FII selling keeps India down

Sat, 30 Apr RoundUp

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It was a mixed week for the world stock markets. Benchmark indices in Europe and US closed in the positive while most of the Asian stock markets closed the week in the red. Germany was the biggest gainer of the week up 3% while China was the biggest loser of the week down 3.3%. European stock markets were helped by data from the US that consumer spending was up by 0.6%. As a result the European markets were buoyant during the week. France was up by 2.1% while UK was up by 0.9%. In the Americas, US was up by 2.4% as a result of strong earnings being posted by companies. However, Brazil was down by 1.7%. In Asia, only Japan closed the week in the green up 1.7%. Singapore and Hong Kong were down by 1.4% and 1.7% respectively. Even the Indian stock markets closed the week in the red, down 2.4% due to persistent selling by FIIs and expectation of another round of interest rate hike by RBI.

Source: Yahoo Finance

Moving on to the performance of sectoral indices in India,pharma and PSU stocks were the only ones to close the week in the green. Concerns on further rise in interest rates put pressure on realty stocks which the result that BSE-Realty index was the biggest loser of the week down 5.9%. Rising crude oil prices has also been a concern over the week. As a result oil & gas stocks witnessed a sell off resulting in the BSE-Oil & Gas index closing the week down 2.9%. BSE-Capital Goods and BSE-Banking indices were among the other worst performers of the week down 1.8% and 1.7% respectively. Among the best performers, BSE-Consumer Durable and BSE-FMCG indices closed the week down 0.1% and 0.2% respectively.

Source: BSE

Moving on to key corporate developments during the week - a handful of companies announced their results for the quarter ended March 2011. From the FMCG space Nestle declared its 1QCY11 results. The company had a strong quarter as a result of higher demand and price increases. Top line for the company grew by 22.1% YoY. Geographically, domestic sales performed better than exports. While domestic sales grew by 23.1% YoY, exports grew by 10.2% YoY. With regards to operating margins, lower cost of raw material helped neutralize other expenditure. As a result operating margins remained flat at 21.1% (as a percentage of sales). Higher commodity costs continued to play spoilsport during the quarter. However, cost of raw material was lower as a result of improvement in product mix and the end of free product promotion. Nestle plans to increase production in existing factories and hence redesigned their layout. The related charges for the redesign resulted in increase of other expenditure. Net profits of the company grew by 26.7% YoY. This was due to higher operating income, increase in other income, fall in interest, subdued growth in depreciation and lower effective tax rate. While other income grew by 138% YoY, interest expense fell by 87% YoY. During the quarter there was a reduction in amortization in management information system. This resulted in lower depreciation costs in spite of higher depreciation on fixed assets. Effective tax rate was lower by 0.8% to stand at 28.7% for the quarter.

Another company from the FMCG space which released its results was Procter & Gamble Hygiene and Health Care Limited (PGHHCL). The company recorded strong sales during the quarter. With the feminine hygiene business growing by 23% YoY and the health care business growing by 11% YoY, the company's top line grew by 14.3% YoY. In the feminine hygiene business Whisper Ultra and Whisper Choice turned in a robust growth. Vicks Cough drops grew by 28% YoY while Vicks Inhalers grew by 24% YoY. What has been encouraging this quarter is that the volume growth has been quite strong at 21%. However, price cuts and increase in excise duty resulted in top line growth moderating. On the other hand, operating income growth was a disappointing 6% YoY. This was due to higher commodity prices which resulted in a sharp increase of 50% YoY in cost of goods sold. However, advertisement and staff costs fell by 14% YoY and 5% respectively while other expenditure grew by 11% YoY. This provided some support to operating income. Net profit of PGHHCL fell by 11% YoY during the quarter. This was the result of lower operating income, fall in other income and rise in depreciation costs. While other income fell by 50.6% YoY, depreciation rose by 28.8% YoY. However, fall in effective tax rate by 1.8% to 20.5% provided support to the bottom line.

In news from the auto space, TVS Motors declared its FY11 results. The company's had a stellar year with a top line growth of 42% YoY. This growth was led by strong demand for two wheelers. During the year, sales of two wheelers stood at 2,008,239 units, an increase of 32% YoY. Demand for three wheelers also supported top line growth with volume growth of 166% YoY. The company ended the year with 39,680 three wheeler units sold. Two wheeler exports also grew at a robust rate clocking a growth of 39% YoY and stood at 229,132 units. Operating profit for the company grew by 25% YoY. This was slower than top line growth as a result of higher commodity prices. During the year, cost of raw material grew sharply by 48.8% YoY. However, other expenditure grew at a slower clip than sales resulting in some support for the operating profits. Net profits increased by 118% during the year. This was due to the fact that TVS has an extraordinary expense last year which wasn't there this year. When adjusting for this extraordinary expense, net profit grew by 43% YoY. This was faster than operating profit growth due to an increase of 70% YoY growth in other income and 35% YoY fall in depreciation. However, increase in tax expense capped net profit growth.

