Easy liquidity drives the rally

Fri, 17 Feb RoundUp

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While emerging markets with the exception of China registered a strong rally, the developed markets too closed the week with modest gains. The rally was fuelled by positive cues emanating from the US economy and on the speculation that Greece would secure a second bailout. While Asian stock markets including India and Brazil were up, China was relatively flat as investors were skeptical about the policies adopted by Beijing authorities to restore the slowing economic growth.

The Indian stock markets were up by 3% during the week. This was the seventh straight weekly positive close for the markets with Sensex mustering gains to the extent of 18% during the course of the year. Positive global sentiments have infused liquidity and increased the risk appetite of the investors.

Amongst the other world markets, Brazil (up by 3.4%) led the gains followed closely by Japan (up by 3.3%). However, the China and UK markets were flat having registered a growth of 0.2% and 0.6% respectively.

Source: Yahoo Finance; * We have taken Thursday close while calculating returns for all markets except India

All the sectoral indices with the exception of Oil & Gas registered healthy gains during the week. Realty was up 10.2%. Power was up 8.5% during the week after government enforced Coal India to enter into fuel supply agreements with independent power producers. Capital Goods stocks were up over the positive sentiments arising from the announcement of National Thermal Power Corporation (NTPC) bulk tender which was entangled in bureaucratic issues.

Source: BSE

Let us now take a look at key developments during the week. The government announced the new telecom policy recently. According to the new policy, the prescribed limit on spectrum allocated to service providers has been raised from the present 6.2 MHz of spectrum to 2X8 MHz (paired spectrum) for GSM technology for all service areas. In Delhi and Mumbai, the prescribed limit has been raised to 2X10 MHz (paired spectrum) for GSM technology. This is likely to benefit subscribers in the form of better quality services at economical rates. Additionally, the policy announced a uniform licence fee of 8% compared to the current range of 6-8% of Adjusted Gross Revenue (AGR) paid by operators annually. Besides the policy provided allowance for 35% market share in case of mergers paving way towards a liberal merger and acquisition regime in the industry.

The government's directive to Coal India to ensure adequate fuel supplies to the power generators is expected to put an end to the ordeal the companies have been going through over the past year. That the onus of importing power in case of supply deficit is also on Coal India, will ensure that the power producers' margins remain safeguarded. The Prime Minister of India has instructed Coal India to ensure supplies for 20 years to 50,000 megawatt power plants. These are the plants that are to be commissioned by 2015. In the event of Coal India failing to supply lesser than 80% of this, it will face penalty and if it is able to supply more than 90%, it will get incentives. This move is likely to bring back the confidence of bankers who were unwilling to fund power companies for want of assured fuel supply.

India's largest power generation firm NTPC is set to award its Rs 160 bn bulk tender based on supercritical technology. This tender has been stuck for the past two years. NTPC had disqualified the consortium of Ansaldo Caldie and Gammon from Stage-1 bidding on the grounds that certain parts in the equipment were outsourced. The consortium had then taken NTPC to court. In March 2011, the Delhi High Court had upheld the plea against disqualification by NTPC for the bulk tender. However, the latest Supreme Court verdict has barred Ansaldo Caldie from bidding. NTPC will now be able to award all the nine units of 660 MW each.

In order to boost petrol car sales, India's leading passenger car manufacturer Maruti Suzuki has increased margins for its dealers. The move has come at a time when the company's share in the domestic market has fallen below 40% for the first time ever. Maruti will pay Rs 1,000 more to its dealers to sell small cars, such as the WagonR, Estilo and Alto. In the case of Ritz and SX4, it has increased commission by Rs 1,500; and in the case of the A-Star, the amount has been raised by Rs 2,000. The revision in commissions has come after the carmaker increased retail prices across its fleet last month. It must be noted that this is the first time in almost a decade that Maruti has increased the commission paid to its dealers. There was increasing pressure to revise the commission as it is the only carmaker in India that does not allow its franchisees to trade in other brands.

Pharma major Glenmark has successfully completed Phase I trials for its molecule GRC 17536 for pain and respiratory conditions. Thus, the company plans to initiate Phase II trials on the same. The global addressable market for osteoarthritis and neuropathic pain is US$ 10 bn while that for asthma is around US$ 30 bn. Although a commercial launch is still a long way off and highly uncertain, in the event that the company is able to do so the potential for higher revenues and profits is huge. Glenmark so far has been following the strategy of out-licensing its molecules to global pharma companies for further development in return for milestone payments. Hence, depending upon how this molecule progresses in clinical trials, the company may choose to out-license this as well. Having said that, while Glenmark's ability to find partners speaks volumes about its research pipeline, the company has had to contend with failures in the past highlighting the high risks associated with novel drug research.

Movers and shakers during the week

Company	10-Feb-12	17-Feb-12	Change	52-wk High/Low
Top gainers during the week (BSE-A Group)
Lanco Infratech	16	23	41.1%	45/9
HDIL	90	123	36.3%	195/54
IFCI	34	46	34.6%	57/20
Indiabulls Financial Services	179	236	31.7%	218/120
Hindustan Construction	24	31	29.3%	41/17
Top losers during the week (BSE-A Group)
Cipla	352	322	-8.7%	357/276
Educomp Solutions	251	233	-7.1%	510/174
MMTC Ltd	894	839	-6.2%	1069/448
Chambal Fertlizers	93	88	-4.9%	116/68
Hindustan Copper	298	283	-4.9%	328/148

Source: Equitymaster

We will now discuss the other important corporate events that took place over the week.

Gas output from Mukesh Ambani-led Reliance Industries' (RIL) D6 block is expected to drop by 10% to 34 million standard cubic metres a day (mmscmd) by April 2012. At present, the D6 block produces about 37 mmscmd of gas. Of the total, about 30 mmscmd is produced from D1 and D3 gas fields. It must be noted that output from these gas fields has been declining for quite some months and is expected to decline from 30 mmscmd to 27 mmscmd. The other 7 mmscmd is produced from the MA oilfield that also produces natural gas. The output from this field is expected to remain steady at 7 mmscmd. While RIL has attributed the decline to geological complexity, the oil ministry has put the blame on the company arguing that it drilled fewer wells than what was planned.

The current week saw key announcements in the telecom and power sector. This coupled with strong global cues saw markets rallying for the seventh consecutive week. However, with budget just around the corner it would be interesting to see whether it pleases India Inc (reform issues need to be addressed) or not as that would ascertain which way the Indian stock markets would head from here on.