Rate hikes concerns dampen markets

Sat, 18 Jun RoundUp

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It was a mixed week for the world stock markets. Most developed markets except UK and Japan closed the week on a positive note. However, emerging markets closed the week in the red. Germany (up 1.3%) led the gains amongst developed markets followed by France (up 0.5%).

After registering six straight losses, the US markets finally ended its losing streak and closed the week on a positive note. Optimism crept into the US markets as financial rescue arrangement for Greece moved closer to a compromise amongst the European Union. Markets were also enthused by better than expected lead-economic indicator forecast's signaling that growth may pick up by the end of 2011. Amongst other developed markets, UK was down 0.9% and Japan was down 1.7% for the week.

Indian stock markets closed the week in red (down 2.2%). This was on the back of higher-than-expected May inflation data which resulted in another round of rate hike by RBI. It may be noted that RBI raised its lending rate to banks (repo rate) by 0.25% to 7.5% in the recent monetary policy review. The sell-off was also attributable to FII outflows as concerns arose with respect to inflation and subsequent monetary tightening hurting growth and corporate profits. Amongst, other markets Singapore and Hong Kong closed the week down by 2.4% and 3.2%. Even Brazil ended the week with a loss of 2.6%.

Source: Yahoo Finance

Moving on to the performance of sectoral indices in India, stocks from the oil & gas space were the biggest losers during the week. The losses were led by Reliance Industries which lost about 9% during the week on reports that the company was shown undue favor over its KG basin block causing huge loss to the exchequer. Even the IT index was down 4.5% during the week on prevailing concerns in US and Europe. Banking stocks were down due to recent rate hike by RBI. Auto stocks were down led by Maruti (down 5% during the week) due to a 13 day strike which impacted the production schedule and profitability. Amongst the other indices, BSE-Power was up by 0.3% while BSE-FMCG closed the week with a marginal loss of 0.2%. Even BSE-Capital Goods index was down by 0.6% during the week.

Source: BSE

Moving on to the key economic developments during the week, the Indian central bank declared its second monetary policy for the financial year 2011-12. Skyrocketing commodity prices, inflationary pressure drove the RBI to tighten its monetary policy once again. The RBI raised the rates at which it lends to (repo rate) banks by 0.25%. Thus the repo rate now stands at 7.5% from 7.25% previously. The rate at which RBI borrows from banks (reverse repo), has been pegged at 1% below the repo rate. Thus, the reverse repo rate has automatically adjusted to stand at 6.5% from 6.25% previously. The increase in the price of commodities globally was cited as the 'key risk factor' troubling the RBI. Post the RBI's aggressive stance in its previous monetary policy review, 47 banks raised their base rates by 1.5-3% during July 2010-May 2011. Thus, credit growth may see a further moderation, hurting India's GDP growth prospects. And this may be the reason why markets suffered a setback during the week.

The rate hike came in as India's inflation rate rose by 9.06% year-on-year (YoY) in May. This came in higher than the 8.66% rise in April 2011. What was worrying is that while food price inflation rose by 8% in May compared to 7.6% in April, non-food manufactured inflation (India considers this 'core inflation') - rose from 6.3% to 7.2%.

Finally, the 13 day employee strike at Maruti Suzuki's Manesar plant ended late night on Thursday. This was decided after the management agreed to take back the sacked employees. It may be recollected that 11 employees went on strike on June 4 to obtain acceptance for a newly formed employees union Maruti Suzuki Employees Union (MSEU). They were sacked two days later in a disciplinary action for inciting others to go on strike. It may be noted that the 13-day strike resulted in revenue loss to the tune of Rs 4.2 bn and production loss of 12,600 units. For each day of strike, Maruti will deduct 3 days of wages as penalty. However, there still is no clarity about recognition of the newly formed union. According to Haryana's labour minister, Shiv Charan Sharma the company management cannot deny formation of the union but the same will take longer. The workers will have to apply for it and get the approval from the Government.

Bharat Heavy Electricals Ltd (BHEL) is in talks with Areva, Alstom, Toshiba, General Electric and Siemens to source technology for manufacturing higher rating nuclear sets of 1,000 MW and above. As per the company management, the move is strategic as the country is heading towards high-capacity nuclear power projects providing a good scope for manufacturing high - rating sets of above 1000 MW. The company has a tripartite joint venture with Nuclear Power Corporation of India (NPCIL) and Alstom to manufacture 700-mw nuclear turbines. NPCIL plans to set up high-capacity units in Gujarat, Maharashtra and Tamil Nadu. A lot of projects including Jaitapur in Maharashtra are proposed to have 1,650-MW units. The company wants to make the most of this opportunity and expand to higher sized units.

Steel major Tata Steel has finally decided to sell its entire 26.27% stake in Riversdale Mining to Anglo-Australian mining group Rio Tinto for 1.06 bn Australian dollars (equivalent to US$ 1.12 bn or Rs 50 bn). The divestment plan has come on the back of Rio Tinto's plan to delist Riversdale Mining. Rio Tinto took control of the company in April 2011 and so far holds 73.2% stake in the company. The valuation at which Tata Steel plans to sell its stake is twice its initial investment in the company, meaning about 100% appreciation in less than four years. The investment is held by Tata Steel Global Minerals Holding Pte which wholly owned subsidiary of Tata Steel based in Singapore.

The follow-on public offer (FPO) by Steel Authority of India Ltd (SAIL) may be deferred till the end of 2011. As per a finance ministry official, the issue will be looked at sometime during end of the October in view of choppy market conditions. He said that all steel firms are under pressure and the government would not be able to raise the required funds at this juncture even after diluting its stake in the steel firm.

Currently, steel companies are facing the pressure on margins on account of rising coking coal prices. Besides, there are apprehensions of a strike in some coal mines of Australia. It is important to note here that Indian companies import upto 35 MT of coking coal annually, of which a significant share comes from Australia. If this comes true, it will worsen the supply situation further.

Movers and shakers during the week

Company	10-Jun-11	17-Jun-11	Change	52-wk High/Low
Top gainers during the week (BSE-A Group)
Sun TV Ltd	305	344	12.7%	557/273
Godrej Industries	186	203	9.0%	248/154
Pantaloon Ltd	270	292	8.0%	531/233
Idea Cellular	72	78	7.8%	80/54
Punj Llyod	65	69	6.7%	142/54
Top losers during the week (BSE-A Group)
GTL Ltd	410	340	-17.1%	477/395
IDFC	135	120	-11.1%	218/121
Jain Irrigation	157	141	-10.0%	264/148
PFC	200	181	-9.7%	383/189
Reliance Industries	955	868	-9.1%	1187/894

Source: Equitymaster
ONGC plans to spend around US$ 39 bn over the next 5 years (starting April 2012) in order to raise its output. This investment, when finalized will be a 40% increase from the company's spending programme in the previous 5 year period. ONGC holds the largest and most prospective acreage in India, including blocks in Krishna Godavari (KG) basin. The company accounted for 65% of India's crude oil and 44% of its natural gas output in the year ended March 31 2011. However, its output has been stagnant, as its oil fields are aging and it has not been able to bring any new fields into production. In order to fund its expansion, the company mainly plans to use internal accruals, as it is a debt free company

While the near term economic and business indicators do not make a good read, investors need to keep a close eye on companies that have the ability to tide over the crisis and are available at a bargain.