Government is Planning to increase the Company’s Subsidy

India’s primary oil producer, the Oil & Natural Gas Corporation (ONGC), is about to get it in the neck once again. According to news reports, the government is planning to increase the company’s subsidy burden in order to avoid taking a more direct hit on budgetary finances.

Under the formula worked out earlier, ONGC and other oil and gas producers (Gas Authority of India Ltd and Oil India Ltd) have to offer “discounts” (i.e. subsidies) to  oil marketing companies (Indian Oil, BPCL and HPCL) up to 33.3 percent of their losses on diesel, cooking gas and kerosene sales. Now, the government apparently wants to raise the subsidy amount to Rs 30,000 crore this year, which works out to 38.5 percent, though there is no official confirmation of this move.

While the ONGC share is obviously tanking on this news, the move raises serious concerns about corporate governance at ONGC. The government wears two hats when it comes to ONGC. As a policymaker, it can direct  ONGC to subsidise whomsoever it wants to in public interest. But ONGC is not fully owned by the government: 26 percent of its shareholders are ordinary and institutional investors, whose interests cannot be sacrificed at the whims of the majority shareholder. The same holds for GAIL and OIL, both of which are publicly-listed companies.

Nifty turns choppy

Indian markets were witnessing a choppy session due to lack of buying conviction amongst investors as concerns of inflationary pressure and possible rate hike by the Reserve Bank of India in its next meet dampened sentiments. Auto, banks and oil & gas stocks were down on profit booking while IT and capital goods space showed some strength.

"The market has been reeling under a series of bad news. It started with the dismal results and dramatic exits at Infosys. The RBI aggravated the pain with a 50 bps rate hike. Earnings from RIL and Bharti also failed to impress.

On Tuesday, shocking Q4 results from SBI sent the market into a tailspin. Bad news on ONGC and RIL exacerbated the fall. The knock on the chin could have been harder but for the strength in ITC, HUL and TCS.

Today's start will be better but don't bet on a substantial turnaround. All eyes are now on Bajaj Auto results today. L & T will announce its report card on Thursday. ITC will come out with its numbers on Friday.

Inflation remains a big headache as well.

Top Losers Tata Motors, RIL, SAIL

Indian benchmark indices were trading with some volatility. Selling pressure was seen in oil & gas, auto, pharma and realty stocks while IT stocks were trading firm. Reliance, ONGC, SBI and Tata Motors were negative contributors to the Sensex.

At 10.38 hrs IST, the Sensex was up 9.57 points or 0.05% at 18146.92, and the Nifty was up 1.50 points or 0.03% at 5440.45. About 1001 shares advanced, 1202 shares declined, and 1438 shares remained unchanged.

SBI resumes downtrend

It was a quiet start for the Indian markets after massive drubbing by bears this week. The banks resume its downward march led by SBI. ONGC however bounced back and the stock was trading in green.

At 09.21 hrs IST, the Sensex was up 24.77 points or 0.14% at 18162.12, and the Nifty was up 2.15 points or 0.04% at 5441.10. About 580 shares advanced, 340 shares declined, and 2721 shares remain unchanged.

Selling was seen in rate sensitives and oil & gas stocks. Buying was seen in FMCG and capital goods stocks. Nifty gainers: BHEL, HDFC, Larsen, Hindalco and ONGC were up 0.8-1.5%.

Nifty losers: SBI, SAIL, Tata Motors, Maruti Suzuki and BPCL were down 1-1.5%.

Technical View: On the daily chart, the Nifty has been forming Head and shoulder top reversal pattern on the daily chart since first week of March 2011. The middle peak (head) is pegged at 5944. The two outside peaks (left and right shoulder) is pegged at 5608/5605 levels.


Midcap gainers: Bajaj Finserv, Unichem Labs, BOC India, Motherson Sumi and HT Media were up 2-7%.

9 stocks to watch

State Bank of India: SBI will be announcing its results during the day. The market expectation is that the bank will post a topline of Rs 12,732.5 crore and a profit of Rs 2,922.5 crore for the quarter ending March 31, 2011. The stock has shown weakness and technically the chart will be forming a bearish pattern below Rs 2,610. Being an event-based day, volatility will be high.

Coal India: Analysts across broking houses have maintained a buy rating on Coal India with a caveat that the rating or price target will be revised after the announcement of consolidated results on May 25, 2011. The chart, however, shows good strength and the stock trades close to its all-time high. Selling has been on lower volumes, indicating that not many are selling. A cross above the current top of Rs 396.35 can take the stock to Rs 410.

Bata: Bata has been attempting to cross Rs 474, its all-time high price, for the last five trading sessions. It has seen selling pressure in the Rs 465-474 range. A move above Rs 474 can take Bata to the Rs 500 level. The company, which came out with an excellent set of numbers, has been upgraded by a number of brokers. A fall below Rs 450 will change the bullish sentiment in the short term.

SAIL: Over the last four months, the stock has bounced back from Rs 150 levels four times. It is about to test the level for the fifth time. A breach of the Rs 150 level can take the stock to its next level of Rs 127. Other steel companies like Tata Steel too are trading near important support levels, while the smaller ones have broken all support levels. Thus, the probability of the stock breaking the Rs 150 level is high.

Crompton Greaves: In the last three months, the stock touched Rs 240 for the second time. There has been good buying at these levels over the last five days. Rumours in the market are that the company is going in for a big acquisition. Crompton was very strong in a weak market on Monday, with a spurt in volume over the last five minutes. Probably there is something to the rumour. The stock looks good above Rs 248.

Glenmark: The company announced out-licensing of its products to Sanofi. Glenmark will be getting an upfront payment of $50 million from the deal (Rs 7-8 per share, post-tax) over the next two-three months. The remaining milestone and commercialisation-related payments of $613 million (Rs 90 per share) along with royalties are dependent on the success of the product, which can take five to seven years. The stock has already moved up by Rs 50 on Monday on extremely high volumes. After the initial euphoria, selling was witnessed in the counter. A fall below Rs 291.45 can bring the stock back to Rs 275.

Suzlon: There has been a build-up in the price in anticipation of results. The stock opened very strongly on Monday, but since the opening bell, there has been continuous selling. The stock closed at the low of the day. Selling is expected to continue, given the intra-day pattern. The stock can touch a level of Rs 50.

JSW Steel: The company announced its results in the second half of Monday and held an analysts meeting after close of the market. Analysts say that margins are expected to remain under pressure, especially since its coal contracts are up for renegotiation. The stock touched the previous day’s low and bounced back on Monday. It can fall further if it falls below this low of Rs 908.

Diamines & Chemicals: The company has informed the exchange that it will be holding a board meeting to consider the issue of bonus shares. The stock is expected to react positively to the news and can touch a level of Rs 84 where it can meet some resistance. However, this will depend on the bonus ratio.