Markets trade flat; ADAG stocks remain under pressure

The key Indian stock indices have lost almost all of their gains and are now trading flat in late-afternoon trades tracking negative cues from the regional counterparts, who are trading mostly in the red, influenced by the Chinese central bank's decision to raise the reserve requirements by another 0.50 percentage points. On the domestic front, fear of rate hike is weighing on the sentiments to a notable extent and hence investors are mostly treading cautiously. Amongst the sectoral indices, Realty, power, metals and capital goods stocks were under pressure while Information Technology, Fast Moving Consumer Goods and banking counters moved higher. ADAG stocks continue to remain under pressure today after market regulator SEBI barred Anil Ambani and two group companies from investing in the secondary market till the end of this year, on the possible violation of investment norms, though he has made the clarification that the temporary exile was self-imposed and not a ban. Meanwhile, volumes have been on the higher side at Rs 85,000 crore till now. Broader indices have extended last week's losses and are under-performing their larger counterparts and are trading with losses of more than half-a-percent in trade today. The market breadth on the BSE was week; the losers thrashed the gainers in a ratio of 1703:959 while 119 shares remained unchanged.

The BSE Sensex was flat, though marginally up 2.58 points or 0.01% at 18,863.02. The index touched a high and a low of 18,967.53 and 18,779.38, respectively.

The BSE Mid-cap and Small-cap indices declined 0.96% and 0.85%, respectively.

The top losers on the BSE sectoral front were Realty down 2%, Power down 1.25%, Metal down 1%, Capital Goods (CG) down 0.89% and Auto down 0.70%.

On the flip side, Information Technology (IT) up 1.08%, Fast Moving Consumer Goods (FMCG) up 0.81%, TECk up 0.58%, Bankex up 0.39% and Consumer Durables (CD) up 0.25% were the only gainers in the BSE sectoral indices.

Meanwhile, the Reserve Bank of India (RBI) has found in a recent study that even as the corporate sector witnessed substantial volume growth over the first half of the current fiscal, the growth in profitability has been rather muted as industries were facing higher costs in wake of rising prices and higher interest rates in the country.

Based on a study of 2576 select non-financial non-government companies the RBI inferred that sales growth, which had been flat in the first half of the previous financial year, was robust during April-September 2010 on account of rise in consumption demand and better price realizations seen over the latest period. Also, aggregate stock-in-trade was sharply built-up in the first half of 2010-11 to meet the rising demand.

Nonetheless, despite improvement in sales, profitability did not grow much on annual basis owing to rising costs. "...despite recording robust sales of about Rs 10 lakh crore, corporates on an aggregate could not improve their year-on-year profit performance largely on account of higher input costs, significant increase in interest payments and lower foreign exchange related gain," concluded the RBI in a study published in its monthly bulletin for January 2011.

"With faster increase in total expenditure in relation to sales, profitability in terms of operating, gross and net margins contracted by 140, 140 and 120 basis points, respectively, in the first half of 2010-11. Interest burden, which is measured as a ratio of interest payments to gross profits, increased by 90 basis points due to faster increase in interest outgo in comparison to gross profits. Depreciation provision reported a growth of 18.7% compared to more than 20% growth observed in the first half of last year indicating lower capacity additions," observed the RBI.

After having hiked its benchmark policy rates six times in current financial year, the central bank had earlier stated in Oct that in wake of rising cost of capital, it would not like to hike rates further in the short term. However, the inflation continues to remain a major problem and even as the central bank itself sees the rising interest rate regime as a dampener on growth, it might still hike rates further going forward to keep inflation expectations under control.

The top gainers on the Sensex were HDFC up 1.86%, ITC up 1.79%, TCS up 1.72%, Cipla up 1.33% and Infosys up 1.13%.

Reliance Infra down 6.50%, RCom down 4.08%, JP Associates down 3.36%, Hero Honda down 2.70% and DLF down 2.22%, were the top losers on the index.

Tyre manufacturers are likely to increase the prices of their products over next one month as cost of production for the industry remains high. Prices of rubber, which constitute nearly 50% cost of production for tyre makers, have continued to remain at elevated levels in both domestic and international markets.

One of the biggest tyre companies, JK Tyre & Industries, is already understood to have decided to hike price by 2-4%. The price revision is inevitable and it is likely to be implemented within current month, told AS Mehta, Marketing Director of the company to a news agency. Other companies are also likely to follow the suit at cost of production has increased continuously over last few months.

In recent weeks, tyre makers have been buying natural rubber at levels of Rs 210-220 per kg, more than double the levels seen in early 2009, as sellers have been raised prices following a similar increase in the international markets. In past, tyre makers have been postponing the hike in prices of their products hoping the prices will come down. Now however as the prices remains sky high, tyre companies will have to implement hikes.

Only reprieve for the industry is that the demand side is currently very strong. Sales have been increasing sharply, riding on rally in auto industry and overall economic growth and the industry has been running at full capacity throughout the last three quarters or so. In fact the tyre makers are planning ambitious capacity expansion projects. Nonetheless, even as the strong demand side fundamentals help the companies pass the rise in costs to consumers; the extremely high competition in the industry has ensured that only the bare minimum necessary hike is implemented in prices.

The S&P CNX Nifty slid 4 points or 0.07% to 5650.55. The index touched a high and a low of 5682.05 and 5624.15, respectively. 

The top gainers on the Nifty were HDFC up 1.99%, Axis Bank up 1.98%, ITC up 1.67%, TCS up 1.62% and Kotak Mahindra Bank up 1.61%.

The top losers on the index were Reliance Infra down 6.46%, RPower down 6.19%, Reliance Capital down 5.38%, RCom down 4.30% and JP Associates down 3.37%.

Other Asian markets are mostly trading in the red at this point of time. Shanghai Composite dipped 3.02%, Hang Seng shed 0.65%, Jakarta Composite declined 1.55%, Straits Times dropped 0.23%, Seoul Composite trimmed 0.39% and Taiwan Weighted slid 0.83%. 

On the flip side, KLSE Composite rose 0.19% and Nikkei 225 added 0.04%.

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