Tuesday’s Market Preview: Cautious opening indicated; RBI policy review eyed

The local market is likely to open on a cautious note, ahead of the Reserve Bank of India’s (RBI) monetary policy review. Volatility would also be a part of the trading session, as seen in the futures and options expiry week. Heavy-weights like HUL, Sterlite Industries, Dr Reddy’s Labs, Indiabulls Securities and UltraTech Cement, among others will announce their quarterly numbers today.

On the global front, Wall Street continued its winning spree with the key indices closing with modest gains on Monday. The upmove was supported by merger and acquisition announcements, buyback plans and dividend prospects. Tracking the US markets, the Asian pack was mostly in the green in early trade today. The SGX Nifty was up 22 points at 5,763 compared to its Monday’s close of 5,741.

The Indian market opened on a positive note yesterday, boosted by good quarterly numbers announced by State Bank of India and Reliance Industries over the weekend. Overcoming initial hiccups, the indices touched their day's highs around noon. Choppiness was evident, ahead of the RBI monetary policy review, to be announced tomorrow. Analysts opine that the central bank might succumb to economic pressures and resort to a rate hike in a bid to bring down spending and curb price rise. The market pared some of the gains and stayed in a narrow range in post-noon trade till the end of the session.

As expected, the market moved in the positive direction today. It traded above Friday's closing for the entire day. The Sensex ended 144 points higher at 19,151 and Nifty ended 47 points higher close at 5,743. The market has stopped falling and is making a basing action. The RBI will conduct a review of its monetary policy tomorrow. The market direction will be clear only thereafter. Our sense is that the stock prices have factored in a 50 basis point hike. The market may decline following the monetary policy but that may set the stage for a rally.

Markets in the US closed with modest overnight, boosted by corporate announcements. Smurfit-Stone Container Corporation vaulted 27% as Rock-Tenn Company agreed to buy the packaging company for $3.5 billion. Intel Corporation gained 2%, boosting the technology sector after the world’s largest chipmaker added $10 billion to its buyback plan. Warren Buffett’s Berkshire Hathaway Incorporated rose 3.2%, the most since June, amid speculation the company may start paying a dividend this year.

Meanwhile, president Barack Obama’s State of the Union address later today will focus on reducing deficit, providing additional jobs and putting the economy back on track.

The Dow extended rose 108.68 points (0.92%) to end at 11,980.52. The index hit a fresh 52-week high intra-day at 11,982.94, within kissing distance of the 12,000 mark The S&P 500 added 7.49 points (0.58%) to close at 1,290.84, while the Nasdaq gained 28.01 points (1.04%) to 2,717.55.

Markets in Asia were mostly in the green in early trade on Tuesday, boosted by positive cues from the US overnight. Material stocks received a boost with the London Metal Exchange’s base metal index rising 0.4% on Monday, gaining for the second day in a row.

The Hang Seng gained 0.44%, the Jakarta Composite advanced 0.87%, the Nikkei 225 surged 0.94%, the Straits Times rose 0.24% and the Seoul Composite was 0.85% higher. On the other hand, the Shanghai Composite declined 0.55% and the Taiwan Weighted lost 0.06%.

Back home, the RBI on Monday said the government should start spending to ease the liquidity situation that has significantly tightened towards the end of 2010.

“It is expected that the government would spend in order to meet its committed expenditure for the year during the ongoing quarter, which is the last quarter of the financial year,” the apex bank said in its macroeconomic review released yesterday.

The liquidity conditions tightened significantly to the point of imposing constraints on growth in the last few months of 2010, it said.

As of December, the government surplus increased at Rs1,44,437 crore compared to Rs93,425 crore in November, 2010. With government cash surplus beginning to flow back into the system, the liquidity position would improve, it added.

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Monday Market Report: Will the Sensex head higher?

RBI policy may lead to a knee-jerk reaction and a subsequent rally

The market opened on a positive note, boosted by good quarterly numbers announced by State Bank of India and Reliance Industries over the weekend. Overcoming initial hiccups, the indices touched their day's highs around noon. Choppiness was evident, ahead of the Reserve Bank of India's monetary policy review, to be announced tomorrow. Analysts opine that the central bank might succumb to economic pressures and resort to a rate hike in a bid to bring down spending and curb price rise.

