Wednesday Closing Report: The bears may withdraw temporarily

Volatile trading continued to be the highlight for the third consecutive day. Sluggish global cues added to the woes, pulling the market down for the second day in a row.

The market picked up momentum after a soft start this morning on the back of tardy global cues. The indices stepped into the green in early trade in the midst of a volatile session. However, ups and downs continued even today with the market witnessing indecisive trade. The market touched the day's high in the post-noon session but ended off the day's low, in the red for the second straight day.

The Sensex settled 110.98 points (0.56%) lower at 19,872 after swinging between a high-low of 20,044 and 19,822 during the session. The Nifty stood at 5,982, 45.20 points (0.75%) at close of trade. The index touched an intraday high of 6,038 and a low of 5,966.

In line with the indices, the overall market breadth was also negative. The Sensex had 21 stocks on the losers' side against nine advancing stocks. The Nifty ended with 38 declining stocks while 12 stocks settled in the green. Among the broader indices, the BSE Mid-cap index lost 0.03% and the BSE Small-cap index was down 0.54%.

The gainers in the Sensex list included Tata Power (up 1.16%), NTPC (up 0.91%) and Larsen & Toubro (L&T) (up 0.54%). The losers were led by Sterlite Industries (down 3.54%), HDFC (down 2.78%) and Tata Steel (down 2.76%).

The sectoral gainers were BSE Capital Goods (up 0.20%), BSE HealthCare (HC) (up 0.16%) and Oil & Gas (up 0.16%). BSE Metal (down 2.22%), BSE Realty (down 1.37%) and BSE Consumer Durables (CD) (down 1.11%) were the prominent sectoral losers today.

Markets in Asia ended mostly lower as the Chinese rate hike, announced on Tuesday, spooked markets in the region. While Chinese authorities claim that the move will rein in inflation, other regional economies are worried that it would slow the pace of the global recovery.

The Hang Seng was down 0.87%, Jakarta Composite declined 0.39%, KLSE Composite was down 0.13%, Nikkei 225 tumbled 1.65% and Straits Times ended 0.41% lower. On the other hand, Shanghai Composite added 0.07%, Seoul Composite rose 0.71% and Taiwan weighted advanced 0.97%.

Wall Street closed sharply lower overnight on concerns that banks will be forced to buy back bad mortgages. The worries followed reports that a group of institutional investors and the Federal Reserve Bank of New York were suing the Charlotte, NC, a lender, over mortgage securities. Besides, the sudden increase in interest rates by the Chinese government on Tuesday also weighed down on the investors.

The Dow tumbled 165.07 points (1.48%) to 10,978. The S&P 500 shed 18.81 points (1.59%) to 1,166. The Nasdaq lost 43.71 points (1.76%) to 2,437.

Participation by institutional investors was muted on Tuesday. Foreign institutional investors were net buyers of stocks worth Rs107 crore while domestic institutional investors were net buyers of equities worth Rs240 crore on the same day.

Jet Airways (India) (up 0.03%) has reported 37.1% growth in its domestic passenger traffic during the month of September 2010. It carried 7.61 lakh revenue passengers last month against 5.55 lakh in September 2009. Improved global business scenario and strategic marketing and network initiatives taken by the company helped its performance.

Similarly, Jet's international operations last month also witnessed robust growth of 36.4%, carrying 3.61 lakh revenue passengers, as compared to 2.65 lakh in the year ago period.

The country's largest lender State Bank of India (SBI) (down 0.87%) today increased its base rate or the minimum lending rate for the new borrowers by 10 basis points (bps) to 7.6%, a move that would make all kinds of advances, including corporate loans, costlier.

The bank has revised the base rate below which bank cannot offer loans, upwards by 10 basis points from 7.5% to 7.6%, effective from 21st October 2010, SBI informed the Bombay Stock Exchange (BSE).

Pharmaceutical and biotechnology firm Wockhardt (up 0.14%) today said it has received tentative approval from the US Food & Drug Administration (USFDA) to sell generic version of Sanofi Aventis' Allegra-D, used for treating allergic rhinitis.