In other news from the auto sector, a leading financial daily reported that the car market is losing its sheen. Judging from the number of people visiting showrooms, the growth in the car industry is expected to drop below 10% YoY in FY12. This slow down has been confirmed by all the major auto makers including Maruti Suzuki, Hyundai Motors, Tata Motors, Honda Siel Cars and Toyota Kirloskar Motors. It may be noted that in 2010-11, India had beaten China as the fastest growing car market with a 30% YoY growth in sales. This was on the back of a slew of new cars launches coupled with rising income. However, now the mood has become less buoyant. This is because of increasing cost of ownership of a car due to price increasing on all counts from stickers to auto loans and fuel prices.

Auto loans have increased to 11-15% in the last year after eight rounds of interest rate hikes during that period. As per bankers, the mood of customers changed dramatically once the interest rates hit the 15% mark. Further interest rate hikes are expected and this is also dampening the mood of potential customers. Many customers are expecting oil marketers to further increase petrol and diesel prices after the assemble election process is over in West Bengal, Tamil Nadu, Assam, Kerala and Puducherry next month. This is due to the rising crude oil prices. These factors have dramatically affected the mood of customers as inquiries for cars are not translating in actual sales.

Moving to banking, ICICI Bank declared its FY11 results. The company's net interest income remained flat for the year which a growth of 1% YoY. Advances grew by 19% YoY while net interest income grew by 11% YoY on the back of higher CASA proportion. Operating costs increased during the year with cost to income ratio at 42% up from 38% in FY10. Capital adequacy stood at 19.5% at the end of the year while net NPAs falling to 0.9% of advances during the year. This is an improvement of 1% from FY10. Net profits for the year grew by 28% YoY. This was due to write-back of provisioning during the year. Provisioning coverage ratio stood at 76% for the year.

Movers and shakers during the week

Company	21-Apr-11	29-Apr-11	Change	52-wk High/Low
Top gainers during the week (BSE-A Group)
GSK CONSUMER	2,263	2,438	7.7%	2,460/1,575
EXIDE INDUSTRIES	142	153	7.6%	180/112
ASIAN PAINTS	2,579	2,774	7.6%	3,027/2,010
GSK PHARMA	2,117	2,256	6.6%	2,430/1,880
NESTLE	3,767	4,003	6.3%	4,199/2,722
Top losers during the week (BSE-A Group)
IRB INFRA.	203	176	-13.4%	313/158
HOUSING DEV. INFRA	185	161	-13.0%	300/127
UCO BANK	120	104	-13.0%	152/68
IVRCL LTD.	90	79	-12.4%	194/63
GUJ.NRE COKE	57	50	-11.7%	85/42

Source: Equitymaster

In other news, food inflation has inched by marginally to 8.76% for the week ending 16th April. This is up from 8.74% recorded for the week ending 8th April. This rise comes on the back of rising prices of fruits, protein based items and onions. While the increase is marginally, it will put pressure on the government to increase interest rates next week. RBI is expected to raise repo and reverse repo rates by 0.25% in the coming.

During the week under review, prices of non food articles went up by 26.48% YoY while fuel and power prices increased by 13.53% YoY. Petrol was up by 21.81% YoY. It may be noted that headline inflation for March stood at 8.98% vs. the government's projection of 8%. The government had been counting on record harvest of wheat and pulses to reverse the trend on increasing food prices. However, after a slight moderation in February and March, food inflation has started moving up again.

As per a report by Asian Development Bank (ADB) a 10% rise in domestic food prices could push an additional 64 m people out of 3.3 b people living on the Asian continent into extreme poverty. This is based on a US$ 1.25 per day poverty line. The reason for this is that poor families in Asia spend over 60% of their income on food. Higher food prices would further reduce their ability to pay for medical care and their children's education. As per the report, if global food prices and oil price hikes seen in the beginning of 2011 continue for the rest of the year, economic growth in the region could be lower by 1.5%. The short term outlook looks bleak as food prices are expected to continue climbing due to production shortfalls, rising demand, weak dollar and high oil prices. In response, the report calls for steps to be taken to increase market integration and the elimination of policy which create hurdles for transferring foods from regions of surplus to regions of deficit. Moreover, speculative actives in food markets should be checked if food prices are to come down.