Old worries return, sink world stock markets

Sat, 14 May RoundUp

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It was a lackluster week for the majority of the world's stock markets. Commodity concerns continued to spook markets across the global. Falling commodity prices were interpreted as a slowdown in demand from the US. Reappearance of Greece's debt problems and concerns over further tightening in emerging markets after China lifted bank reserve requirement ratios by 50 basis points (0.5%) also added to the weakness in global stock markets. The biggest loser of the week was Japan down 2.1% while Singapore was the biggest gainer up 2.1%. Besides Singapore, Hong Kong closed the week up 0.5% while Indian stock markets were marginally up by 0.1% on the back of assembly election results which went in the favor of the ruling Congress party and its allies.

In Europe, Germany was the biggest loser down 1.2% while France and UK closed the week down 1% and 0.9% respectively. In the Americas, Brazil was down by 1.8% while US was down by 0.3%. China closed the week down 0.7%.

Source: Yahoo Finance

Moving on to the performance of sectoral indices in India, it was a mixed week for the sectoral indices. The BSE-FMCG index was the top gainer of the week up 4.4% with FMCG stocks performing well on the back of a decent quarterly result by HUL led by volume growth. On the other hand BSE-Capital Goods index was the biggest loser down 0.6%. Rising interest rates continued to weigh on the banking stocks. As a result BSE-Banking index closed the week down 0.6%. Rising crude prices and under recoveries for oil marketing companies dominated the headline this week. As a result, BSE-Oil & Gas index found itself as one of the week's worst performers down 0.5%. Among the best performers, BSE-Realty index was up 3.9% while BSE-Pharma index closed the week up 1.4%.

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 consumer goods space Hindustan Unilever Limited (HUL) released its 4QFY11 (fourth quarter for financial year 2010-2011) results. The company's top line grew by 13.4% YoY for the quarter. This was on the back of strong sales growth in the Home Personal Care and Foods Segment. Sales of Soaps and Detergents grew by 11.4% YoY while sales of Personal Products grew by 16.2% YoY. Beverages sales and Processed Foods sales grew by 11.2% YoY and 26.6% YoY respectively. Top line for the Ice Cream business grew by 21% YoY while Exports sales grew by 9.3% YoY during the quarter. However, sales from the 'Others' segment, which comprises Pureit water purifier fell by 4.2% YoY.

EBITDA margins fell by 0.6% YoY during the quarter to 13%. This was on the back of higher raw material costs partially offset by fall in employee costs and advertisement expense during the quarter (all as a percentage of sales). Raw material grew by 19.9% YoY during the quarter while, employee costs and advertisement cost fell by 1.5% YoY and 0.5% YoY respectively. Net profits fell by 2.1% YoY during the quarter. This is due to a sharp fall in one-time income partially offset by higher other income and fall in effective tax rate. While onetime income fell by 57% YoY, other income nearly doubled during the quarter. Net effective tax rate fell from 33% to 25%. When adjusting for onetime income, net profits grew by 26% YoY. HUL was one of the biggest gainers of the week.

In news from the healthcare space, Piramal Healthcare released its 4QFY11 results. The company's top line fell by 40.6% YoY during the quarter as its domestic formulation and diagnostic business has been sold off to Abbott and Religare SRL. Of the continuing businesses, sales of the Pharma solutions business grew by 37% YoY while the critical care business grew by 31.2% YoY. OTC (Over the counter) and Ophthalmology business grew by 26.5% YoY during the quarter. Pharma solutions business benefitted from increased in customers while critical care business grew on the back of new products introduction and increased market share of existing products. Operating margins of the business for the quarter stood at 8% (23% for 4QFY10). Net profit of the company grew by 31% YoY. This was on the back of increase in interest income and gain in foreign exchange of Rs 878 m. Piramal Healthcare was one of the biggest losers of the week.

Lupin released its FY11 results as well. The company's sales grew by a healthy 19.7% YoY. This strong growth was aided by strong demand across geographies led by emerging markets and the US. The branded generics business in the US grew by 50% YoY driven by more than 50% YoY increase in sales of Suprax. This pushed up the contribution of US to the company's sales to 35%. Operating margins of the company increased marginally by 0.2% YoY to 20.4%. This is because the savings in raw material costs was offset by the increase in employee costs and manufacturing and other expenses (all as a percentage of sales). During the year, raw material costs fell by 2.1% to stand at 38.4% of sales while employee costs increased by 1.1% and manufacturing and other expenses increased by 0.7% to stand at 13.2% and 28% of sales respectively. Bottom line of the company grew by a marginal 3% YoY. This was due to fall in other income and increase in effective tax rate. While other income fell by 69% YoY, effective tax rate increased by 0.5% to stand at 12%.

