Market may remain volatile

Concerns about corporate governance standards at Indian firms may continue to weigh on Indian stocks in the near term. A government probe into the telecom spectrum allocation spooked the market, with investors dumping shares of firms which are perceived to have weak corporate governance standards. The Q3 result season is almost over and the focus will now shift to expectations from the Union Budget 2011-2012 to be presented by the finance minister in parliament on 28 February 2011. Bargain hunting helped the Sensex recover from 8-month low on Friday, 11 February 2011.

The results announced so far showed that the combined net profit of a total of 2,535 firms rose 21.6% to Rs 84245 crore on 19.5% increase in sales to Rs 836684 crore in Q3 December 2010 over Q3 December 2009.

Shares of aluminum and copper major Hindalco Industries and Reliance Capital will react to Q3 December 2010 results when trading resumes on Monday, 14 February 2011. These two companies are due to report Q3 results on Saturday, 12 February 2010. On Monday, 14 February 2011, Reliance Infrastructure (R-Infra), Reliance Communications, Reliance Power, Tata Power, Coal India and Unitech are due to report Q3 results. The board of R-Infra will consider buyback proposal along with the results. Steel giant Tata Steel reports Q3 results on Tuesday, 15 February 2011.

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.

Concerns about corporate governance standards at Indian firms may continue to haunt Indian stocks in the near term. 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 8 February 2011. Balwa's counsel 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. DB Realty has said that its chief has been wrongly implicated in the case and is not involved in anything ''illegal''. The company has said that Balwa will strongly contest the CBI charges.

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.

On the macro front, the government will unveil data inflation based on the wholesale price index (WPI) for January 2011 on Monday, 14 February 2011. Inflation accelerated to 8.43% in December 2010 from 7.48% in November 2011. Inflation for October, 2010 was revised upward to 9.12 % from 8.58% as the provisional figures reported on 15 November 2010.

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 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.