see some change as valuations may come down."

Within this segment, there would be some stocks which would do better than the others. "Our top pick among broking stocks is Edelweiss. We expect the stock to outperform its broking peers given that its financing segment in particular is showing a great deal of traction. For India Infoline, the stock is yet to recover from the reputational damage to its franchise from its involvement in the Money Matters QIP," Ms Thapliyal said.




6 years ago

Insurance is sold every corner of India, because agents are taken care of by the insurance companies. No one worried about return from insurance and it is also accepted by retail investor. When agents are getting 2% upfront commission for MF, MFs are not penetrated in INdia. Now who will take the message to Retail Investor. "Now rich will become richer" because of no upfront commission. Everyone knows there is no free lunch. Instead of correcting the ill brokers, mf industry is in doll drum.

Devjeet Chakraborty

6 years ago

Broking companies are too focused in brokerage generation through fancy products or taking risky positions for their clients. None of the Brokerage Company is focusing in increasing the market. All of them have a funny Compensation and Incentive structure. Employees will justify his employability by generating min 3 times of his/her CTC and will earn incentives only when he or she is able to generate more than 4 times of his/her CTC. So, the structure makes their employees focus in for high account margin, taking position in cash & derivatives and all the funny stuffs you can think of.
None of the Company is making any serious effort to expand & improve the market. Sales and Marketing has taken a back seat. These are the primary reason for lacklustre performance of broking companies. And in near future things are not going to improve also.

R Balakrishnan

6 years ago

Retail business is humbug. For the volume of retail business, the market cannot support more than twenty odd brokers. with close to a thousand, it is a joke! The zero entry barrier to this business is the cause.
The listed ones rely on 'other' business- captive nbfc, investment banking, FII broking, selling research etc to make money. That space is fully occupied.


6 years ago

Food inflation is quite high and interest rates are going up , in these scenario invest in stocks with high margin of safety.

nn bala

6 years ago

The broking houses themselves encourage future & option tradng. I get atleast 10 to 15 SMSs per day from two broking houses all related to futures and options buy or sell calls. If it is a low margin segment why do they push this so hard.

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