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MARKET REVIEW 10th Feb, 2011

The key benchmark indices declined for the third straight day on weak global stocks. The barometer index BSE Sensex hit seven-month closing low and the 50-unit S&P CNX Nifty tumbled to near eight-month closing low. Reliance Infrastructure (R-Infra) jumped after the company on Wednesday said the board will consider buyback along with Q3 results on 14 February 2011. Index heavyweight Reliance Industries (RIL) edged lower in volatile trade. IT and some realty stocks were weak. Healthcare and auto stocks rose. Banking stocks were mixed. The BSE 30-share Sensex was down 129.73 points or 0.74%, up close to 100 points from the day’s low and off close to 175 points from the day’s high. The market breadth was weak.

Intraday volatility was immense. The market edged lower in choppy early trade on weak Asian stocks. The Sensex declined once a gain to hit fresh intraday low in morning trade after trimming initial losses. The market once again trimmed losses after hitting fresh seven-month lows in mid-morning trade. The market weakened once again after recovering sharply from near eight-month low in early afternoon trade. Volatility continued as market came off lows in afternoon trade. Auto and banking stocks led a sharp recovery as the key benchmark indices erased all the intraday losses to turn positive for a brief period in mid-afternoon trade.

The food price index rose 13.07% and the fuel price index climbed 11.61% in the year to 29 January 2011, government data on Thursday showed. In the prior week, annual food and fuel inflation stood at 17.05% and 11.61%. The primary articles price index was up 16.24% in the latest week, compared with an annual rise of 18.44% a week earlier.

Foreign institutional investors (FIIs) sold shares worth a net Rs 284.60 crore on Wednesday, 9 February 2011, lower than an outflow of Rs 531.60 crore on Tuesday, 8 February 2011. FII outflow in February 2011 totaled Rs 1301.60 crore (till 9 February 2011). FIIs had sold equities worth Rs 4813.20 crore in January 2011. FII outflow in the calendar year 2011 totaled Rs 6114.70 crore (till 9 February 2011).

The Central Bureau of Investigation (CBI) widened its probe in 2G scam with the arrest of Shahid Balwa, managing director of DB Realty and vice chairman of Etisalat DB, the venture between DB Group and Abu Dhabi’s Etisalat on Tuesday, 8 February 2011. Balwa’s counsel on Wednesday contended that the company of his client was being singled out and he was being made “scapegoat” despite the involvement of more firms in the case.

Swan Telecom and Unitech Telecom had together caused a loss of over Rs 7000 crore to government exchequer as both had offloaded their shares for hefty sums after getting the 2G spectrum, according to CBI. In a five-page FIR, CBI said the officials of the Department of Telecom and some private companies entered into a criminal conspiracy and caused wrongful gains to themselves. DB Group sold a 45% stake in Swan Telecom to Etisalat after the operator was granted a licence. Swan Telecom has since been renamed Etisalat DB.

The Comptroller and Auditor General of India’s (CAG) report in November 2010 said rules were flouted when telecom licences were awarded, which led to many ineligible firms winning licences. Telecoms minister A Raja was sacked soon after the report was released. He was arrested this month on charges of misuse of ministerial office and criminal misconduct.

The Q3 December 2010 results season is drawing towards a close. The results announced so far showed that the combined net profit of a total of 2,370 companies rose 22% to Rs 83211 crore on 19.5% rise in sales to Rs 819849 crore in Q3 December 2010 over Q3 December 2009.

There are concerns of slowdown in corporate profit growth going ahead. With the rise in key policy rates by the Reserve Bank of India (RBI) recently, interest cost will only rise in the coming quarters that could hurt earnings going forward. If raw material costs keep rising at a fast clip, companies will feel the heat of slowing sales growth and rising cost of operations that could start eating into profit growth.

European shares edged lower on Thursday, with Air France falling after a profit warning. The key benchmark indices in France, Germany and UK declined by between 0.32% to 0.9%.

Asian markets succumbed to a bit of profit taking on Thursday, after the head of the Federal Reserve signaled the US economic recovery was still fragile and warned against sharp spending cuts. Fed Chairman Ben Bernanke suggested US economic conditions were still too weak for the central bank to pull back on its vast monetary stimulus. The key benchmark indices in Hong Kong, Japan, Indonesia, South Korea, Singapore and Taiwan fell by between 0.11% to 1.89%. But, China’s Shanghai Composite rose 1.62%.

US index futures reversed initial gains. Trading in US index futures indicated that the Dow could fall 50 points at the opening bell on Thursday, 10 February 2011.

In US market action on Wednesday, investors took profits after a recent rise in stocks but a late-hour rally in Bank of America shares helped the Dow squeeze out its eighth straight day of gains. Bernanke told a congressional committee that the labor market remains sluggish and he continues to believe that inflation will remain subdued.

The BSE 30-share Sensex was down 129.73 points or 0.74% to 17,463.04, its lowest closing level since 5 July 2010. The Sensex lost 230.18 points at the day’s low of 17,362.59 in mid-morning trade. The index rose 44.11 points at the day’s high of 17,636.88 in early trade.