In news from the IT space, NIIT Limited released its 4QFY11 results. The company's sales grew by 10% YoY. The 'corporate learning solutions (CLS)' business of the company which makes up 47% of net sales grew by 9.5% YoY+ 6 while the 'individual learning solutions (ILS)' business making up 38% of net sales grew by 6.7% YoY during the quarter. The 'school learning solutions (SLS)' business which makes up 11.5% of net sales witnessed a growth of 16.5% YoY during the quarter. New business segment (3.5% of net sales) saw a strong quarter growing by 27% YoY. Operating margins of the company fell by 3.6% during the quarter. This was on the back of increase in business development and project transition expenses. Net profit of the company grew by a strong 53% YoY. This was faster than operating income growth and came on the back of positive other income (loss the previous quarter) and fall in effective tax rate. Other income stood at Rs 75 m while effective tax rate fell from 36% in 4QFY10 to 10% in 4QFY11.

In news from the textile sector, Arvind Limited has entered into a JV with Tata Housing to develop a township in Gujarat. Arvind will receive Rs 2.5 bn from sale of land for this township. The project has estimated sales of Rs 20 bn. The Rs 12.5 bn project will be spread over 9 m sq feet of land and will have residential, commercial and retail space apart from a hospital, school and other civic amenities. The development work will start in 3 - 4 months and will have about 10,000 houses. As per a company spokesperson, Arvind is looking to liquidate Rs 8-9 bn worth of land over the next 3 years. This includes the Rs 2.5 bn it expects from this JV (joint venture) with Tata Housing. It may be noted that Arvind has ventured into real estate development last year when it has formed a JV with B. Safal group to develop about 1 m square feet of residential space in Gujarat.

Movers and shakers during the week

Company	6-May-11	13-May-11	Change	52-wk High/Low
Top gainers during the week (BSE-A Group)
RANBAXY LAB	427	492	15.2%	625/411
HIND. UNILEVER	268	306	14.3%	329/232
HOUSING DEV. INFRA	140	159	13.5%	300/127
UNION BANK	292	326	11.7%	427/283
IND. INFOLINE	70	78	11.5%	130/65
Top losers during the week (BSE-A Group)
BHUSHAN STEEL	530	455	-14.2%	545/254
PIRAMAL HEALTHCARE	463	416	-10.3%	600/413
SHREE RENUKA SUGARS	68	62	-10.1%	108/53
INDIA CEMENTS	94	88	-6.0%	128/81
INDIABULLS FIN. SER.	163	155	-4.8%	241/133

Source: Equitymaster

In news from the economy, coal shortage has forced the government to plan an addition power capacity of only 7,675 Mw for 2011-12, the last year of the 11th five year plan. This would bring the capacity addition for the 11th five year plan to 42,000 Mw as against an initial target of 62,374 Mw. The government is now trying to fix a target of 113,072 Mw for the 12th plan. However, issues relating to land acquisition and environmental concerns could result in a downward revision of this target also. As per a government official, due to a low carbon approach, capacity of 100,000 Mw will have to be reworked.

The downward revision of the target for 2011-12 has been due to coal shortages. While Coal India Ltd (CIL) had committed to deliver 335 MT of coal in 2010-11, it was only able to deliver 302 MT. This resulted in plants commissioned in 2009-10 operating at lower Power Load Factor (PLF) and the plant commissioned in 2010-11 not operating as they had no coal supply. However, the government was able to achieve a capacity addition of 12,160.5 Mw in 2010-11 which is the higher capacity addition in a single year.

The Planning Commission has set up a working group on power to review the capacity addition for the 11th Plan. This group would also work to formulate strategy for the upcoming 12th five year plan. The working group would also recommend optimal mix of additional generating capacity during 12th plan period. This would be based of different fuels at different locations. It would also exploring avenues for purchase of power from neighboring countries through joint venture schemes. Furthermore, this group would assess the investment required for the 12th plan. Infrastructural support e.g. transportation, port facilities, construction and manufacturing capabilities that would be required for implementation of the 12th and 13th five year plans would also be studied by the group. The working group would submit its report by September 30 this year.