Inflation & IIP data buoy markets

Sat, 14 Jan RoundUp

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After witnessing steady gains in the first week of 2012, global stock markets continued their north bound journey in the second week as well. Except for UK, all the markets closed the week on a positive note. The US stock markets were up 0.5% for the week. Disappointing earnings performance from JP Morgan Chase and expectations of credit downgrades for several Euro-zone countries overweighed markets.

The Indian stock markets were up by 1.9% during the week. This was the highest weekly close registered in the past five weeks. Easing inflation and recovery in manufacturing output buoyed markets. While food inflation remained negative for the week industrial production grew by 5.9% in November 2011.

Amongst the other world markets, China was up 5.2%, followed by Hong Kong (up 3.3%). However, UK ended the week on a flattish note with minor losses of 0.2%.

Source: Yahoo Finance

The concluding week saw an all round positive performance from all the sectors except for IT. While Realty was up 13.1% during the week, Metals' pack was up 9.8%. power and capital goods stocks too registered healthy gains and were up by 8.6% and 8.5% respectively. However, technology stocks were down during the week amidst downbeat full year guidance from the IT bellwether <>Infosys.

Source: BSE

Let us now take a look at key economic developments during the week. Food prices fell for the second consecutive week (ending December 31st) as food inflation remained in the negative zone at -2.9%. In the previous week, food inflation stood at -3.36%. This is a sharp contrast to the above 19% levels seen in the corresponding week of 2010.

Further, with a recovery in manufacturing output, industrial production (IIP) grew by 5.9% in November, 2011. Output of the manufacturing sector, constituting over 75% of the index, went up by 6.6% in November, compared to a growth of 6.5% November 2010. Power generation grew by 14.6% in compared to 4.6% previously. Production of consumer goods increased 13.1%, as against a benign growth of 0.7% in November 2010. Better IIP numbers and rate cuts going forward may cut the negative sentiment in the country.

Now let us take a look at the key corporate developments during the week. Industry major, Infosys recently released its third quarter results for the financial year 2011-2012 (3QFY12). The company reported a 14.8% quarter on quarter (QoQ) growth in its total revenues. Operating margins improved to 31.2% as compared to 28.2% seen during the previous quarter (2QFY12). This was on account of cost savings across all of the expense heads (all as a percentage of sales). Higher operating margins as well as higher other income led to a 24.4% QoQ growth in the net sales of the company. However, the company's management lowered its full year guidance due to uncertainty in global markets. Further they have hinted on a slowdown in the IT industry on account of troubles in the Euro zone as well as slower growth in developed markets.

National Thermal Power Corporation (NTPC) is planning to enter into power distribution business across the country. The company is in early stages of internal discussion and is exploring the option whether to enter the power distribution business through a license route or franchise route. Entering into new stream of business will be done through its wholly-owned subsidiary NTPC Electric Supply Company Ltd (NESCL). The company has been planning to enter the power distribution segment for quite some time but did not have any success earlier. It had earlier proposed to set up distribution networks in Kanpur, Patna and Mangalore among others, but the plan could not materialize. However, no investment has been earmarked for the new venture.

Taro Pharmaceuticals is evaluating an offer by Sun Pharma over complete buyout. Presently Sun Pharma owns 66% in Taro. Sun Pharma had made an offer in October last year announcing a cash offer of US$ 24.5 per share for the remaining stake. The Mumbai based Indian pharma company had stated that the offer price represented a premium of almost 26% over the most recent closing of Taro stock. It is expected to invest around US$ 350-370 m to buy the remaining stake and gain 100% ownership.

The consumers of coal have strongly opposed the new pricing system by coal india. The new pricing system seems to be increasing the cost of coal drastically for everyone. Fuel costs for steel companies will be higher by up to 70% while some cement companies may face a shutdown now. Power companies will also have to increase the tariffs by 40% in order to mitigate the impact of coal price increase. Coal India began its new pricing method from the start of the year based on gross calorific value or heat produced by burning it. Prior to this, the pricing was fixed based on the moisture and ash content present in coal. Consumers have alleged that Coal India is misusing its monopolistic power. However, Coal India defended saying that this is a global method and will improve the quality of coal.

Movers and shakers during the week

Company	6-Jan-12	13-Jan-12	Change	52-wk High/Low
Top gainers during the week (BSE-A Group)
Lanco Infratech	11	15	40.9%	58/9
KSK Energy Ventures	36	49	34.8%	123/33
Jai Corp	56	75	34.5%	209/46
JSW Ispat Steel Ltd	10	12	29.9%	26/9
GMR Infrastructure	23	29	29.6%	45/18
Top during the week (BSE-A Group)
Infosys Ltd	2,831	2,586	-8.7%	3332/2169
TCS Ltd	1,171	1,087	-7.2%	1247/903
REI Agro	16	15	-6.3%	30/14
Nestle India	4,143	3,942	-4.9%	4549/3160
HCL Technologies	418	399	-4.4%	528/360

Source: Equitymaster
In some news from the sector, the Indian automobile industry is likely to report a lackluster performance this financial year. This is in contrast to the 26%-30% growth rates recorded in the previous two years. At the start of the year, Society of Indian Automobile Manufacturers (SIAM) had forecasted a growth of 14%-16% for the year but recently this has been cut drastically to only 0%-2%. However, things could get better in FY13 on account of over 50 new launches in the Auto Expo and some favorable initiatives from the government. Also, there has been some revival in the industry recently with car sales recording a growth for the second consecutive month as a result of discounts and freebies.

With the announcement of results by Infosys, the earnings season of India Inc has begun. It would be interesting to see how the third quarter pans out for companies especially from the Capital Goods, Metals and Realty sectors considering they had borne a major brunt of the investors in 2011.