The market pared some of the gains and stayed in a narrow range in post-noon trade till the end of the session.

As expected, the market moved in the positive direction today. It traded above Friday's closing for the entire day. The Sensex ended 144 points higher at 19,151 and Nifty ended 47 points higher close at 5,743. The market has stopped falling and is making a basing action. The RBI will conduct a review of its monetary policy tomorrow. The market direction will be clear only thereafter. Our sense is that the stock prices have factored in a 50 basis point hike. The market may decline following the monetary policy but that may set the stage for a rally.

The market breadth on the key benchmarks was tilted in favour of the advancing stocks today. The Sensex closed with 17 gainers and 12 losers while 29 stocks on the Nifty closed in the green and 21 closed lower. The broader indices closed a tad higher with the BSE Mid-cap index gaining 0.84% and the BSE Small-cap index rising 0.79%.

BSE Bankex (up 2.40%), BSE Consumer Durables (up 1.93%) and BSE PSU (up 1.20%) were the top gainers in the sectoral space. BSE Oil & Gas (down 0.21%) and BSE Healthcare (down 0.03%) were the sectoral losers.

The top Sensex gainers were State Bank of India (up 3.66%), Tata Steel (up 3.06%), ONGC (up 3.05%), Maruti Suzuki (up 2.96%) and HDFC (up 2.53%). The major losers were Wipro (down 2.57%), Reliance Industries (down 1.57%), Cipla (down 1.49%), Hindalco Industries (down 1.11%) and Reliance Communications (down 1.07%).

Finance minister Pranab Mukherjee today said the Centre is working at a "political level" with states for countrywide rollout of Goods and Services Tax (GST), but it may take some time to arrive at a consensus on the new indirect tax regime. Once implemented, GST will subsume indirect taxes like excise duty and service tax at the central level and VAT at the state level, besides other local levies.

Markets in Asia settled mixed on optimism exhibited by corporates in their quarterly numbers, a sign that the economic recovery is on track. However, cautiousness prevailed in China over possible rate-tightening moves.

The Nikkei 225 gained 0.69%, the Straits Times added 0.04% and the Seoul Composite gained 0.59%. On the other hand, the Shanghai Composite declined 0.68%, the Hang Seng fell 0.31%, the Jakarta Composite tanked 0.99%, the KLSE Composite fell 0.29% and the Taiwan Weighted settled 0.26% lower today.

Back home, foreign institutional investors were net sellers of stocks worth Rs368 crore on Friday. On the other side, domestic institutional investors were net buyers of equities worth Rs223.14 crore.

Bharti Airtel launched its third generation (3G) services in Karnataka today. It aims to cover 40 cities by March and expand the services to 1,500 cities and towns in a year's time. Similarly, Reliance Communications is set to launch the services in 12 cities of Rajasthan in a month. Bharti Airtel was down 0.82% while Reliance Communications fell 1.07% today.

Hero Honda Motors (down 0.33%) today said it has executed a final binding licensing agreement with Japan's Honda Motor Company. The agreement paves the way for the Japanese company to exit Hero Honda Motors, its joint venture with the Munjals-promoted Hero Group. The agreement pertains to the existing and new products that Hero Honda Motors will offer in the Indian market once the sale of the Japanese firm's stake to Hero Group is concluded.

McNally Bharat Engineering Company (up 3.88%) has informed the BSE that the company has received an order from BHEL for design, engineering, manufacture, supply and erection, testing & commissioning of stacker cum reclaimer and wagon tippler for the 2x520MW TPP for Hinduja National Power Corporation at Vizag for a value of around Rs33.45 crore.

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Q3FY11 analysis: PNB asset quality under pressure, RIL strong margins, Wipro profit lags rivals

Punjab National Bank’s reliance on bulk deposits continues to be a worry; Reliance Industries’ higher profits due to higher other income somewhat disappointing; Wipro sees model volume growth, flat margins

Punjab National Bank (PNB)

Asset quality continued to be under pressure. While net interest income (NII) was at the higher end of expectations, profit was at the lower end, mainly because of the sharp rise in loan loss provisions (up 1.5 times year-on-year) and higher than expected provisions for pension and gratuity liabilities.