The S&P CNX Nifty was down 27.75 points or 0.53% to 5,225.80, its lowest level since 15 June 2010. The Nifty hit low of 5,196.80 in mid-morning trade.

The BSE Mid-Cap index was up 0.11% and outperformed the Sensex. The BSE Small-Cap index was down 0.86% and underperformed the Sensex.

Sectoral indices on BSE were mixed. The BSE Auto index (up 0.83%), Power index (Up 0.82%), Healthcare index (up 0.58%), Capital Goods index (up 0.03%), FMCG index (down 0.04%), Metal index (down 0.17%), Consumer Durables index (down 0.24%), and banking sector index Bankex (down 0.31%), outperformed the Sensex. The BSE PSU index (down 0.76%), Oil & Gas index (down 0.81%), Realty index (down 1.03%), and IT index (down 1.53%), underperformed the Sensex.

The market breadth, indicating the health of the market, was weak. On BSE, 1,848 shares declined while 1,035 shares advanced. A total of 85 shares remained unchanged.

Among the 30-member Sensex pack, 16 declined while the rest rose.

BSE clocked turnover of Rs 3558 crore, lower than Rs 3942.21 crore on Wednesday, 9 February 2011.

Index heavyweight Reliance Industries (RIL) was down 1.33% to Rs 899.75. The stock hit a 52-week low of Rs 885.10 on NSE today, 10 February 2011. As per reports, RIL’s ambitions to become a key shale gas player will push it to accept the $3.2 billion deal between Chevron Corp and Atlas Energy despite concerns but RIL would finalise the strategy later this week. RIL had acquired shale acreages from Atlas Energy last April, outbidding Chevron. Later US oil major announced acquisition of Atlas.

Cairn India rose 0.43%. The company’s consolidated net profit jumped 590.85% to Rs 2010.12 crore on 425.87% rise in total income to Rs 3130.60 crore in Q3 December 2010 over Q3 December 2009. The company announced Q3 results after market hours today.

Some healthcare stocks edged higher. Matrix Laboratories, Lupin, Ranbay Laboratories and Sun Pharmaceutical Industries rose by between 0.19% to 3.6%.

Most auto shares rose on bargain hunting after recent sharp losses. India’s top truck maker by sales Tata Motors rose 2.37% ahead of its Q3 results tomorrow, 11 February 2011. India’s top bike maker by sales Hero Honda Motors rose 0.87%. The stock had hit a 52-week low of Rs 1412.20 on Wednesday.

Car maker Maruti Suzuki India rose 0.15%, in volatile trade. The stock hit a 52-week low of Rs 1146 today. India’s second largest bike maker by sales Bajaj Auto gained 0.53%.

Mahindra and Mahindra (M&M) was flat in volatile trade after company unveiled plans to acquire a 38% stake in BSE-listed EPC Industrie. The acquisition would be through preferential allotment of shares by EPC, following which M&M will make the mandatory open offer to acquire a 20% stake in the Nashik-based micro-irrigation firm.

Banking stocks were mixed. India’s largest private sector bank by net profit ICICI Bank rose 0.4% to Rs 961.50, off the day’s high of Rs 974. India’s second largest private sector bank by net profit HDFC Bank fell 0.13% to Rs 2019.30, off the day’s high of Rs 2046.70.

India’s largest bank by net profit and branch network State Bank of India fell 3.64%. State Bank Of India has announced that the bank has concluded an issue of Senior debt, fixed rate bonds, Under the medium term note (MTN) Programme, having a maturity of 5 years at a coupon rate of 3.375% p.a. payable annually in the form of Regulation-S Global Notes. The bonds will be issued through bank’s London branch as of 22 February 2011 and shall be listed on six Swiss exchanges.

Power Finance Corporation fell 1.56% after the government on Thursday approved a follow-on share sale by the state-run power sector finance firm. The company will issue fresh shares for 15% of the pre-issue capital and the government will sell 5%, the government said in a statement.

IT stocks fell after Federal Reserve chairman Ben Bernanke signaled the US economic recovery was still fragile. US is the biggest market for Indian IT firms. India’s second largest IT exporter by sales Infosys declined 2.27% and India’s third largest IT exporter by sales Wipro shed 1.25%. India’s largest IT exporter by sales TCS fell 0.67%.

Reliance Infrastructure (R-Infra), part of the Anil Ambani group (ADAG) jumped 9.45% after company said its board will meet on 14 February 2011 to consider a share buyback. The stock was the top gainer from the Sensex pack. The company announced the board meeting for buy back after market hours on Wednesday after the stock slumped 18.79% on that day.

Shares of other Anil Dhirubhai Ambani group (ADAG) stocks also rebounded after plunging on Wednesday. Reliance Capital, Reliance Communications and Reliance MediaWorks jumped by between 1.53% to 4.97%. Reliance Power fell 0.44%, reversing initial gains. On Wednesday, Reliance Capital had tumbled 14.05% and Reliance MediaWorks had tanked 16.11%. Reliance Communications had plunged 14.32%.