In a statement the company said it has received tentative approval from the USFDA for marketing the Fexofenadine HCl 60mg + Pseudoephedrine HCL 120mg extended release tablets, which is used for treatment of seasonal allergic rhinitis without causing drowsiness.


Currency Wars: Why are they now hitting a low note?

In the present environment of anaemic economies no one wants to be on the losing side with a “winning” strong currency

If you travel to either Buenos Aires or Bucharest, you will notice that both look something like Paris. In the last great era of globalisation from about 1870 until the First World War, Pax Britannica allowed both capital and styles to flow easily between different countries. Globalisation is not a technological imperative, but a result of coordinated trade laws. It is now under threat by a new war, a currency war.

 The probability of a currency war must be taken in context. A currency war to paraphrase Clausewitz is "nothing but the continuation of state policy with other means." The object of state policy is always to protect the state or, to be more specific, to protect the political futures of those politicians who happen to be running the state. Politicians are notoriously short-sighted, so some of the effects of the present dislocations caused by competitive currency devaluations may have longer lasting and more general effects than is currently anticipated.

 Of course a currency war is simply an aspect of a trade war. The WTO has been successful in limiting protectionism, but recently it has been rising. The beginning of a currency war is just another example of this increase. It is severe because of its size. Some $3.2 trillion worth of currencies are traded each day. Unlike trade, it is a zero-sum game. For one country's currency to rise, another country's currency must fall. In other words, there are winners and losers. In the present environment of anaemic economies no one wants to be on the losing side with a "winning" strong currency.

 Most of the strong currency losers these days belong to emerging market currencies including India's rupee, South Africa's rand, the Brazilian real and the Thai baht. Some developed countries like Israel, Switzerland and Australia are losing with strong currencies. Even the yen and the euro are on the losing side. Of course, the winning weak currencies belong to the two largest economic powerhouses in the world, the United States and China.

Many of the emerging markets have been relatively successful in avoiding much of the pain of the recession. Anticompetitive currencies are the last thing they need. Basically they have three rather poor choices. They can just do nothing and let their exchange rates appreciate, which harms their exports. Second, they can intervene by selling their local currency and accumulating unwanted dollars, but this can threaten domestic monetary stability. Finally, they can use regulations like taxes and controls to stem the massive capital inflow. Presently we were seeing examples of all three.

 Despite the variety of different methods of controlling the flood of foreign capital, they all share one thing in common. None of them work. According to Kristin Forbes at MIT there was no significant impact on the volume of capital inflows or currency appreciation. Still many of these countries, unlike the US, are highly dependent on exports and feel that they must do something to keep their exports competitive.

China has the same problem. Its premier, Wen, warned of dire consequences to any revaluation. Mr Wen stated, "If we increase the yuan by 20% or 40%, as some people are calling for… many of our exporting companies would have to close down, migrant workers would have to return to their villages." Mr Wen further warned that such economic dislocations would result in Chinese "social and economic turbulence, that it would be a disaster for the world." Of course China's undervalued currency causes dislocations as well, just not in China.

The other perpetrator and potential instigator of a global currency war is the US central bank, the Federal Reserve. The Federal Reserve in its last meeting stated that the US economy was not growing fast enough, so they have hinted that it could flood the economy with as much as a half a trillion dollars through quantitative easing. This flood of money has driven the dollar to historic lows and inflated other currencies, markets and commodities.

With the two largest economies in the world fighting tooth and nail to devalue their currencies and smaller countries anxiously trying to protect themselves with limited resources and potentially ineffectual policies, what chance is there to avoid the currency war or a larger trade war?

Sadly very little. Countries have very different markets and different circumstances, so cannot agree on a coordinated response. There are also no quick fixes for the present imbalance. As professor Pettis of Peking University notes: "China, and surplus countries such as Germany and Japan, must understand that their policies damage the rest of the world. But the world also needs to understand that these countries cannot adjust quickly without damaging internal consequences." So while China can allow its currency to appreciate they must do so slowly. And while the United States economy will ultimately grow, its recovery will also take time. In the present climate, though, no country is really willing to wait. The consequences of this impatience will no doubt hurt us all.