PNB’s reliance on bulk deposits continues to be a worry and so does the falling CASA ratio (down to 39% from 41% in the September quarter). These factors coupled with a sharp rise in deposit rate are estimated to lead to a margin contraction. Loan growth is also expected to moderate due to a delay in infra projects (this has been the fastest growing area for the bank).

PNB restructured an additional Rs800 crore of loans, which make up 6.5% of the total loans. Incremental delinquency has been higher than last year. For the nine months ended 31st December it is around Rs3,100 crore compared to Rs2,000 crore in the corresponding period last year.

The bank has assumed its total pension liability due to the second pension option at Rs3,600 crore and expects to provide for this over the next five years. Therefore, annually, the charges work out to Rs720 crore.

Punjab National Bank Q3 FY11 highlights

Rs crore

Dec 2009

Sep 2010

Dec 2010

Net interest income

2,212.3

 2,976.7

 3,203.3

Employee expenses

832.7

 1,113.1

 1,223.5

Provisions

281.9

 516

 713.9

Net profit

1,011.3

 1,074.5

 1,089.8

NIMs %

3.6

4.1

4.1

Gross NPLs

3,155.6

 4,024.8

 4,541.1

Gross NPLs %

1.8

1.9

2.0

 Over a three-month period PNB’s share price is down 12% compared to a 4% Sensex fall. Over a month the share (down 6%) has underperformed the Sensex (down 4%).

 Reliance Industries

Reliance’s net sales and net profit were at the higher end of expectations. However, it’s somewhat disappointing that the profits were higher on account of higher other income and lower tax.

The management has indicated that KG-D6 gas output may not rise significantly in the near term. Brokers who haven’t already done so are revising FY12-13 output levels to 50-55 mmscmd. While gas production from the MA field has ramped up to 7-8 mmscmd (largely in line with expectations) production at the more important D1-D3 fields has fallen to 44 mmscmd. RIL had estimated that it would achieve a peak of 80 mmscmd. Brokers now assume the peak to be achieved in FY14 which is a severe setback.

As expected, petrochemical volumes and margins were strong. Crude throughput was good at 16.1mt cf and gross refining margins were also strong at $9/bbl. Since gas is now not going to be a major earnings driver, refining margins will be back in focus. RIL will need to maintain its refining margins above $9 per barrel in FY12 to avoid downgrades. Petrochemical margins will also need to be strong.

Reliance Industries Q3 FY11 highlights

Rs crore

Dec 2009

Sep 2010

Dec 2010

Net sales

56,856

57,479

59,789

Net profit

4,008

4,923

5,136

 

Over a three-month period, Reliance’s shares (down 8%) have underperformed the Sensex (down 4%).  Over a month, the shares are down 8% compared to a 4% fall on the Sensex. The shares were up about 2% on the day of the results.

 WIPRO

Both IT service revenues and net profit were in line with estimates. Modest volume growth of 1.5% and flat margin in IT services despite +0.6% onsite and 3.7% offshore productivity gains were key disappointments.

More large accounts (the company now has three $100 million+ and four $90 million+ relationships) and growth of its enterprise business are positives, but the attrition rate (24% annualised) continues to be a worry.

TK Kurien’s appointment as CEO of the IT business has been taken well by analysts.

Wipro's Q3 FY11 highlights

 

Dec 2009

Sep 2010

Dec 2010

IT services revenues ($ million)

 1,127

 1,273

 1,344

Net income (Rs crore)

 1,193.6

 1,280.5

 1,309.9

 Over a three-month period, Wipro’s shares (up 3%) have outperformed the Sensex (down 4%).  Even over a month, Wipro’s shares are flat compared to a 4% fall on the Sensex.

 (This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security. Some of the opinions expressed in this article are the author's own and may not necessarily represent those of Moneylife.)

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