Inflation spooks Indian stock markets

Sat, 19 May RoundUp

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It was a disappointing week for world stock markets. All the stock markets ended the week in the red. US stocks succumbed to selling pressure on account of ongoing Eurozone debt crisis and disappointing US economic data despite strong corporate earnings. Also, the downgrade of Spanish banks by Moody's in the latter half of the week added to the woes of investors.

In India, high inflation and global concerns coupled with rupee's fall were major causes of concern during the week. However, the Indian stock markets though down by 1% were the best performing markets amongst all.

Amongst, the other world markets, all were on the losing end. Brazil in particular shed more than 8% followed by UK which was down nearly 6%.

Source: Yahoo Finance

Most of the sectoral indices closed the week in the red with auto and consumer durable stocks losing the maximum. FMCG, pharma and Information Technology could manage some gains.

Source: BSE

Let us now take a look at key developments during the week. Inflation moved up to 7.23% in April. This was mainly because of hike in prices of essential items including vegetables, pulses and dairy products. In March, inflation was 6.89% and the same was 9.74% in last April. Stock markets reacted very strongly to this bad news and witnessed a huge fall during the week. Such a high inflation number is a cause of concern for investors because this suggests that the Reserve Bank of India (RBI) may have to continue its hawkish stance for a while longer. Resultantly, we may not see further rate cuts in near future.

Companies continued to declare their results for the quarter ended March 31, 2012 and in some cases for the full year 2011-12 too.

Larsen & Toubro announced results for fourth quarter as well as full year 2011-12. Gross revenues were up by 21% YoY for the quarter as also for the full year. There was growth in buildings and factories, infrastructure, power, transmission and distribution, and minerals and metals space. Order book stood at 1.45 trillion at the end of March 2012. Net profits saw an increase of 25% YoY during the quarter. For the year 2012, net profits were up by 20% YoY. The board also recommended a dividend of Rs 16.5 per share, amounting to a dividend yield of 1.4%.

Pharmaceutical company Dr Reddy's declared numbers for the March quarter as well. The company's consolidated revenues grew by 32% YoY. However a jump in operating expenses to the tune of 83% resulted in a marginal 3% YoY increase in profits. The company's operating margins expanded to 28.4% from 20.5% during 4QFY11. However, we may note here that there was an extra ordinary expense amounting to Rs 1 bn (a non-cash impairment charge related to product intangibles) during the quarter. Adjusted profits were resultantly higher than reported numbers. For the full year, company's revenues and profits were up by 29% each.

Automaker Bajaj Auto declared its results for the last quarter of financial year 2012. Net sales increased by 12% YoY during the quarter. Volumes grew by 7% YoY while average net realizations were up by 19% YoY. Growth in volumes was on account of higher exports which grew by 26% YoY. Profits at operating level increased by 14.6% YoY during the quarter while profit after tax declined by 45% YoY. For the full year, revenues were up by 19% YoY while net profits reduced by nearly 10% YoY. Bajaj Auto recommended dividend of Rs 45 per share.

In other news from the corporate world, Glaxosmithkline Consumer Healthcare (GSCKH) has ambitious plans in the breakfast and snacks segment. The company's offering Horlicks Oats has been doing well in the southern part of India. It now captures a 12% market share and is the third largest in oats segment. However, Horlicks Foodles failed to elicit similar response from consumers. GSKCH wants to focus on oral care too by launching newer products. The toothpaste Sensodyne's current market share is only 2% but the company has plans to raise it to double digits in future.

Movers and shakers during the week

Company	11-May-12	18-May-12	Change	52-wk High/Low
Top gainers during the week (BSE-A Group)
Koutons Retail	8	8	12.8%	33/7
Divis Laboratories	824	912	10.7%	921/693
Sesa Goa	175	193	10.3%	302/155
Sterlite Industries	94	101	7.2%	175/88
NMDC Limited	166	176	6.0%	278/140
Top losers during the week (BSE-A Group)
Moser Baer	13	10	-20.8%	42/11
REI Agro	10	8	-15.9%	30/9
IVRCL Limited	53	45	-15.6%	78/28
Gujarat NRE Coke	19	16	-14.1%	52/15
NCC Limited	37	32	-13.8%	95/32

Consumer goods firm Dabur India Limited is looking at expanding its new retail chain "NewU". The company's subsidiary, H&B Stores Ltd that currently operates 44 'NewU' stores is planning to open 30 new stores in the next twelve months. The FMCG company is targeting not just opening of more NewU stores but also dedicated online portal to cater to its customers. The online platform is ready and is in its testing phase at the moment. As per the company, the online portal will be functional from June onwards. With this online portal, the company will be able to reach a wider base of consumers. Dabur had earlier launched a similar dedicated online portal for its beauty products too.

Although, global concerns over deepening Eurozone debt crisis continued, what caused more disappointment in Indian stock markets was the double digit food inflation number. With inflation being high again, the possibility of RBI reducing rates has become bleak. However, situations like these offer opportunities to invest in fundamentally sound stocks that are available at reasonable valuations.