Euro zone debt concerns derail world markets

Sat, 19 Nov RoundUp

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It was a tumultuous week for the world stock markets. Both the developed and the emerging markets closed in the red. The US stock markets were down 2.9% during the week. Eurozone was adversely impacted by the developments in Spain. Asian stock markets were also trading in the negative territory as concerns about Europe's debt troubles combined with the possibility of Chinese property markets overheating, depressed the sentiments across the region.

Indian stock markets markets were down 4.8% during the week. During the week, the inflation remained uncomfortably high as measured by wholesale price index that stood at 9.73% in October 2011, as against 9.72% in September 2011. The annual inflation rate was at 9.08% during the corresponding month of the previous year.

Amongst the other world markets, France and Germany were down 4.8% and 4.2% respectively during the week. Hong Kong and UK followed the decline by 3.4% and 3.3% respectively.

Source: Yahoo Finance

All the sectoral indices ended the week in the red with Realty, Capital Goods and Oil and Gas leading the downfall by 9.8%, 9.5% and 6.9% respectively. Stocks in the Information Technology (IT) and Pharma saw relatively moderate losses during the week.

Source: BSE

Now, let us take a look at the key events during the week. In the oil and gas sector, the shortage of domestic gas supplies loomed large on the sector. To make up for the same, Petronet LNG Ltd. (PLNG) has signed an agreement with GDF Suez wherein the latter will sell Petronet about 0.6 million tons (9 cargoes) of liquefied natural gas (LNG). The agreement extends over 2012. The gas cargoes will be sourced from GDF SUEZ LNG portfolio and will be delivered to Petronet's Dahej LNG terminal in India.

Oil PSU majors, GAIL (Gas Authority of India Ltd) and HPCL (Hindustan Petroleum Corp Ltd) have stated that they will form a joint venture with Greater Calcutta Gas Supply Corporation Limited (GCGSCL) for supplying coal bed methane gas in the West Bengal. Both GAIL and HPCL will own 33% each in special purpose vehicle (SPV) while GCGSCL will own 26% stake. The SPV will invest Rs 20 bn over the next 2 to 3 years to build a gas pipeline in Kolkata. Around 70% of the funds will be raised in debt. The gas will be used by industry, automobiles and households.

In an important development with regards to the formation of new policy in the Indian Pharmaceuticals space, the Honourable Supreme Court has told the central government to ensure that prices do not change from the current levels post the pharma pricing policy 2011. The Court said that in the name of the new policy, the prices should not escalate. At present, there are only a few drugs which come under price control. Rest are out of reach of common man. Some time back in 2003, an NGO (Non-government organization) had filed a Public Interest Litigation (PIL) in this regards. Subsequently, the Department of Chemicals and Petrochemicals informed the court that it had started taking steps towards creation of new policy that would bring a lot more drugs under pricing control. But the court was forced to intervene following apprehensions that the new policy could lead to steep hike in prices.

IT major, Tech Mahindra announced results for the quarter ended September 2011 during the week (2QFY12).The company's topline was up 3.2% QoQ on account of a good growth in the business of non-BT (British telecom) business during the quarter. Operating margins fell by 3.4% QoQ to 15.3% as compared to 18.7% in the previous quarter (1QFY12). Despite a higher contribution from its associate Mahindra Satyam, bottomline was down 13.1% QoQ mainly due to the decline in the margins at operating levels. The company performed well in the 'Rest of the World' market during the quarter. The management expects to continue its growth momentum in emerging market. On BT front, as per the management, there would be pressure on the growth as well as margins for another two quarters. However, the management is very optimistic on the non-BT front.

Engineering major, Bharat Heavy Electricals Ltd (BHEL) also announced its results for the second quarter of financial year 2011-12 (2QFY12) during the week. The company's sales and net profits registered a growth of 23.7% Year-on-Year (YoY) and 23.7% YoY respectively. Operating profits were up 20.0% YoY during the quarter while margins at operating levels stood at 19.0%, down by 0.6% YoY during the quarter owing to a rise in other expenditure as a percentage of sales. Despite contraction in the margins at operating levels, net margins remained flat at 13.7% during the quarter, largely on account of higher other income. The government is contemplating to impose import duty on Chinese equipments. This has alleviated the fears of further loss in market share of the company to a certain extent. However, at present, the market is primarily concerned about the slowdown in order inflows. It may be noted that order inflows in the first half have already declined by 31.0% YoY. The order book at the end of the quarter stands at Rs 1.61 tn.

Voltas also announced its results for the second quarter of financial year 2011-12 recently. The company has reported 3.6% YoY growth in sales. However, net profits have declined by 54.7% YoY. The sluggish growth at the topline level was largely due to disappointing performances from Engineering & Project services (EPS) and Unitary Cooling Products (UCP). The decline in UCP business was due to drop in AC volumes arising from unfavorable weather conditions and rising inflation (leads to deferment of purchases).Operating profits fell by nearly 74.6% YoY due to increase in raw material expenses and staff costs, which led to a huge margin contraction of 7.7% YoY to 2.4% during the quarter. This results into a huge decline in the net profit which was also negatively impacted by higher interest costs and higher depreciation charges during the quarter. Order book for the Electro-Mechanical & Project services (EMPS) segment stood at Rs 44.6 bn at the end of the quarter.

Talking about global economy, the Euro zone economy seemed to have hit another low with Spain taking a blow as the 10-year Spanish bond yield hit a Euro era high of 6.63%. This has led to concerns that the debt crisis in Euro zone could be spreading. However, this could not convince Germany into printing more money and buying bonds on a greater scale. Until that happens, the downward spiral for the biggest economic bloc in the world is likely to continue.

Movers and shakers during the week

Company	11-Nov-11	18-Nov-11	Change	52-wk High/Low
Top gainers during the week (BSE-A Group)
Cipla	285	314	10.0%	380/276
Pantaloon	187	198	6.0%	444/152
Idea Cellular	95	99	4.4%	101/57
Bank of India	322	335	3.9%	493/300
Hero MotoCorp	2,130	2,184	2.5%	2213/1379
Top losers during the week (BSE-A Group)
Shree Renuka Sugars	54	35	-35.0%	164/72
Suzlon Energy	36	24	-33.5%	775/540
PTC (Power Trading Corp) India Ltd	71	49	-30.9%	473/181
Educomp Solutions	270	189	-30.1%	72/21
Adani Enterprises	460	336	-27.0%	107/53

In some more news from the Indian economy, a member of central bank, the Reserve Bank of India (RBI) has said that he expects inflation to ease in the January-March quarter as global commodity prices will begin to cool by then, helped by a favorable base. However, it will still overshoot the RBI's March-end projection of 7%, possibly ending the fiscal year at as high as 8%. The economy is expected to grow at 7%-7.5% this year, revised from earlier forecast of 7.6%