Interest rate overhang continues

Wed, 27 Jul Closing

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While indices in the Indian stock market came off the day's lows during the closing stages of the day, they could not overcome the dotted line and hence, closed in the negative on yet another occasion. The BSE-Sensex lost in the region of 90 points today whereas NSE-Nifty edged lower by around 30 points. Furthermore, while the BSE Small cap index closed flat, BSE Midcap index closed the day marginally in the positive. More than two stocks declined for every one that gained on the Sensex today.

Asian indices ended the day on the mixed note while Europe is trading in the red currently. The rupee was trading at Rs 44.1 to the dollar at the time of writing.

It looks like RBI's move of hiking interest rates continued to stifle the markets for the second day in a row. This could also be gauged from the fact that the blue chips that lost the most today belonged to the banking and infrastructure space, sectors that are most sensitive to interest rates. The worst part is that the RBI may not be done just yet. Should inflation continue to remain stubborn, another round of rate hikes could well be considered. Indeed, not very good times for companies that are substantially levered.

GAIL (India) Ltd. has announced results for the first quarter of the financial year 2012 (1QFY12). The company has reported net sales growth of 25% on a year on year (YoY) basis. The operating profits for the quarter registered a growth of 8% YoY. Operating margins declined by 2.7% YoY on account of 31% increase in cost of raw material (up 3.3% as a percentage of sales). The 'other income' registered a growth of 28% YoY. The bottomline was up 11% YoY. However, the net profit margins were down 1.4% YoY. The decline in net profit margins was modest in comparison to decline in operating profit margins as the depreciation and interest costs declined as a percentage of sales. As per the Government decision, the company has provided a sum of Rs 6.8 bn towards the under recoveries on LPG. The stock closed marginally lower today.

IDFC, the infrastructure financing major also announced its first quarter results today. The company's net profits for the quarter rose by 3% YoY on the back of a 31% growth in topline. On a consolidated basis, net profit suffered a decline of 6% YoY as against a 24% YoY growth in revenues. This is not all. As per the company's Chairman, growth of new business took a hit during the first quarter. This was on account of delay in infrastructure project approvals. Gross approvals for infrastructure financing were down more than 50% during the quarter. The chairman was also of the view that the company will have to hike lending rates by 50 bps as it cannot absorb the latest hike in rates. The stock closed marginally lower today.