ADAG said after trading hours on Wednesday that a series of baseless and motivated rumors were spread by rivals, which was accompanied by vicious and illegal bear hammering of the group shares. It said it had asked the Securities and Exchange Board of India and the stock exchanges to investigate.

Most of the interest rate sensitive realty stocks extended recent steep losses on concerns higher interest costs and higher property prices may dent demand for residential units. Ackruti City, Sobha Developers, Sunteck Realty and Peninsula Land fell by between 0.52% to 8.86%.

Unitech tumbled 5.03% extending recent losses, with the firm named by the Central Bureau of Investigation as one the beneficiaries of cheap spectrum allocation in 2008. The stock hit 52 week low of Rs 32.35 today. The CBI said Unitech was allotted licences for 22 cricles for Rs 1658 crore. It later offloaded its 60% of shares in the licenses to Telenor of Norway for Rs 6100 crores even before the roll-out, CBI said.

Some cement stocks recovered after recent steep losses. ACC, Jaiprakash Associates and Ambuja Cements rose by between 0.91% to 5.25%.

Some telecom stocks fell after the telecom regulator proposed steep increases in the price of second-generation (2G) mobile radio waves. Idea Cellular (down 2.19%) and Bharti Airtel (down 2.8%) dropped.

The Telecom Regulatory Authority of India (TRAI) has recommended a six-fold hike in the price of start-up 2G spectrum and has said that every Mhz of additional spectrum (on an all-India basis) beyond the contracted limit of 6.2 megahertz (Mhz) will cost a massive Rs 4,571.87 crore. All spectrum with existing telecom companies, which is more than the 6.2 megahertz (Mhz) that is being provided under the license be repriced. As a result, Bharti Airtel is now facing a liability of Rs 4,000 crore, Idea Cellular Rs 1,316 crore, MTNL Rs 883 crore and Reliance Communications Rs 70 crore.

TRAI’s proposals to the government come in the wake of a telecoms scandal that has shaken the political system, involving the allocation below market prices of 2G licences and spectrum in 2008.

Hotel shares dropped. Hotel Leela Venture, EIH and Indian Hotels shed by between 2.88% to 8.22%.

Metal stocks were mixed. Sterlite Industries, Hindalco Industries and Jindal Steel & Power fell by between 0.27% to 2.53%. JSW Steel, Tata Steel, Bhushan Steel, National Aluminum Company rose by between 0.21% to 6.42%.

Consumer durables stocks extended recent losses. Gitanjali Gems, Blue Star and Videocon Industries shed by between 0.58% to 0.77%.

Omkar Speciality Chemicals clocked highest volume of 2.24 crore shares on BSE. Cals Refineries (1.75 crore shares), Unitech (1.51 crore shares), Alok Industries (79.26 lakh shares) and Reliance Communications (77.85 lakh shares) were the other volume toppers in that order.

State Bank of India clocked highest turnover of Rs 193.50 crore on BSE. Reliance Infrastructure (Rs 180.40 crore), Jain Irrigation (Rs 120.90 crore), Reliance Capital (Rs 120.56 crore) and Reliance Industries (Rs 115.59 crore) were the other turnover toppers in that order.

The Reserve Bank of India faces a challenge in easing liquidity without signalling that it is loosening its anti-inflationary monetary policy stance, its governor, Duvvuri Subbarao, said on Wednesday. Subbarao also said that a cut in the cash reserve ratio may send a mixed signal to the markets.

The Reserve Bank of India is taking steps to bring liquidity in the financial system, which has been in deficit for several months, into the “comfort zone”, Subir Gokarn, deputy governor of the Reserve Bank of India said on Wednesday.

The government will announce industrial output data for the month of December 2010 tomorrow, 11 February 2011. Industrial production growth slumped to 2.7% in November 2010 as against a revised 11.30% growth in October 2010, as growth in the manufacturing output slowed sharply.

The next major trigger for the stock market is Union Budget 2011-2012 to be unveiled by the finance minister Pranab Mukherjee on 28 February 2011. Investors will watch if the Finance Minister announces measures to rein in inflation and inflationary expectations. The Finance Minister may announce a new road map for the Goods & Services Tax (GST). The original deadline of 1 April 2010 for roll-out of GST has already been missed due to the lack of consensus between the Centre and states on the issue. GST is India’s most ambitious indirect tax reform plan, which aims to stitch together a common market by dismantling fiscal barriers between states.

The Centre has reportedly sent the empowered committee of state finance ministers yet another draft constitutional amendment on the proposed goods & services tax (GST) in a last-ditch attempt to reach a consensus before the Budget session of Parliament. The third draft reportedly proposes the creation of a GST Council through an Act of Parliament, instead of presidential order, as proposed in the previous draft. The empowered committee will convene in New Delhi on 11 February 2011 to discuss the revised draft.

The government may also announce some populist measures in the Budget given that assembly elections are due in Kerala, Tamil Nadu, West Bengal and Assam. In all these states, the Congress is potentially looking to regain power or to retain it.

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