Global markets tumble on weak US economy

Sat, 6 Aug RoundUp

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The week gone by was a poor one for the global stock markets as the latter witnessed heavy selling pressure on the back of some negative developments in the US. In fact, the US markets had their worst week since recession (down by nearly 6%). The debt deal that was struck by the US government did nothing to alleviate fears of a prolonged recession in the US economy. Some economic data released was not too enthusing either as reports on manufacturing and consumer spending published weak numbers. This fuelled the anxiety of investors and led to a selling spree across the world markets. The fact that US still faced the possibility of a ratings downgrade even after raising the debt ceiling further spooked the markets. And there was no improvement seen with respect to the Europe debt crisis either.

Indian stock markets faced the brunt of heavy selling too with the BSE Sensex closing lower by 4.9% during the week. Amongst the other world markets, Germany was the biggest loser (down by 12.9%) followed by France (down 10.7%) and Brazil (down 10%). However, China showed some resilience and was down by only 0.9%.

Source: Yahoo Finance

Moving on to the performance of sectoral indices in India, all were down during the week. Stocks from the Realty and Metal space were the worst hit. Among other stocks that were at the receiving end, IT stocks were particularly hit hard on fears of the US economy slowing down. PSU stocks and those from the Oil & Gas sector managed to contain losses. Falling crude oil prices helped the Oil & Gas stocks during the week.

Source: BSE

Now, let's take a look at key economic developments during the week. The Finance Minister has advised the public sector banks to exercise extra caution while sanctioning loans but ensure availability of credit. Mr Pranab Mujherjee had a meeting with chiefs of these banks last week whereby he stated that while proper due diligence should be conducted when offering loans, there should not be any delay in the process. This comes on the back of rising NPAs (non performing assets) of the public sector banks. The gross NPAs of such banks have risen from Rs 440 bn in March 2009 to Rs 781 bn in June 2011. This, we believe will ease the credit concerns of corporate India to an extent.

In news from the pharma industry, Wockhardt has signed an agreement to sell its nutrition business to Danone. The deal is said to be worth US$ 250 m. As per the deal, Danone will acquire Wockhardt's nutrition business including brands and related manufacturing capacities. The brands like Dexolac, Farex and Nusobee enjoy high consumer awareness. The nutritional supplement brand Protinex is also quite popular. The said deal will provide Danone entry into baby nutrition and medical nutrition markets in India and also access to a wide distribution network across India. Given that Wockhardt has been saddled with a lot of debt, this move is a part of its strategy to raise funds and retire some debt.

Continuing with the result season, many companies declared their results for the quarter ended June 2011. Let us discuss a few of those.

Titan Industries declared results for the first quarter of financial year 2011-2012 (1QFY12). The watch to jewellery maker reported 61.3% YoY growth in sales and 76.4% YoY growth in PAT during the quarter. The sales were largely led by growth in jewellery sales amounting to 71.9% YoY. This segment now contributes to 80.7% of the total sales for the company. Watches saw a relatively slower growth at 23.2% during the quarter. Titan has been able to maintain the operating margins at the same level as last year (9%). Lower interest costs coupled with higher other income helped it in posting huge growth in net profits.

Steel major SAIL also announced its first quarter financial results of 2011-2012 (1QFY12). The company reported a 19.6% YoY increase in the revenues. This was on account of exports doing well clocking a 131% YoY growth during the quarter. The domestic business was slightly behind with a growth of 17% YoY. The expansion in dealer network helped the steel company. However, higher raw material costs played spoilsport and resulted in 28.8% decline in operating profits. Operating margins too fell down from 20.2% to 12% over the same period last year.

In news from the automobiles world, the country's largest carmaker Maruti Suzuki posted a record 25% drop in sales in July. Sales of Swift Dzire witnessed sharp fall (5,471 units lower YoY) due to a shift in the manufacturing facility from Manesar to Gurgaon. Maruti sold 75,300 vehicles in July this year compared to 100,857 in 2010. The company also halted dispatches of Swift hatchback in July to introduce a new model in August. This impacted production of 15,000 units.

Movers and shakers during the week

Company	29-Jul-11	5-Aug-11	Change	52-wk High/Low
Top gainers during the week (BSE-A Group)
Chambal Fertilisers	87	92	6.6%	104/66
Idea Cellular	90	96	6.0%	99/57
BPCL	660	699	6.0%	811/540
HPCL	381	403	5.7%	551/312
IOC	318	332	4.4%	451/298
Top losers during the week (BSE-A Group)
IVRCL Ltd	63	50	-20.8%	180/50
Gujarat NRE Coke	44	35	-20.8%	72/39
Jai Corp	107	85	-20.4%	304/88
Adani Enterprises	741	618	-16.6%	773/512
Housing Devlopment Infra	147	124	-15.8%	296/126

Source: Equitymaster
In some more news from the economy, the Indian government has decided to restore export incentives on export of cotton and cotton yarn. It may be recollected here that, earlier in April last year, the government withdrew tax refund benefits on these. This was done on the back of sharp rise in cotton prices. With the prices now falling both domestically and internationally, the government has decided to restore the DEPB (Duty Entitlement Passbook Scheme) on cotton yarn with retrospective effect from April 2011 and on cotton from October 2010. Under DEPB, exporters are given a refund of the tax incidence on the imports of units used in manufacturing products for exports. Prices of cotton have fallen from Rs 170 per kg to Rs 150 per kg over the last one year. While production estimates for cotton have been revised upwardly, the domestic consumption is projected to slow down on account of higher inventories.