Markets succumb to rate hike concerns

Sat, 7 May RoundUp

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It was a lackluster week for the world markets. Except for Japan all global indices closed the week on a negative note. India was the biggest loser (-3.2% WoW) followed by Brazil (-2.6% WoW) and Hong Kong (-2.4% WoW). Amongst other markets, Singapore was down 2.3% while China was down 1.7% during the week. Even the US markets were down 1.3% during the week. Possibility that Greece might leave the Euro zone fuelled negative sentiments in the world markets (as concerns with respect to sovereign debt crisis escalated). However, a surprisingly strong job data from US salvaged some worries built around Greece.

The entire Asia pack (except for Japan) was bleeding throughout the week as commodity shares were battered the most amidst falling crude and metal prices. Amongst Asia, Indian stock markets were the worst performer as rate hike by RBI triggered concerns that a hawkish monetary policy will dent corporate earnings. Markets reacted to a higher-than-expected rate hike and ended the week on a sour note.

Source: Yahoo Finance

Moving on to the performance of sectoral indices in India, not surprisingly, all the sectoral indices closed the week in the red. Metal (-5.1% WoW) was the biggest loser during the week. A sudden sharp decline in commodity prices during the week battered commodity stocks. Further, a higher than expected rate hike by the RBI saw rate sensitive's being clobbered as well. The auto and realty indices were down by 3.6% and 3.9% respectively during the week as increase in repo rate would increase the borrowing cost and subsequently impact sales. Amongst the other indices, Pharma was down 2.7% during the week followed by Capital Goods and Oil & Gas which registered a decline of 2.0% and 1.9% respectively.

Source: BSE

Let us first take a look at the key economic developments that concluded during the week. During the week RBI announced its credit policy while government considered a possibility of raising diesel prices post the state assembly elections.

While the fact that the central bank would resort to a rate hike was never in doubt, the quantum of the same perhaps left quite a few investors rattled. The RBI raised the rates at which it lends to (repo rate) banks by 0.5%. Thus, the repo rate now stands at 7.25% from 6.75% previously. In terms of quantum of hike, this is one of the highest since July 2010. The RBI reiterated that inflation is a huge threat that cannot be ignored. It poses significant risks to future growth. Thus, the central bank is willing to sacrifice some short term growth. This is in order to make sure that the long term Indian growth story stays intact.

The government is planning to consider a hike in fuel prices. An empowered group of ministers headed by the finance minister Mr Pranab Mukherjee are scheduled to meet on May 11, 2011 to discuss the same. The government plans on hiking diesel prices by up to Rs 3/litre. This will be post the state assembly elections in five states which finish next week. An increase in petrol rates is also on the cards which can be to the extent of Rs 3-4/litre. An increase in domestic LPG prices may also be discussed. However, considering that crude prices have declined substantially in the last week it would be interesting to see whether the government goes ahead with the fuel price hike as planned.

Moving onto the key corporate developments during the week, it may be noted that Infosys has appointed K V Kamath as chairman in place of its founder N R Narayana Murthy. S D Shibulal who is currently the chief operating officer will succeed S Gopalakrishnan as CEO in August 2011. In turn, Gopalakrishnan will become the executive co-chairman. Kamath, who has earlier led the largest Indian private sector lender ICICI Bank, will now prepare a succession plan for the eventual exits of all founders. He will play a key role in the process of identifying and grooming the right talent to fill important positions either on the board of directors or on the management council.

Current CEO S Gopalakrishnan has said that Infosys is looking for acquisitions in Europe and Japan in areas including healthcare and public services. It is also pursuing acquisitions in new areas such as cloud computing. It could acquire companies with annual revenues of up to US$ 600 m. it may be noted that the company has cash and cash equivalents of US$ 3.8 bn as of 31st March 2011.

Now, let us take a look at a few key corporate results that were announced during the week.

Bharti Airtel released its 4QFY11 and FY11 results. The consolidated sales of the company grew by 3% QoQ during the fourth quarter while for FY11, sales of the company grew by a sharp 42% YoY. The big jump in sales for the full year came on the back of inclusion of Bharti's African operations in the consolidated results. Operating margins grew by 1.9% QoQ to stand at 33.5%. This growth was aided by fall in staff costs and lower selling and marketing costs (both as a percentage of sales). Selling expenses were lower during the quarter as the company had incurred a onetime rebranding expense of Rs 3.3 bn the previous quarter. For FY11, operating margins fell by 6.5% to stand at 33.7%. Net profit grew by 8% QoQ. This subdued growth came on the back of increase in effective tax rate. For FY11, net profits fell by 33% YoY. This was due to higher depreciation expense and increase in interest costs. It may be noted that during the quarter mobile subscriber base in India grew by 6% QoQ to stand at 162 m subscribers. Total subscriber base on the network grew by 6% QoQ (including Asia and African operations).

