Crude oil & Rate hike shock for markets

Sat, 17 Sep RoundUp

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Renewed optimism that central bankers across Europe will take steps to ease the sovereign debt crisis fuelled a relief rally in the global stock markets. The developed markets registered healthy gains while emerging markets ended the week on a flattish note. The US stock markets rallied for five consecutive days and were up 4.7% during the week. However, it would be interesting to see whether the current momentum continues in the next week or not. Investors are keenly eyeing the outcome of the Federal Open Market Committee (FOMC) meet scheduled on Tuesday. Further, existing home sales data for the month of August would also be released on Wednesday. The outcome of these events is likely to set the momentum for next week's trade.

Indian stock markets managed to stay afloat during the week notwithstanding another rate hike undertaken by the central bank. Positive global cues overweighed rate hike concerns with Indian shares registering gains for third consecutive week. Amongst the other markets, Germany was up 7.4% while UK was up 2.9% during the week. However, Singapore (down 1.3%) and Hong Kong (down 2.1%) closed the week in red.

Source: Yahoo Finance

Moving on to the performance of the sectoral indices, IT (up 3.1%) and Oil & Gas (up 1.5%) saw the maximum gains. Oil & Gas stocks increased amidst petrol price hike undertaken during the week. Rate sensitive's like Realty and Auto closed the week on a flattish note due to concerns that current rate hike undertaken by the central bank would defer consumer purchases. Capital Goods stocks were down during the week amidst concerns of further delays in industrial capex due to the ensuing rate hike.

Source: BSE

Now, let's take a look at key economic developments during the week. In its mid-quarter review of the monetary policy, the Reserve Bank of India (RBI) has continued with its hawkish stance. By raising the repo and the reverse repo rate, the central bank has now hiked policy rates for the 12th time in last one and half years. The repo rate was raised by 0.25 percentage points to 8.25%, while the reverse repo rate will now be 7.25%. The primary reason for the same has been the persistently high inflation that has been prevailing for quite some time now, which has been well out of the comfort range of the central bank. The latest IIP (Index of Industrial Production) was also quite low at 3.3% and many companies are facing the pressure of rising interest rates and input costs, which have hurt profits. Thus, it would be interesting to see for how long the RBI continues with its monetary tightening measures.

To combat firm international fuel prices and slide of rupee against dollar, petrol prices have been raised to the extent of Rs 3.14 at the end user level. The ad hoc price increase may to an extent reduce under recovery losses for state oil retailers and subsidy burden for companies like Oil & Natural Gas Corporation (ONGC). However, such piecemeal measures are just crude shocks to consumers and no substitute to clear pricing and subsidy sharing formulae for the sector. Rise in crude oil prices will further stoke inflation which is already above the comfort zone.

As per a leading financial daily, power companies may default on their loans. Companies like Power Finance Corp, Rural Elect., Tata Power, and Reliance Power are reeling under low tariffs, scarcity of fuel and land acquisition problems. Their new plants are not operating at the targeted capacities. They are likely to default on loans worth Rs 1,350 bn. As a result, banks are exercising caution while sanctioning loans for power projects. As per the Reserve Bank of India (RBI), banks have an exposure of Rs 2,923 bn loans to this sector. Of this half the loans have not yet been utilized and fund flow to new projects has almost stopped.

Now let's take a look at key corporate events during the week. Infosys is the frontrunner to acquire the health care business of Thomson Reuters. The deal is estimated to be worth approximately US$ 700 m. The health care unit is a provider of data, analytics and performance benchmarking solutions and services to companies, government agencies and health care professionals. This acquisition is a part of Infosys' strategy to diversify beyond banking services. The IT company had earlier maintained that healthcare is one of the key focus areas going forward. This is because health care, as a part of revenue contribution, was just about 1.1% at the end of the quarter ended June 2011. This is far less compared to Wipro which had 11% and TCS which had 6% contribution from healthcare.

Power major NTPC is expected to raise generation capacity to 36,000 MW by the end of this fiscal with the commissioning of two more 660 MW units at Sipat power project. The first 660 MW plant has already been commissioned. The 1,980 MW Sipat power project is the company's first supercritical plant and is 2% more efficient as compared to other thermal plants. Further, the company is working on projects of about 40,000 MW at present. Projects with capacity of over 14,000 MW are under various stages of implementation. It must be noted that NTPC is targeting to become a 128,000 MW company by 2032 with 28% capacity from non-fossil sources. NTPC's share in the country's generation was 27.4% in 2010-11, with 17.75% of the national capacity. It has planned capex of Rs 264 bn for FY12. However, fuel linkages and execution will be the key.

State owned Steel Authority of India Ltd. (SAIL) is set to raise its production from its iron ore mines to about 38 m tonnes. The move is in tandem with the company's Rs 700 bn mega expansion plan wherein it will increase hot metal capacity from 13 m tonnes to 23 m tonnes by 2012-13. In order to meet the higher raw material requirement, SAIL is following a three-pronged strategy to double its iron ore output from its captive mines at an expected investment of about Rs 103 bn. First, the company will increase production from existing mines through de-bottlenecking and deploying high capacity heavy earth moving equipment. Second, the company will enhance the capacity of existing mines at Kiriburu, Meghahatuburu, Bolani and Gua. SAIL also plans to develop new mines at Chiria and Taldih.

Movers and shakers during the week

Company	9-Sep-11	16-Sep-11	Change	52-wk High/Low
Top gainers during the week (BSE-A Group)
GTL Ltd	53	63	19.8%	440/49
Tulip Telecom	145	157	8.1%	200/132
Madras Cement	94	101	7.9%	128/81
Financial Technologies	800	861	7.6%	1430/690
Indiabulls Financial Services	151	162	7.4%	240/138
Top losers during the week (BSE-A Group)
Pantaloon Ltd	301	259	-13.8%	521/233
Marico Ltd	161	141	-12.3%	169/114
Koutons Retail	24	21	-11.9%	306/19
Indian Overseas Bank	113	101	-10.9%	175/102
Jet Airways	302	272	-9.8%	910/256

Source: Equitymaster
The recent rate hike undertaken by RBI has raised concerns over the already struggling real estate sector. The industry is currently besieged with high input cost and slumping sales due to waning buyer interest. And thus the current hike may not bode well for the industry. With festive season approaching there was an expectation that absorption rates across key cities may witness an uptrend. However, increase in repo rate means that home loans are about to get costlier. This would deter sales and further excruciate the pain for the developers. Unless the RBI dilutes its hawkish stance thereby making credit cheaper we do not expect a meaningful traction as far as home sales volumes are concerned.