Momentum rally continues

Sat, 4 Feb RoundUp

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The world stock markets closed the week on a strong note. The US stock markets were up 1.6% during the week due to strong employment data. The unemployment rate fell to 8.3% in January as the economy created 243,000 jobs against an expectation of 150,000. The UK markets too showed some sparks of optimism as business confidence returned easing worries of double dip recession.

The Indian stock markets were up by 2.2% during the week. Rising foreign flows (foreign investors bought shares worth US$2 bn last month) and expectation of rate cuts buoyed markets. It may be noted that after a 25% decline in 2011; Sensex is already up 14% year to date. Considering this was the fifth consecutive weekly gain for the Sensex it would be interesting to see whether the current rally has legs to sustain its momentum over the coming weeks.

Amongst the other world markets, France was up 4.6% during the week followed by Germany (up 3.9%). Even Brazil registered healthy gains of 3.7% during the week. However, markets from Singapore and Japan were relatively flat.

Source: Yahoo Finance

All the sectoral indices (barring few) saw a strong performance during the week. While realty was up 4.8% during the week auto pack too registered healthy gains of 3.5%. However, consumer durables and capital good stocks were down by 2.8% and 1% respectively during the week.

Source: BSE

Let us now take a look at key developments during the week. In a major development in the telecom sector, the Supreme Court has revoked 122 telecom licences issued after 2008 under the tenure of A Raja. While the news is negative for the companies that were involved in the case, it has given a significant boost to the share price of Bharti Airtel as it implies reduced competition and more spectrum availability. As per the Supreme Court ruling, the existing licenses will be valid for four months. During this period, the Government will decide on the fresh norms for issuing licenses. As per the industry resources, the decision is likely to impact less than 5% of the country's total mobile subscribers.

Telecom companies are not the only ones to suffer due to this decision taken by the Supreme Court. It may be noted that public sector banks have an exposure of about Rs 100 bn in the telecom companies whose licences were cancelled in connection with 2G scam. However, of this exposure of Rs 75 bn is secured (against assets). However, PSU banks that are already burdened with restructured debt lent to agriculture and small industries will feel the pressure on provisions mounting.

Now let us take a look at the key corporate developments during the week. Decision regarding divestment of Oil and Natural Gas Corporation Ltd. (ONGC) and Bharat Heavy Electricals has been deferred after a meeting of the empowered group of ministers. It was expected that the new Security And Exchange Board Of Indian (SEBI) guidelines might induce the government to start thinking about the divestment plans once again. We may note here that the government has raised Rs 11.45 bn so far of its Rs 400 bn divestment target. Even after discussing the implications of these guidelines, no decision was taken. However, the stake sale in ONGC would be completed to the extent of 5%. This could be done either through follow on public offer or the auction route.

Ranbaxy Laboratories is up for a tough time ahead on account of regulatory issues. The company has been accused of making unsafe drugs for its crucial US market. As such, the company has to give up six months marketing exclusivity rights for three generic drugs where it has the first-to-file (FTF) status. The decree impacts its FTF cash flows from three drugs, with five more at risk. Besides, the company needs to hire an expert to review the plants that were found non compliant along with other procedures like withdrawal of applications based on false data which will mean additional costs and time that can delay the approval process.

Now let us take a look at few results that were announced during the course of the week. ICICI Bank declared the results for the third quarter and first nine months of financial year 2011-2012 (9MFY12). The bank has reported 17% YoY growth in net interest income and 20% YoY growth in net profits for the third quarter. While its capital adequacy ratio was healthy at 18.9% at the end of December 2011, net NPAs improved to 0.7% of advances in 9mFY12 (1.2% in 9mFY11). ICICI Bank's advances grew by 19% YoY in 9MFY12. This was backed by 20% YoY growth in the deposit base. The proportion of low cost deposits (CASA) increased from 42% in 1HFY12 to 44% in 9mFY12 despite higher interest rates offered on term deposits.

Bharat Heavy Electricals (BHEL) has announced its third quarter results for the financial year 2011-2012 (3QFY12). The company reported Rs 105 bn in net sales during the quarter, a 19% year-on-year (YoY) rise. While the power segment grew by 58% YoY, the industry segment witnessed a decline of 37% YoY. High raw material costs and other expenditure caused operating margins to decline from 23.4% in 3QFY11 to 19.7% in 3QFY12. At the bottomline level, the company reported net profits of Rs 14 bn, a mere 2% YoY rise. At the end of the quarter, the company's order book stood at Rs 1.46 trillion, down 9% on a quarter-on-quarter basis.

Indraprastha Gas Ltd. (IGL) announced results for the third quarter ended December 2011. The topline registered an increase of 45.1% YoY during the quarter on account of hike in gas prices and higher volumes in both CNG and PNG segments. For the nine months, sales were up 45% YoY. The operating profits were up by 16.4% during the quarter with margins at 22.7%, down from 28.3% in the corresponding quarter last year. This was on account of increased costs of sourcing gas and added burden due to rupee devaluation. For the nine months, operating profits were up by 29.1% YoY and margins came at 26% (versus 29% last year). The net profits for the quarter grew just by 2.9% YoY, with margins at 10.4% versus 14.7% last year on account of a surge in interest costs. For the nine months, the bottomline was up 18.8% YoY, with margins at 12.6%, versus 15.4% last year

Movers and shakers during the week

Company	27-Jan-12	3-Feb-12	Change	52-wk High/Low
Top gainers during the week (BSE-A Group)
KSK Energy	52	69	32.7%	123/35
Tata Global Beverages	96	119	24.1%	120/80
Aban Offshore	445	549	23.4%	707/332
Sintex Industries	80	98	22.8%	193/62
JSW Steel	610	709	16.2%	1001/480
Top losers during the week (BSE-A Group)
Sterling Biotech	16	14	-11.2%	106/11
GTL Infrastructure	13	12	-8.9%	40/7
BHEL	284	264	-7.1%	446/232
Glenmark Pharma	315	296	-5.9%	341/261
Voltas	99	93	-5.6%	187/73

Source: Equitymaster
Besides the results there were a few other important news announcements during the week too. Let us discuss these.

As per agricultural ministry's estimates India may witness a record food output in the current year. The total output comprising of rice, wheat, pulses and cereals is seen at 250 m tones in the June-July crop year of 2011-12. Conducive monsoons and steps taken by the government are seen responsible for the increase in output. The record production is likely to ease food inflation in the near term and also increase the prospects of exports.

The results season is not yet over and more announcements are expected over the next couple of weeks, which could have a bearing on where the stock markets head. Although markets are already up 14% within a span of just one month we believe that policy issues, union budget and interest rates will decide the broader course of the markets in the near future.