Egyptian worries spook markets

Sat, 29 Jan RoundUp

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Most of the key global stock markets ended the past week on a negative note. Brazil was the biggest loser of the week down 3.5% while Singapore and China were the biggest gainers up 1.4% each. Most of the European markets were under pressure as a result of the political turmoil in Egypt which threatens to spill over into the Middle East. UK and France were down by 0.3% and 0.4% respectively while Germany was up by 0.6%.

India (down 3.2%) was one of the worst performers of the week on concerns of food inflation and a 0.25% hike in key interest rates by the RBI. Among other Asian markets, Hong Kong was down 1.1%. However, the remaining Asian markets closed the week in the green. China and Japan closed the week up 1.4% and 0.8% respectively. US also closed the week in the red down 0.4%.

Source: Yahoo Finance

Moving on to the performance of sectoral indices in India - All indices closed the week in the red on concerns that RBI will increase interest rates further. Realty stocks were the biggest losers with the BSE-Realty index plummeting 8.6%. Among the other key underperformers, BSE-Pharma and BSE-Auto indices closed the week down 5.3% and 5% respectively. The relatively better performers of the week were PSU stocks with the BSE-PSU index down 1.8%. BSE-Consumer Durable and BSE-IT indices were also amongst the worst performers losing 2.2% and 2.5% respectively.

Source: BSE

Moving on to key corporate developments during the week - a handful of large cap companies announced their results for the quarter ended December 2010. Several FMCG companies released their 3QFY11 results during the week. These include ITC, HUL and Godrej Consumer.

Starting with ITC, the company saw a sharp increase in its top line with a growth of 18.6% YoY. This was largely due to increase in sales of cigarettes (up 15.6% YoY) and other FMCG (up 23.8% YoY). Cigarette sales were supported by introduction of new brands, price hikes and strengthening of trade and distribution channels while sales of other FMCG business grew aided by product mix enrichment, higher net realization, smart commodity sourcing and active cost management. The hotels business showed a growth of 15% YoY in sales while sales for the Agri business grew 18% YoY. Operating margins of the company remained flat as higher raw material costs were neutralized by lower other expenditure. Net profit of the company increased by 21.4% YoY. This was due to higher operating income, higher other income, lower depreciation and lower effective tax rate during the quarter. The net profit could have been higher but for a 111% increase in interest costs during the quarter.

Indian's second largest FMCG company HUL also declared its 3QFY11 results. While the company's top line increased by 12.1% YoY, its bottom line fell by 1.8%. The company's top line growth was supported by increased in sales of the company's personal product division which grew by 20.25 YoY. It was also supported by processed foods, and ice cream division which grew by 18.6% YoY and 30.9% YoY respectively. However, beverage business disappointed with a growth of 9.3% YoY. Soaps and detergent business turned in a dismal 5.8% YoY growth. The company's operating income fell by almost 8% YoY. This was the result of high commodity inflation and increase in advertisement costs. Net profit was affected by the fall in operating income, increase in depreciation charges and increase in effective tax rate by 0.5%.

Another FMCG company with released its results was Godrej Consumer. The company's top line grew by a phenomenal 90% YoY. This was the result of strong growth of overseas business as well as from inclusion of 100% financials of Godrej Household Products Limited (49% same quarter previous year). Domestic soap segment grew by 6% YoY and ended the quarter with a market share of 10%. Hair colorant segment ended the quarter with a market share of 29.4%. International business, which contributes 34% to the total sales, grew by 296% YoY. This growth was a result of robust all-round performance in all geographies except UK.

Moving on to banking sector, SBI and HDFC Bank came out with their 9mFY11 results over the week. SBI's net interest income grew by 44% YoY for 9mFY11. This was on the back of a 22% YoY growth in advances. Net interest margins (NIMS) improve from 2.6% in 9mFY10 to 3.4% in 9mFY11 led by robust growth in low cost deposit base (CASA). Despite having low cost deposits (CASA) of the size of the balance sheets of smaller banks in India, SBI managed to grow the same by 28% YoY in 9mFY11. In fact most of the bank's deposit growth in the past 9 months came in from low cost accounts. This was thanks to the large branch network which the bank enjoys. SBI also managed to garner some large corporate salary accounts and added to its CASA base this fiscal. NIMs of the bank grew on the back of re-pricing of term and bulk deposits. However, the bank, suffered due to rise in NPAs with grew to 3.2% of advances up from 3.1% in 9mFY10. Net NPAs remained at 1.6% (1.9% in 9mFY10).

Interest income of HDFC Bank on the other hand grew by 19% YoY in 9mFY11 on the back of 33% YoY growth in advances. NIMs remain stable due to marginally higher proportion of lower cost deposits (CASA 51% of deposits). HDFC Bank's high growth is attributed to acceleration in credit offtake to large corporate. This helped the bank maintain a loan growth in excess of 32% even during difficult times. Backed by 40% YoY growth in loans to large corporate, the bank saw its advance book grow by 33% YoY. Net NPAs to advances improved marginally from 0.5% in 9mFY10 to 0.2% in 9mFY11. Net profits increased by 3.1% YoY during 9mFY11.

Movers and shakers during the week

Company	21-Jan-11	28-Jan-11	Change	52-wk High/Low
Top gainers during the week (BSE-A Group)
BPCL	569	632	11.0%	815/495
IOC	307	334	8.7%	459/275
KSK ENERGY	106	113	6.6%	207/104
ZEE ENT	111	116	4.3%	163/109
HPCL	350	365	4.3%	555/298
Top losers during the week (BSE-A Group)
IVRCL INFRA	99	84	-15.3%	194/87
JSW STEEL	1,031	898	-12.9%	1,400/950
POWER FIN CORP	292	254	-12.9%	383/230
ORIENTAL BANK	369	322	-12.8%	545/230
DLF LIMITED	254	223	-12.2%	397/239

Source: Equitymaster
Coming to economic news, food inflation rose marginally in mid-January after two consecutive weeks of decline as a result of increase in onion and fruit prices. The index for food prices was up by 15.57% for the week ended January 15. Onion prices up 112% YoY contributed significantly to this increase. The spillover effect of high food inflation has been that the headline inflation rose 8.43% YoY in December from 7.48% YoY in November. This is because food articles have a 14.3% weight in the wholesale price index. Experts expect some let up in food inflation by March this year, but we believe that food inflation is a structural issue and farm productivity needs to rise for decline in prices.

Nevertheless, the RBI raised its short term rates by 0.25% to curb inflation. In fact another hike is expected with the bank reviews its monetary policy in March. As a result of this hike, there are concerns on the growth of the economy. High lending rates are expected to impact industrial growth which had already slipped to 2.7% In November 2010. While the persistent shortage of liquidity in the banking system has already raised expectations that interest rates will harden considerably in the coming year, signs of weakening of industrial performance should be followed by a downward revision in interest rates to give a boost to industrial and economic growth. The key challenge in the current year for RBI will be to strike a balance between controlling inflation and ensuring economic growth.