Down on Fed QE worries

Sat, 30 Oct RoundUp

   Previous Close   

Stockmarkets across the world were under pressure this week with Asia leading the pack of losers. Concerns in Asia were over the earnings growth slowing down as well as the US central bank's decision on its quantitative easing strategy early next month. Japan and Hong Kong were amongst the top underperformers this week, with their benchmark indices down by 2% each. The Singapore and Indian markets followed suit with their respective markets down by about 1% each. Stocks in Europe and the US ended lower this week as well, with UK, France and US down by about 1.2%, 0.9% and 0.1% respectively.

Source: Yahoo Finance

Moving on to the performance of sectoral indices in India - Consumer durables and auto stocks were in favour this week with the BSE-Consumer Durables and BSE-Auto indices ending with gains of 3.7% and 1.9% respectively. These two indices were the sole gainers this week. Amongst the top underperformers were stocks from the realty, power and IT spaces. While the BSE-Realty Index ended lower by 4.3%, the BSE- Power and BSE-IT indices ended lower by 3.5% and 2.3% respectively.

Source: BSE

Moving on to key corporate developments during the week - a handful of companies announced their results for the quarter ended September 2010. A few FMCG majors such as HUL, ITC and Colgate Palmolive India declared their results this week. HUL's revenues were up by 12% YoY on the back of strong volume growth in the domestic consumer care segment. At the operating level, it performed poorly as margins fell by 1.7% YoY to 13.6%. The key reason for the same was higher advertisement as well as higher cost of packaging moulds (both as a percentage of sales). However, the company did well on the bottomline front as profits were higher by 32% YoY. This was mainly due to higher other income, lower interest costs and extraordinary gains (loss during 2QFY10). On adjusting the extraordinary items, the bottomline is seen to fall by about 7% YoY.

Colgate's topline grew by 13% YoY on the back of 13% YoY volume growth. The company's toothpaste business grew by 12% YoY while toothbrush category saw a 24% YoY growth. Both categories grew faster than the market, indicating that the company gained market share in the process. The new category of mouthwash grew sharply with market share of Plax mouthwash increasing from 6.4% at the end of September 2009 to 16.3% at the end of September 2010. The company's operating income grew by 17% on the back of fall in raw material costs (as a percentage of sales) and reduction in advertisement expenses. On the other hand, a rise in other expenditure capped operating income growth for the quarter. Profits for the quarter grew slower than operating income, registering growth of 12% YoY. This was due to higher effective tax rates as a result of Colgate exhausting some of its tax exemption benefits.

ITC's topline grew by 17% YoY during the quarter ended September 2010. Growth was led by the company's FMCG (including cigarettes), hotels, paper and packaging and agriculture businesses. At the operating level, ITC's margins increased marginally on the back of lower other expenditure (as a percentage of sales), leading to an operating profit growth of 18% YoY during the quarter. On the bottomline front, profits were higher by 24% YoY. The increase in net profits was higher as compared to the increase in operating profits on the back of higher other income as well as lower interest and depreciation charges.

Moving on from results of the FMCG majors to a power major - NTPC too announced its results this week. The company reported a 34% YoY growth in net sales during the quarter. Growth was led by higher generation (up around 3.5% YoY) and sales of electricity. Higher generation was a result of commissioning of new capacity as well as higher capacity utilisation at the existing plants. Despite the robust growth in sales during the quarter, NTPC's operating margins took a hit, declining to 25.6% from 32.7% in 2QFY10. This fall in the margins was largely on account of higher provisions (as percentage of sales). Led by this fall in operating margins as also a lower other income (down 7% YoY), the company's net profits dropped by 2% YoY during the quarter. As for the six month ended September 2010, revenues were higher by 20% YoY, while profits were lower by 9% YoY.

The stock of Titan Industries was amongst the top gainers in stocks forming part of the BSE 'A' Group. The reason behind this was the company's strong set of results. Titan's revenues and profits increased by 34% YoY and 65% YoY respectively. Revenue growth during the quarter was led by the company's jewellery segment, which grew by 37% YoY. This segment formed nearly 73% of the company's total sales. As for its second major business segment of watches, revenues were up by 21% YoY during the quarter. The surge in the company's profits was on the back of a margin expansion (11.3% in 2QFY11 as against 9.4% last year), with operating profits rising by 61% YoY. The key reason for the expansion in margins was lower raw material costs (as a percentage of sales).

Capital goods major, BHEL declared its results this week as well. The company's revenues and profits increased by 26% YoY and 33% YoY. Revenue growth was led by the company's 'power' segment, which grew by 28% YoY and formed nearly 80% of total revenues. At the operating level, profits were up by 30% YoY on the back of a 0.7% expansion in margins. BHEL's operating margins stood at 17.7% during the quarter. The expansion in margins was led by lower staff and other expenses (as percentage of sales). The increase in net profits was mainly due to a strong operating performance coupled with a lower effective tax rate. During 1HFY11, revenues and profits were higher by 21% YoY and 36% YoY respectively.

In other news, a leading business daily had reported that two-wheeler major Hero Honda was looking at exporting its 'Splendor' brand of bikes to Africa. The company has sent a team to Tanzania to conduct a feasibility study. It has been reported that the company's management has ruled out the possibility of setting up a plant in East Africa at this moment. This is on the back of concerns of localization of parts. This piece of news comes at a time when long time co-promoter, Honda is mulling an exit from the joint venture company, Hero Honda. It may be noted that Honda was against Hero Honda exporting its vehicles since it was present in many markets worldwide. Exports form a very insignificant part of Hero Honda's volumes. The company barely exports 2% of its total sales volumes.

Movers and shakers during the week

Company	22-Oct-10	29-Oct-10	Change	52-wk High/Low
Top gainers during the week (BSE-A Group)
Indiabulls Financial Services	192	221	15.0%	223 / 95
Shriram Transport	770	882	14.6%	886 / 380
Titan Industries	3,220	3,553	10.4%	3,606 / 1,220
Thermax	783	864	10.3%	870 / 465
Cummins India	720	793	10.2%	802 / 365
Top losers during the week (BSE-A Group)
Financial Technologies	1,160	986	-15.0%	1,722 / 1,061
Mundra Port & SEZ	175	152	-13.2%	185 / 96
Piramal Healthcare	548	477	-13.0%	600 / 334
Petronet LNG	127	111	-12.9%	130 / 63
Bank of India	554	486	-12.3%	588 / 310

Source: Equitymaster
It has been reported that the global outsourcing industry grew by 20% YoY during the quarter ended September 2010 as compared to last year. This is largely due to the revival in IT services outsourcing. The interesting bit is that this is quite a contrast to the preceding quarter i.e. the quarter ended June 2010 when the growth was led by the BPO services segment. Management consulting firm Everest Group has reported that the quarter ended September witnessed an 89% increase in the annual contract value (ACV) in IT services. Further, BPO deals halved during this period, as compared to last year.

It may be noted that this is in line with what the management of the top Indian IT companies have been saying. With companies from major markets such as US and Europe either looking at making transformations or cutting costs, the demand for IT services has been on the rise. While there was a slowdown in discretionary spending by companies during the first half of the year, investments towards application development and system integration have been on a rise.

The report went on to add that that the Indian buyers constitute nearly 5% of the total transactions globally. The Indian service providers cater to 60% of the global IT market and about 35 to 40% of the BPO segment. Coming to the overall value in deals, they increased from US$ 2.3 bn to about US$ 3.4 bn (on a YoY basis).