Repo rate cut boosts Indian stock markets

Sat, 21 Apr RoundUp

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World Stock markets displayed positive sentiments during the week. In the US, earnings season so far has been quite good with 81% of S&P 500 companies that have declared results so far beating expectations. However, the Federal Reserve's monetary policy committee meeting scheduled next week will set the pace for the future.

The Indian stock markets closed the week in the green post the repo rate cut of 50 basis points by the Reserve Bank of India (RBI) during the week. The RBI move, aimed at stimulating the economy was a surprise for investors who were expecting 25 basis points (0.25%) cut at the most. The stock markets were up by 1.6% during the week.

Barring Japan (down by 0.8%), all other world stock markets had a positive end to the week. Germany (up by 2.5%) and UK (up by 2.1%) led the list of gainers.

Source: Yahoo Finance

Sectoral indices registered a mixed performance during the week. Auto stocks (up by 6%) were the top performers followed by metals (up by 3.3%). On the other hand, we had energy stocks losing the most. These stocks ended the week down by 0.5%.

Source: BSE

Let us now take a look at key developments during the week. The Reserve Bank of India (RBI) cut the repo rate (the rate at which RBI lends to banks) by 50 basis points. This was the first reduction in lending rates in the last three years. The repo rate now stands at 8% from 8.5% previously. Reverse repo is now 7% post the review. Cash Reserve Ratio (CRR) has been kept unchanged at 4.75%. It has been done with the aim to boost economic growth. However, RBI Governor, Dr D Subbarao stated that rates could be raised again if price pressures revive. The move by RBI came as a surprise to the markets that had anticipated a 25 basis point cut.

HDFC Bank declared results for the fourth quarter and the full year 2011-12 (FY12). It has reported a 19% YoY growth in net interest income in 4QFY12 and 17% YoY growth for FY12. This is largely a result of 22% YoY growth in advances. Net interest margins for the year 2011-12 were slightly up from 4.1% to 4.2%. The private bank's capital adequacy was a comfortable 16.5%. Other income grew by 19% YoY during the quarter and by 21% YoY during the full year 2012. The bank's aggressive expansion in Tier III to Tier VI cities resulted in addition of 558 branches during the year. HDFC Bank has declared a dividend of Rs 4.3 per share implying a dividend yield of 0.8%.

Hindustan Zinc declared results for the quarter ended March 31, 2012 as well as the full year. Net sales have declined by 3.2% YoY for the March quarter. For the full year, sales were up by 13.6% YoY. Higher raw material costs led to fall in operating profits by 15.5% YoY during the quarter. Operating margins fell drastically by 7.7%. The company reported 20.2% YoY decline in net profits due to lower operating profits, lower zinc and lead prices and higher taxes. For FY12, net profits were up by 12.8% YoY. A dividend of 45% has been declared which is Rs 0.9 per share. Total dividend including interim dividend already paid amounts to Rs 2.4 per share. This is the highest dividend ever proposed by the company.

Ambuja Cements reported its results for the first quarter of CY12. Sales have increased by 19% YoY during the quarter, while the net profits declined by 23% YoY during the same period. The growth in topline was lead by higher sales volume and improved realisations. While the cost of raw materials and power & fuel increased by 0.5% YoY and 2% YoY respectively (as a percentage of net sales), other cost heads witnessed a decline. As a result, operating margins improved marginally by 0.6% YoY. The reason for the decline in net profits is due to exceptional losses on account of change in its depreciation method for captive power plants with retrospective effect as well as change in accounting policy for measuring employee stock options.

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

Piramal Healthcare has bought the research and development portfolio from Bayer AG. With this, Piramal will now have access to Florbetaben, the Alzheimer's drug produced by Bayer. It may be noted that the market for Alzheimer's drugs is estimated at around US$ 1 bn - US$ 5 bn. The other companies that manufacture such a drug are Eli Lily & Co and General Electric Co. Florbetaben is in its final stage of clinical trial. It will help detect symptoms early in the probable patients and thus aid in faster treatment too.

Coal India has initiated the process of signing fuel supply agreements (FSAs) with power companies. This follows a Presidential directive to the coal mining company to ensure that power companies get adequate fuel for use in their plants. It may be noted that no new FSA has been signed between Coal India and power companies since March 2009. This move is expected to benefit power plants with a combined capacity of 28,000 megawatt (MW). The power companies that could benefit are Reliance Power, Tata Power, Sterlite and National Thermal Power Corporation Limited. (NTPC). On the other hand, Coal India's finances may suffer.

The much awaited repo rate cut by RBI has brought some relief to the markets. However, RBI Governor has cautioned that there is very less chance of further rate cuts. In fact, he stated that RBI may resort to raising the rates again if price pressures resurface. For the meantime, corporates especially the realty and auto companies have something to cheer about.