(The writer is president of Emerging Market Strategies and can be contacted at [email protected] or [email protected])


Earnings Analysis: Sesa Goa, HDFC Bank

Sesa lowers volume estimates; HDFC Bank retail loan growth very strong


Net sales: Rs9.07 billion (expected range Rs6 billion-Rs10.2 billion)
Net profit: Rs3.88 billion (expected range Rs2.6 billion-Rs4.8 billion)


  •  Realisations at $76/tonne were much lower than market expectations; CLSA has predicted a drop in global iron ore prices by the end of the year based on higher supplies from India after monsoons and more supplies coming in from Brazil and Australia.
  •  Volume growth was in line with expectations. However, Sesa lowered FY2011E volume growth guidance to 10% from 20% because of the ban on iron ore exports by the Karnataka government and logistics constraints for iron ore shipments in Orissa and Goa. Karnataka made up 20% of volumes in FY10.
  •  What came across in its conference call after earnings is that its plan to expand production capacity to 50 million tonnes (MT) by the end of FY13 may not happen chiefly because of delays in getting environment clearance. The expansion of its Orissa mine may also be delayed. Many brokerages will probably lower their estimates. 
  •  The general consensus conclusion about its Cairn acquisition is that it was not in the value zone and took away from its main business - most fair values for Cairn range between Rs280 and Rs340 but Sesa has paid Rs355/share (if its open offer is not fully subscribed it will have to acquire the rest of the shares from Vedanta at Rs405/share). However, the acquisition is likely to add to its EPS for FY12 and FY13 by more than 10% and 20% respectively.

Conference call highlights:

  •  Iron ore production cost (including royalties) was $90-95/tonne for the Orissa mine and $40/tonne for the Karnataka mine.
  •  Sesa reversed the provision it had created in Q1 for taxes since it now believes its profits could be lower than it initially estimated for FY11. It believes that its tax rate for the year could be 15%-16% vs. 18% earlier. Its EOU benefits expire in this financial year after which it will have to pay full tax.
  •  It has environment clearance for mining for 25MT (17MT in Goa, 6MT in Karnataka, additional 2MT in Orissa).
  • Its capital expenditure in FY11 will be Rs14 billion of which it will spend Rs12 billion for pig iron and mine capacity expansion.
  •  Its cash and cash equivalent at the end of September were Rs76 billion.


NII: Rs25.26 billion (expected range Rs24.59 billion-Rs25.55 billion)
Net profit: Rs9.11 billion (expected range Rs8.98 billion-Rs9.61 billion)


  •  Both net profit and NII were at the higher end of expectations; loan growth at 38% y-o-y was also on the higher end of the range due to some short-term wholesale loans; core loan growth was at 33%. 
  •  Pace of NPLs is coming off and this will mean lower loan loss provisions cushioning impact of possible lower fee income growth in the future.
  •  Corporate loan book grew faster than the retail book at 46% y-o-y (9% q-o-q); retail was up 31% y-o-y (8% q-o-q) but makes up for 52% of the total book. Among retail loans, auto loans were up 36% y-o-y at Rs232 billion; retail loan growth is high considering HDFC Bank did not buy any loans from HDFC in the quarter.
  •  CASA, which had dipped in Q1, was back to 50% plus levels; HDFC Bank's deposit growth remains above industry average at 30% y-o-y.
  •  As expected, cost of funds increased and led to a marginal fall in NIMs to 4.2%.
  •  Fee income declined q-o-q and it made a treasury loss of Rs0.5 billion against a profit of Rs1.6 billion in Q2FY10; fee income growth continues to lag credit growth.
  • Staff expenses have risen sharply leading to a rise in operating expenses. 
  •  It opened 40 branches and 328 ATMs in Q2 taking its total branch network to 1,765 and ATMs to 4,721. 

(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).



Shibaji Dash

7 years ago

Anil Agarwal's Cairn gamble has pushed his entire stable to the realm of predictive astrology, at least for the time being, say until the endof FY 10-11.

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