Markets witness correction during the week

Markets ended on a weak note during the week, amidst sessions marked by volatility. The Sensex and Nifty closed lower by 2.2% each. BSE mid-cap and small-cap indices, after positively outperforming the large-cap indices in the previous weeks, lost ground during the week to their large-cap counterparts and ended lower by 2.4% each. The benchmark Sensex closed below the important psychological level of 18,000 for the first time since July 30, 2010. The decline in the index can mainly be attributed to the underperformance of financial, technology, realty, auto, capital goods and power stocks. Volatility in the Indian bourses was primarily witnessed due to negative global cues during the week. On the sectoral front, all sectoral indices ended in red, with the BSE realty index and BSE metal index losing the maximum by 8.5% and 3.3%, respectively.

Realty index down 8.5%
The realty index fell 8.5% during the week, widely underperforming the Sensex, which was down by 2.2%. The top losers in the sector were Sobha Developers (down 12.6%), HDIL (down 11.3%), Unitech (down 9.5%), DLF (down 8.1%) and Anant Raj Industries (down 8.1%). The underperformance of the index can primarily be attributed to profit-booking after a sharp run-up in the realty sector as a whole in the last two weeks. Also, there were news reports of an exercise of put option held by Lehman Brothers' realty fund in Unitech's reality project in Mumbai. However, Unitech has denied receiving any communication from Lehman Brothers to that effect.

PTC India - Event Update: PTC India Financial Services (PFS), a subsidiary of PTC India, has been given the infrastructure financial company (IFC) status by the Reserve Bank of India (RBI). Post this development, PFS would be allowed to have a higher exposure to lending and investment to a single borrower or a group of borrowers. Further, PFS would have better access to resources as the exposure limit for banks' funding to IFCs has been improved. As of 1QFY2011, PFS had sanctioned Rs1,953cr under debt and Rs500cr under equity, while the disbursements under these heads stood at Rs480cr and Rs398cr, respectively. PFS had a net worth of Rs650cr as of 1QFY2011. We maintain our Buy rating on the stock with a Target Price of Rs136.

Mphasis - 3QFY2010 Result Update : For 3QFY2010, Mphasis reported top-line growth of 4.8% qoq to Rs1,279cr. The company registered impressive volume growth of 7.6% qoq in the application segment and ~20% qoq growth in the ITO segment. EBITDA margin declined by 110bp because of the new rate card pricing model with HP, which brought down realizations by 9.6% in the application business. Net profit increased to Rs271.3cr despite flat EBIT due to tax write-back with retreatment of profits under Section 10AA related to SEZ. We maintain our Buy rating on the stock with a Target Price of Rs872.

Markets retain positive momentum

Markets ended positive during the week amidst volatility, with the Sensex and Nifty ending higher by 1.3% and 1.4%, respectively. BSE mid-cap and small-cap indices continued to outperform their large-cap counterparts, growing further by 2.3% and 1.7%, respectively, during the week. Factors such as food and fuel inflation tapering down to 10.4% (11.4%) and 12.6% (12.7%), respectively; marginal decline in WPI index to 9.97% (10%); healthy FII flows resulting in increased liquidity in the markets; and mixed cues from global markets weighed on investor sentiments during the week. On the sectoral front, all the sectoral indices ended in green, with the BSE FMCG index and BSE Bankex gaining the maximum by 2.9% and 2.7%, respectively.

BSE FMCG index outperforms Sensex
Overall, good 1QFY2011 results and the flavoir for defensives helped the BSE FMCG index gain 2.9%, outperforming the Sensex, which gained 1.3%. Gains in the FMCG index were largely driven by heavyweights ITC and HUL. While ITC increased 4.4% on improving fundamentals and robust outlook for cigarette volumes, HUL gained 1.2% after its management announced August 23 as the commencement date for the buyback of its shares. Amongst others, Godrej Consumer gained 6.8% on consolidation of its recent acquisitions and Marico moved up 8% aided by the news of its acquisition of Ingwe in South Africa. During the week, Asian Paints, Dabur and Nestle were up 2-4% owing to improving fundamentals and strong defensive buying. However, with most FMCG stocks trading at peak valuations, we are underweight on the sector.

Cairn India - Event Update: Cairn Energy Plc has entered into an agreement with Vedanta Resources Plc for sale of 40-51% stake in Cairn India. The all-cash deal is being executed at Rs405/share, wherein Rs355/share will be towards the sale and purchase agreement and the balance Rs50/share constituting the non-compete fee. Thus, the open offer to the minorities will be at the lower price of Rs355/share. We recommend Neutral on the stock.

Sesa Goa - Event Update: Vedanta Resources Plc, along with Sesa Goa, has entered into an agreement with Cairn Energy Plc to acquire a 51-60% stake in its Indian subsidiary, Cairn India. Vedanta, along with Sesa Goa, will make the 20% mandatory open offer to other shareholders of Cairn India at Rs355 per share; Sesa Goa will make a strategic investment of 20% in Cairn India. We maintain our Neutral view on the stock.

Gujarat Pipavav Port - IPO Note: Gujarat Pipavav Port (GPPL) is coming out with IPO for Rs500cr through fresh issue of 10.4-11.9cr shares in the price band of Rs42-48/share. GPPL also expects to retire high-cost debt utilizing Rs300cr from the issue proceeds resulting in reduction in interest expenses from Rs115cr in CY2009 to Rs92cr in CY2011E. Consequently, we expect GPPL to report profit from CY2011E onwards. Hence, we recommend Subscribe to the IPO at the lower price band with a long-term perspective.

