Asia down, RoW up

Fri, 24 Dec RoundUp

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The past week was a mixed one for global stock markets. While the Asian markets ended the week on a negative note, Europe and America ended on a positive note. The negativity in Asia was driven by lower metal prices dragging down mining companies. Stocks of Japanese exporters also fell after the yen strengthened. China and Japan ended the week lower by 2% and 0.2% respectively. Gains across the other global markets were on the back of data showing an economic recovery. UK, Germany and India led the pack of gainers with their respective benchmark indices gaining by about 1 to 2%. The US markets ended the week higher by about 1%.

Source: Yahoo Finance

Moving on to the performance of sectoral indices in India - Metal, IT and auto stocks were the key gainers this week with the BSE-Metal, BSE-IT and BSE-Auto indices ending the week higher by about 4%, 2% and 1% respectively. Stocks from the capital goods, oil & gas and realty spaces were amongst the worst hit this week. While the BSE-Capital Goods Index ended lower by 1%, the BSE-Oil & Gas and BSE-Realty indices ended marginally lower.

Smallcap stocks seemed to be in favour this week, as the BSE-Smallcap Index ended the week higher by 2%.

Source: BSE

Moving on to key corporate developments during the week - A leading business during the week reported that state-owned engineering major BHEL is mulling a partnership with Japanese auto major Toyota to manufacture electric vehicles (EVs) in India. The rationale for Toyota approaching BHEL is the latter’s experience. BHEL had previously manufactured electric buses, and produces heavy electric equipment such as electric locomotives. The partnership envisages either setting up a joint venture company or simply a technical tie-up. Electric vehicles are gaining prominence especially due to rising costs of operating vehicles as well as pollution concerns. And as far as the government’s intentions towards the electric vehicle industry goes, it seems to support the same as the Ministry of New and Renewable Energy had announced a subsidy of 20% on the ex-factory cost of electric cars and two-wheelers last month. This is however, subject to a maximum limit.

Moving to news relating to India’s largest passenger vehicle manufacturer Maruti Suzuki. The company’s management during the week stated that it expects sales in FY11 to grow by an impressive 31% YoY. This growth would primarily be led by the demand in the domestic market. This volumes growth expectation seems encouraging given that the company has been facing severe competition in recent times from the likes of Hyundai and Ford as well as domestic rivals. It must be noted that in 1HFY11, Maruti saw a 26% YoY growth in sales led by strong volume growth especially in the domestic market. The company had, however, faced pressure on the operating margin front. The auto industry has been facing cost pressures in terms of commodity prices. Thus, passing on these prices to customers will not be an easy task considering that competition has increased significantly.

However, to cater to the burgeoning demand, the company is looking at ways to ease capacity constraints and increase the output by 15-20% in 2011-12. It is believed that the company at present is working at optimum capacity. To ease capacity constraints the company has already launched a second plant at Manesar but this is expected to become operational by the end of next year. Until then the company is looking at other alternatives on a temporary basis to expand production so as to meet incremental demand. For instance, the company has set up flexi-lines at its Gurgaon facility. Further, the company has also initiated a multi-skill work force program so that the workers can assemble 3-4 different models rather than specialize in only one. These moves seem to be a step in the right direction as it would give the company flexibility in production and help retain market share until the planned capacity comes on stream.

Moving on to news from the auto space to the energy sector - India's largest crude oil producer ONGC is expected to see a marginally decline in its production over the next few years. This is on the back of it not making any onshore discoveries for over two decades. The last major oil discovery was made in 1985. And most of its onshore fields have been in operation for almost 30 to 50 years. There is a natural decline of 8 to 9% from oil fields over a period of time. While use of new technologies and exploratory drilling will help the company to offset the natural decline to an extent, the overall production is still expected to decline by 1 to 2%. It is believed that ONGC has a current budget of Rs 30 bn for its exploration projects. Most of this money is being currently spent towards sustaining production from matured fields. Anyways, global crude oil prices have touched the US$ 90 per barrel mark. Now if Indian companies like ONGC are to see decline in their production going forward, India's energy bill will become a big headache for the government.

The stock of Titan Industries ended Friday on a strong note. Gains in the stocks were seemingly on the back of the company looking at investing heavily to boost sales of its mass brand ‘Sonata’. The company is looking to up the ante in rural markets by expanding the distribution network and plans to launch newer models at lower price points to entice customers. As low price mass market constitutes majority of the prospective demand, the move is likely to drive growth in future. Recently, the company re-launched the brand with new collection and strong marketing initiatives with an aim to almost double the sales volume. It may be noted that out of 13 m watches that Titan sells annually, 6 m are Sonatas. And over the next three years the company is aiming at increasing the figure to 10 m. During 1HFY11, the company’s watches business reported a growth of 22% YoY, contributing to nearly 22% of its revenues for the period. As compared to the jewelry business (which contributes to nearly three-fourth of revenues), the watches business is much more profitable. During 1HFY11, the segment had EBIT margins of 19% as compared to the jewelry business’ margins of 8%.

The second half of the past week was a disappointing one for the Indian IT industry due to the new US healthcare law being passed by the American government. This law seeks to create a US$ 4.3 bn fund. This fund would be used to provide free medical treatment to those suffering from illnesses contracted while clearing the debris in the aftermath of the 9/11 terror attack in New York. And for the same, the government is looking to raise funds by raising visa fees for skilled workers from India, China and Thailand. While the law applies to skilled labour from various industries overseas, Indian IT sector is likely to be impacted the most. This is given that companies from this sector earn more than half of their revenues from exports to America.

Movers and shakers during the week

Company	16-Dec-10	24-Dec-10	Change	52-wk High/Low
Top gainers during the week (BSE-A Group)
Hero Honda Motors	1,679	1,932	15.1%	2,094 / 1,525
Asian Paints	2,701	2,963	9.7%	3,027 / 1,730
Reliance Communications	129	141	9.3%	205 / 123
Shree Renuka Sugars	90	98	8.9%	124 / 53
IFCI	60	65	8.3%	81 / 47
Top losers during the week (BSE-A Group)
Opto Circuits (India)	281	255	-10.2%	328 / 205
Rural Electrification Corpn.	312	292	-6.8%	410 / 210
Indian Oil Corpn.	378	354	-6.8%	459 / 275
Torrent Power	282	265	-6.4%	374 / 273
Dr. Reddy's Laboratories	1,786	1,682	-6.2%	1,855 / 1,051

Source: Equitymaster
Moving on to the some economic news during the week - RBI deputy governor Mr. Subir Gokarn stated that the headline inflation is not easing as fast as the RBI would like it to and that the upside risk remains. The food price index rose 12.1% from 9.5% (previous week) in the year to December 11. This almost 3% hike was due to the sharp increase in the prices of onions. This humble vegetable's price rise has made everyone shed tears as it is a key ingredient for a number of basic Indian dishes. Unseasonal rains have also damaged other food crops. A mild increase in fuel price inflation was also seen. But, now with crude prices above US$ 90/barrel, further hikes in fuel prices are expected.

It must be noted that the central bank had left rates unchanged this quarter but could resume its tightening measures if there is not much improvement in terms of inflation easing off. What is more, although consumer prices have eased a bit in the last three months, they are still on the higher side.