Hero Honda has announced its results for the quarter and full year ended March 2011. The company's topline grew by 31% YoY during the quarter and 17% YoY during the full year. While operating profits grew at lower rate of 17% YoY during 4QFY11 (fourth quarter 2010-2011), the same declined by 5% YoY for the year ended FY11. The major reason for the subdued operating performance was high raw material costs. During the quarter, the bottomline dropped by 16% YoY on the back of a poor operating performance and a near fivefold jump in depreciation charges. For FY11, the net profits dipped by 14% YoY. The company has announced a dividend of Rs 35 per share for FY11.

IDFC recently announced its fourth quarter and (4QFY11) and full year ended results for FY11. The company has reported rise in income from operations by 27% and 22% for the quarter and full year respectively. The topline numbers are Rs 13.02 bn and Rs 49.16 bn for the quarter and the full year. The growth in income from operations in FY11 is mainly on the back of 50% YoY growth in advances. Disbursements and approvals grew by 106% YoY and 40% YoY respectively. Company's taxes went up by 70% over the quarter last year and 36% over the last year. A fall was seen in the other income by 45% year on year. Higher taxes, increased provisioning and lower other income hurt profits for the financial company and IDFC reported net profit growth of 26% in 4QFY11 and 21% in FY11. It has declared a dividend of Rs 2 per share.

Steel Authority of India Ltd (SAIL) recently announced its fourth quarter (4QFY11) and full year ended results for FY11. The company has reported flat topline growth during the quarter ended March 2011. During the financial year 2010-11 (FY11), revenues rose by 5.1% YoY. However, operating profits dropped by 24.4% YoY and 22.8% YoY during the quarter and full year ended respectively. The main reason for the decline was the massive rise in coking coal prices which rose from US$ 128 in 2009-10 to US$ 222 in 2010-11. At the bottomline level, profits declined by 27.7% YoY for FY11. The net profit margins declined from 16.4% in FY10 to 11.2% in FY11.

Pfizer Ltd, a subsidiary of Pfizer Inc, has announced its results for the four months ended March 2011. (It is important to note that the company has changed its accounting year from December - November to April - March. As a result, the results are not strictly comparable.) For the four month period ended March 2011, the company reported a 9% YoY increase in sales over the same period last year. The comparable increase in net profits was 10% YoY. Sales growth was muted on the back of a lower growth in the sales of the company's Becosules product. As this product required higher value raw materials, consequently, lower sales led to lower cost of raw materials during the period. As a result, operating margins were higher at 22% during the four month period. Over the past few quarter, Pfizer has seen a better growth in its core pharmaceuticals business. Growth in this segment has been higher than that of the broader pharmaceutical industry

Movers and shakers during the week

Company	29-Apr-11	6-May-11	Change	52-wk High/Low
Top gainers during the week (BSE-A Group)
Sintex Industries	176	190	7.9%	237/134
HPCL	376	401	6.6%	555/312
Max (I) Ltd	156	166	6.5%	187/135
Godrej Consumer	370	392	5.9%	480/298
Hero Honda	1,680	1,765	5.0%	2,075/1,379
Top losers during the week (BSE-A Group)
Shriram Transport	805	651	-19.2%	900/527
HDIL	175	142	-18.9%	300/127
Lanco Infratech	40	35	-13.1%	75/33
Suzlon Energy	56	48	-12.9%	72/44
Bank of India	482	422	-12.5%	588/316

Source: Equitymaster

The recently concluded week saw a huge correction in commodity prices . Silver prices declined due to increase in margin requirements by the exchanges to curb speculation. Even oil prices fell by more than US$ 10 in a single trading session during the week. Further, appreciation in US dollar pushed the prices of dollar denominated commodities lower. Even gold was down during the week despite the auspicious occasion of Akshaya Tritiya which generally triggers gold buying in India. It was a week where the entire commodity basket got clobbered.

It is difficult to say with conviction that whether the correction was an indication of a cycle swing or it was a breather in the current bull rally. However, a preliminary look does suggest that the correction was temporary in nature. Gold is typically a safe haven and a hedge against inflation. Hence, the demand is expected to remain buoyant in the current inflationary environment. Even crude prices have the possibility of rebounding if US reports positive macro economic data next week. Thus, reasons for the current correction appear to be more temporary in nature rather than permanent. Hence, one can assume that the rally will continue for some more time into the future.

Ever since Jairam Ramesh took over the environment ministry it seemed that getting an approval for an environmentally sensitive project was the most difficult task on this earth. Take the case of Lavasa. Currently, HCC's much coveted hill city project, Lavasa, is under the ministry's scanner for violating environmental norms. Although POSCO was subsequently granted permission in order to set up its steel plant it came with many riders. However, it seems that when it comes to power the ministry had to ultimately soften its stand. We are aware that India is a power deficit country. And coal is an important source of power. As a result, the coal & environment ministry have jointly decided to alter boundaries on 28 coal blocks. Altering a coal boundary would typically mean more coal can be mined as the proposed "no go" mining boundary is reduced. This increases the overall acreage. Partial relaxation in the "no go" policy is a welcome move. This would also ensure that are no shortages as far as the feedstock requirement for generating power is concerned.