Indian mkts underperform global peers

Sat, 9 Jan RoundUp

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After last week's robust performance, this week too major indices across the globe ended on a positive note. The Indian markets though, were not amongst the top gainers this week, and were infact the lowest gainers among all other markets. India’s benchmark index, the BSE-Sensex closed with gains of 0.4%. Part of the reason for this dull performance when compared to other major markets is the uncertainty surrounding interest rates and the Indian government’s anticipated policy actions with respect to curbing the menace of inflation.

Coming to global markets, Brazil and Japan topped the list with gains of 2.6% and 2.4% respectively. UK and France followed as these markets ended higher by 2.2% and 1.9% respectively. The US markets ended higher by about 1.8%. Most gains across key markets were led by positive US retail sales data that boosted confidence in the global economic recovery.

Source: Yahoo Finance

Coming to the performance of BSE indices, most ended the week on a positive note. Stocks from the realty and Smallcap space led the pack of gainers, as the BSE-Realty Index ended higher by 5.6%. It was followed by stocks from the metal and consumer durable spaces. While the BSE-Metal index ended the week higher by almost 4%, the BSE-Consumer Durable Index closed 3.4% up. Amongst the key underperformers this week were stocks from the IT and auto sectors. They infact posted declines to the tune of 4.4% and 0.5% respectively.

Sticking out like a sore thumb was the IT sector this week. After a brilliant run in 2009, wherein the IT index was amongst the top sectoral performers, the new year has started on a weak note for the same. One reason could be the fair valuations at which most IT stocks are trading currently. Then, the rupee's appreciation against the US dollar owing to large foreign inflows into India is also casting some pressure on the sector’s medium term outlook.

Remember, an appreciating rupee affects IT companies' margins. This is because every dollar earned can then be converted into lesser number of rupees while the rupee costs for these firms do not change much. With economists expecting the rupee to strengthen further, profits of IT companies can take some hit during the coming quarters. But that doesn’t change our long term outlook on the sector, which is positive. We believe that the value proposition for IT offshoring remains strong and this will benefit the right kind of companies in the sector over the next 5 to 10 years.

Source: BSE

Moving on to the key corporate developments of the week, FMCG, particularly soap manufacturing companies, are facing the pinch of higher input costs very hard. With prices of non edible oil rising by around 10% in the last six months and no signs of abatement, the companies are planning to either hike prices of soaps in the next few months or reduce pack sizes. Most soap manufacturing companies like ITC, HUL and Godrej Consumer are getting impacted by the rise in palm oil prices as it constitutes about half the input cost for making soaps. HUL and Godrej Consumer are the largest soap manufacturers in the country with nearly 44% and 12% of the market share. Given the reluctance to hike prices at the cost of market share, the companies are expected to keep the price points intact while they will reduce the weight of soaps in the pack.

Adding some degree of credence to India's economic recovery, the spurt in demand for steel from the auto and infrastructure companies has made the third quarter of FY10 very buoyant for steel companies. SAIL reported a 32% YoY growth in sales in December 2009. This is despite the fact that most steelmakers such as SAIL, Tata Steel and JSW Steel have hiked prices by up to Rs 2,000 a tonne on the back of rise in demand. Globally steel prices have risen by US$ 30 to US$ 40 per tonne to US$ 580 a tonne in the past month. Hence, companies in the auto and construction sectors are believed to be building inventories expecting further upmove in prices.

In a move to protect itself from the tough export markets, textile major Arvind Limited is looking at expanding its retail reach in India. The company's management believes rural India has become a very lucrative market, considering that disposable incomes and awareness about branded items has risen in recent times. As such, the company plans to set up a distribution network across the country with at least 1,000 to 1,500 points of sale in each state. A leading business daily has reported that these points of sale would also include non-textile shops such as grocery stores and petrol pumps, amongst others. The main product that Arvind is looking at marketing in such a manner is its shirts. The pricing of this product would be in the more 'affordable' category, the management added.

Arvind is amongst the many textile companies that are looking at the domestic markets to fuel their growth going forward. Factors such as increasing competition, currency fluctuations and volatile demand surrounding the export markets are the reason for the same.

Commercial vehicle (CV) manufacturers like Tata Motors, Ashok Leyland and Eicher are set to introduce a flurry of new models and variants. Tata Motors will make about 15 new launches during 2010. They will range from mini trucks to busses and lorries. M&M plans to introduce at least four new heavy trucks on the new platform developed by its joint venture Mahindra Navistar. The joint venture between Volvo and Eicher plans to launch a series of tractor trailers, buses and tippers. It may be noted that the CV segment had gone into hibernation during the economic slowdown. These launches indicate the intention of manufacturers to make full use of the economic recovery as well as entrench themselves as market leaders.

Movers and shakers during the week

Company	31-Dec-09	8-Jan-10	Change	52-wk High/Low
Top gainers during the week (BSE-A Group)
Hindustan Copper	279	361	29.2%	373/82
REI Agro Ltd	50	59	19.7%	104/38
Nalco	395	471	19.3%	526/172
Aban Offshore	1,270	1,479	16.5%	1680/224
Financial Tech	1,367	1,572	15.0%	1622/404
Top losers during the week (BSE-A Group)
Maruti Suzuki	1,580	1,433	-9.3%	1740/428
Jet Airways	562	526	-6.3%	606/115
TCS	747	701	-6.2%	760/220
HCL Tech.	374	352	-5.9%	385/89
Tata Chemicals	336	317	-5.6%	342/100

Source: Equitymaster
Coming to key economic news of the week, although it continues to remain well over the government's comfort levels, food inflation softened to 18% in the previous week from the 20% figure touched earlier. As the officials in Finance Ministry debate whether to withdraw the fiscal stimuli, containing inflation remains high on their priority. Given the rise in rural income and shortage in food supply due to irregular rainfall, the problem of food inflation is unlikely to be resolved soon. Meanwhile, rise in commodity prices are also stoking inflationary concerns and heightening the possibility of monetary tightening. All eyes are therefore on the upcoming monetary policy and Union budget to know the government's stance on future economic direction.

Indian Prime Minister Mr. Manmohan Singh expressed that he is confident of India achieving a GDP growth rate of 7% for FY10. Interestingly, this is a tad lower than what the Finance Minister Pranab Mukherjee has predicted, namely 7.75%. Further, the PM is optimistic that India could return to those heady years of achieving 9-10% annual growth in a few years time. The obstacle that lies on India's path to higher growth not surprisingly is poor infrastructure. The PM has pledged that his administration would work to address key constraints in the infrastructure and the agriculture sectors as these were the key priorities of the Congress-led government. However, it remains to be seen when these pledges actually translate into action and more importantly into meaningful results.

So investors in Indian stock markets will have to continue to grapple with the uncertainty surrounding the dual problems of managing a high growth trajectory on one side and burgeoning inflation on the other. Considering the significant impact that they have on corporate profits and stock prices, the upcoming monetary policy will be an important event to watch out for.