Excess liquidity pumps market

Sat, 2 Jul RoundUp

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It was an excellent week for the world stock markets. France (up 5.9%) led the gains in the developed markets. Amongst the Asian pack, India led, with gains of 2.9% during the week. Approval of austerity measures by Greece and jump in the manufacturing data fuelled positive sentiments in the US stock markets. It may be noted that the US stock market registered an increase in all of the last five trading sessions netting gains of about 5.4% for the week.

Indian stock markets were also up by 2.9% during the week. Slowing food inflation and increased participation of FIIs fuelled gains in the Indian stock markets. It may be noted that FIIs bought shares (net) worth US$ 1.1 bn in the last five trading sessions alone. Excluding these, inflows the total investment so far in 2011 was only US$ 320 m. Hence, excess liquidity chased shares which resulted in gains. Further, despite a series of rate tightening measures undertaken by the RBI, the finance minister maintained its economic growth targets underpinning positive sentiments.

Amongst the other developed markets, UK was up 5.1% while Germany was up 4.2%. In Asia, Singapore was up 2.4% followed by Hong Kong (up 1%) and China (up 0.6%). Even Japan registered a gain of 2% during the week.

Source: Yahoo Finance

Moving on to the performance of sectoral indices in India, stocks from the FMCG space were the biggest gainers on expectations that strong monsoons will boost demand in rural areas and reduce input prices. Even the realty pack was up 4% during the week on the back of bargain hunting opportunities. It may be noted that realty stocks have been battered the most in the recent past amidst rising interest cost and liquidity crunch. Metal and capital goods stocks were also up by 3.9% each during the week. Oil & gas stocks were the worst performers due to prevailing weakness in RIL and ONGC. RIL has witnessed a sell-off recently on concerns that it has been unduly favored by the oil ministry for the development of its KG-D6 block. ONGC witnessed selling pressure on reports that the company has approved its Follow on Public Offer (FPO). Amongst the other indices, Auto was up 2.6% followed by Pharma and PSU which were up 2.1% each.

Source: BSE

Moving on to the key economic developments during the week, it may be noted that food inflation fell to a 1.5 month low to 7.8% for the week ended June 18. This was on the back of cheaper prices of vegetables, pulses and potatoes. Food inflation, as measured by the Wholesale Price Index (WPI), stood at 9.1% during the previous week, and over 20% during the comparable period of June 2010.

In news from the energy sector, the power ministry has expressed concerns that many new power plants are running at half their capacity on account of coal shortage in the country. They may default on their loan repayment to banks if the fuel situation does not improve immediately. As per a power ministry official, the shortfall in coal supply has forced the companies to buy coal in the spot market. The additional cost thus incurred is not a pass through in tariff. This has resulted in developers defaulting on power purchase agreements (PPAs). If the problem persists, developers may even start defaulting in payments to banks and financial institutions. Such a default will adversely affect power sector financing which is already experiencing a crunch.

In news from the auto sector, car makers in India are keeping their production levels low to suit the decreased demand for cars in the market. It may be recollected that the automobile industry witnessed a near 9% cut in production last month compared to April. The demand for cars is expected to fall down further in the coming months. The industry had been doing well in the last 5 months and in anticipation of further growth in demand, more cars were produced. This has resulted in increased inventory piled up at the dealers. Some companies like M&M and Maruti Suzuki are using the period of maintenance shutdown to prune inventories at dealers. They are expected to shut their plants down for some time this month. Auto component makers have been advised by the players to reduce their supplies in the short term before the arrival of the festive season.

State run oil major ONGC's board has approved a follow-on share sale plan. However, the papers will be filed by the company only after it gets a go-ahead from the Government. It should be noted that the offer has been delayed by a few months as higher oil prices and the consequent higher subsidy burden kept the oil exploration and production behemoth from entering the markets. The company is hoping to raise a total of US$ 2.8 bn. The company has huge capex plans up its sleeve whereby it is planning to pump in nearly US$ 8 bn in developing a gas field in an east coast block and produce up to 30 m cubic meters a day in five years.

HUL and Godrej Consumer Products are expected to see their margins climb up this fiscal year after facing margin pressure over the last two years. It may be noted that palm oil is a key raw material for the manufacture of toilet soaps and accounts for about half of the raw material cost. In June, the prices of palm oil dropped by 18% to Rs 45,700 per tonne. This is the lowest in seven months, after hitting a three year high of Rs 58,320 per tonne in February. Even after this drop, the prices are about 15-20% high on a year-on-year basis and are expected to correct further. However, HUL and Godrej have indicated that price cuts are not on the cards as price hikes in the last few quarters were not in-line with increase in raw material costs .

Larsen and Toubro Ltd has plans to set up another 2,000 MW power plant and a 3 m tonne steel plant in Orissa at a combined investment of Rs 300 bn. This along with earlier plans of Rs 440 bn alumina and aluminium plant and Rs 110 bn power project in Orissa have raised the company's total investment in the state to around Rs 850 bn. The company's new power plant would also involve state government association and a contribution of Rs 100 bn. The project would require about 1,200 acres of land. For its 3 m tonne steel plant and a captive power plant near Paradip, the company has already identified 600 acres of land. Once a memorandum of understanding is signed with the Orissa government, the company would start work on the plant.

Global pharma giant Pfizer Inc has sued Aurobindo Pharma over the generic version of Lipitor. It may be noted that Lipitor, is one of the best selling medications in the American market. The annual sales for the drug in the country stand at approximately US$ 7 bn. According to Pfizer, it has exclusive production right of Lipitor until 2017 as per patents covering the blockbuster drug's brand name. Pfizer has now requested the court to refrain Aurobindo from manufacturing and marketing the drug before January 8, 2017. This is the date of expiration of the patent, including the period of exclusivity granted to Lipitor. It is reported that Aurobindo may opt for out-of-court settlement with Pfizer. It may be recalled that earlier this year, Pfizer had filed a patent infringement suit against Dr Reddy's Laboratories over the same drug.

Movers and shakers during the week

Company	24-Jun-11	1-Jul-11	Change	52-wk High/Low
Top gainers during the week (BSE-A Group)
Punj Llyod	63	77	22.2%	142/54
Pantaloon	264	318	20.6%	531/233
Jubilant Lifesciences	167	201	20.4%	394/149
Tata Teleservices (Mah)	16	19	16.3%	26/15
Shree Renuka Sugars	59	69	16.1%	108/56
Top losers during the week (BSE-A Group)
GTL Ltd	113	97	-13.8%	477/91
Titan Industries	234	214	-8.9%	238/116
Sterling Biotech	91	86	-4.7%	126/84
GTL Infra	17	16	-3.9%	48/15
Voltas	165	159	-3.6%	263/148

Source: Equitymaster
In news from the finance world, Bangladeshi practitioners feel that India's micro finance model is not sustainable. This is mainly because in India, micro finance is hugely dependent on the government and there is a lack of regulatory framework to check exploitation of the poor. As compared to this, the Bangladeshi model is run professionally and is pro-poor with major involvement from civil society and NGOs. Bangladesh's model is also more robust as it is not left to the whims and fancies of the government. The government of Bangladesh only acts as a facilitator. Also, the micro finance model in India is mainly focused on economic development and not so much on women empowerment, health and education which are very crucial for the development of the country in the long run.