Markets end flat

The Indian stock market ended almost flat during the week, amidst sessions marked by volatility, with the BSE Sensex and the NSE Nifty ending marginally higher by 0.1% and 0.2%, respectively. However, BSE mid-cap and BSE small-cap indices outperformed their large-cap counterparts by further extending gains by 1.5% and 1.6%, respectively, during the week. Factors such as strong numbers reported by Tata Motors and State Bank of India during 1QFY2011, lower-than-expected IIP growth at 7.1%, concerns over the pace and sustainability of the global economic recovery leading to mixed cues from global markets weighed on investor sentiments during the week. On the sectoral front, majority of the sectoral indices ended in green, with the BSE realty index and BSE Bankex gaining the maximum by 6.6% and 3.4%, respectively. However, the BSE IT index lost the maximum during the week, ending lower by 2.2%.

Realty index outperforms the Sensex
The realty index gained 6.6% during the week, outperforming the Sensex. The top gainers in the real estate space were Anant Raj (up 19.2%), Omaxe Ltd. (up 12%), Sobha Developers (up 8.8%), HDIL (up 7.5%) and Akruti City Ltd. (up 6.1%). The rally can be attributed to the firm trend witnessed in stability in residential volumes over last 2-3 quarters across markets, with improvement in leasing activity. We expect realty stocks to outperform on the back of a strong project pipeline, well-capitalised balance sheet and decent execution skills.

Nestle - Event Update: For 1HCY2010, Nestle registered robust overall top-line growth of 19% yoy. We recommend a Neutral view on the stock (post weak 2QCY2010 results, Nestle’s stock has corrected ~7%) with a fair value of Rs2,804 (based on P/E multiple of 29x FY2012E earnings and in line with its five-year historical average valuations).

State Bank of India - 1QFY2011 Result Update: For 1QFY2011, State Bank of India's standalone net profit grew 25.1% yoy and 56.1% qoq, which exceeded our estimates on account of better-than-estimated NII and lower operating expenses. Robust operating performance, with reasonable asset quality, was the key highlight of the result. We maintain an Accumulate view on the stock with a Target Price of Rs3,185.

Tata Steel -1QFY2011 Result Update: Consolidated net revenue increased by 16.8% yoy, down 1.1% qoq, to Rs27,195cr. Group deliveries increased by 8.9% yoy to 6mn tonnes; however, they declined by 7.5% on a sequential basis. EBITDA/tonne for TSE increased to US $79 as compared to a loss of US $117 in 1QFY2010. Consolidated EBITDA stood at Rs4,433cr as compared to a loss of Rs30cr in 1QFY2010. Consolidated net profit stood at Rs1,825cr as compared to a loss of 2,209cr in 1QFY2010. We maintain a Buy view on the stock with an SOTP-based Target Price of Rs702.

Markets bounce back

The Indian stock market ended on a positive note during the week, amidst sessions marked by volatility, with the Sensex and Nifty ending higher by 1.5% and 1.3%, respectively. BSE mid-cap and BSE small-cap indices continued to outperform their large-cap counterparts and closed higher by 1.7% and 2.5%, respectively, during the week. The market opened the week on a positive note and mostly traded above the 18,000 mark during the week. Factors such as strong sales reported by auto firms for July 2010, decent set of numbers from banking stocks and revival of the monsoons kept the sentiment positive during the week. However, worries that the Central Bank might raise interest rate again in a mid-quarter policy review also weighed on investors' sentiment. On the sectoral front, most of the sectoral indices ended in green, with the BSE IT index and BSE Bankex gaining the maximum of 3.0% and 2.2%, respectively.

BSE IT index up 3%, outperforms the Sensex

 The BSE IT index gained 3% over the previous week, outperforming the Sensex, which gained 1.5%. The weekly momentum of the BSE IT index gathered strength, with IT companies viz. Wipro, HCL Tech, Mphasis, TCS, Infosys and Tech Mahindra gaining 5.4%, 5.0%, 4.8%, 2.9%, 2.7% and 2.7%, respectively. This was despite the 0.8% appreciation in average INR v/s US Dollar during the week. The surge in the index can be attributed to strong operational results posted by some of these companies for the quarter ended June 2010, specifically TCS and Wipro amongst Indian IT companies, while the MNC IT company Cognizant delivered robust operational profitability for the quarter. Most of these companies have exhibited a positive IT demand environment and are witnessing a pick-up in discretionary IT spends, which would strongly drive their volume growth in the coming quarters. We remain positive on the sector.

Aditya Birla Nuvo - Quick take: Aditya Birla Nuvo (ABNL) is a diversified conglomerate and the holding company of several subsidiaries. We have valued ABNL on an SOTP basis and assigned 20% conglomerate discount. We recommend Buy on the stock with a Target Price of Rs1,166.

ICICI Bank -1QFY2011 Result Update: ICICI Bank's net profit increased 16.8% yoy, which was in line with our estimates. The key positive of the results was a sharp declining trend in slippages from retail loans for the fifth consecutive quarter and a huge reduction in NPA provisioning burden. We maintain Buy on the stock with a Target Price of Rs1,163.

Alembic -1QFY2011 Result Update: Alembic reported below expectation numbers for 1QFY2011, impacted by a decline in API exports. Domestic formulation sales grew by 5.5% yoy on the back of the restructuring exercise undertaken by the company over the last one year, which improved working capital management, resulting in lower debt levels. We maintain Buy on the stock with a Target Price of Rs74.