A lackluster week for Indian equity markets

Sat, 2 Feb RoundUp

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The majority of the world stock markets registered gains this week on the back of positive data from China, Europe and the United States. The US stock markets gained 1.3% during the week. US data on employment suggested a modest growth in the month of January. Besides, the index of national factory activity touched a nine-month high. The industrial output data for Eurozone suggested that January was the best month in a year. On the back of positive data, Euro reached 14 months high levels. The stock markets in Germany gained 1.1% over the week.

Most of the Asian stock markets registered gains over the week on the back of encouraging economic indicators from China. As per HSBC Purchasing Managers' Index (PMI), China's manufacturing activity expanded to a two-year high in January. Further, the statistics suggested growth in the profits of industrial companies in the month of December. The stock markets in China and Japan led pack of gainers with 5.6% and 2.4% growth respectively over the week.

The Indian equity markets witnessed losses over the week. Despite the Reserve Bank of India (RBI) announcement on monetary easing measures to revive economic growth, investor confidence could not be boosted. India's benchmark index the BSE-Sensex declined by 1.6% during the week. The RBI cut the repo rate by 0.25% to 7.75 % and also slashed the cash reserve ratio by 0.25% to 4 %. As per HSBC'S PMI data, the country's manufacturing activity expanded in January 2013, although at a slower rate than that in December.

Amongst the other markets, Brazil was down 1.3% during the week while France was down 0.1%.

Source: Yahoo Finance

Amongst sectoral indices, stocks from the consumer durables and FMCG spaces were the top gainers, up by 2.2% and 1.7% respectively over the week. Stocks from the auto, oil & gas and capital goods were amongst the worst performers during the week gone by with losses at 1.7% , 1.7% and 2.9% respectively over the week.

Source: BSE

Now let us discuss some of the economic developments of the week gone by. The government has revised downward the economic growth for fiscal 2012-13 to 6.2% as compared to a previous guidance of 6.5 %. In another development, the seasonally adjusted HSBC Purchasing Managers' Index for the month of January has slowed down to three months low of 53.2 against its previous reading of 54.7 in December (which was also the 6 month high level).The trend underscores the risks to Asia's third largest economy from weak global demand, particularly in Europe. The growth momentum has been slowed down due to slower expansion in new orders and power outages.

India's fiscal deficit for the first three quarters of the current financial year touched 78.8% of the budget estimates (BE) of Rs 5,140 bn for the entire financial year ending March 31, 2013. As per the data released by Controller General of Accounts (CGA), India's fiscal deficit widened to US$76 bn in absolute terms. However, the fiscal deficit in the first nine months of current financial year is lower than that of 92.3% of the budget estimates (BE) in the same period of previous fiscal. In the Union Budget for FY13 presented in March last year, the government had pegged the total budget deficit at 5.1 % of the country's gross domestic product (GDP). In view of the fiscal deficit trend so far, finance minister P Chidambaram estimated the deficit at 5.3 % for FY13 up from earlier estimate of 5.1 %. For the 12th five year plan, the government has rolled out the fiscal deficit road-map in which it estimates the deficit figure to come down to 3% of the GDP by 2016-17.

Now let us take a look at few company specific developments of the week gone by. A handful of largecap companies announced results for the quarter ended December 2012. The engineering major Bharat Heavy Electricals Limited's (BHEL) sales were down by 4.7% YoY in 3QFY13 as revenues from both the power and industry segment declined 4.6% YoY and 5.5% YoY respectively. Operating profits declined by 19.8% YoY during the quarter. Operating margins also fell from 19.1% in 3QFY12 to 16% in 3QFY13. In line with operating profits, net profits declined by 17.5% YoY during the quarter. Rise in interest expenses (up 251% YoY) and depreciation expenses (18.1% YoY) impacted the profitability. The order book at the end of the quarter stood at Rs 1,137 bn. The company declared an interim dividend of Rs 2.1 per share during the quarter.

The telecom major Bharti Airtel has declared its financial results this week. The company recorded a 9.4% YoY increase in sales during the quarter. The growth was brought about by the increase in revenues from all of its segments. However, its operating margins contracted by 170 basis points (1.7%) to 30.5% on account of higher network operating expenses. At the net level, the company's earnings dipped by 72% YoY largely due to increase in the interest expense, by around 69%. Even the tax outgo rose by 19% as a result of higher tax incidence, reducing net profits for the quarter. The stock is trading down by 0.8%.

Punjab National Bank (PNB) has announced its results for the third quarter of financial year 2013 (3QFY13). The total income for the quarter grew by 10.4% on a year on year (YoY) basis. The operating profits for the quarter grew marginally by 0.22% YoY. The net profit for the quarter registered a growth of 13.5% YoY. The growth in the bottomline was mainly driven by decrease in provisions against non-performing assets, higher cash recovery and reduction in cost of funds. The net interest margin (NIM) of the bank stood at 3.47 % at the end of the quarter. The gross nonperforming assets (NPAs) for the quarter increased to 4.61% versus 2.42% in 3QFY12.The net NPAs also rose to 2.56 % from 1.11 % in the 3QFY12. The Capital Adequacy Ratio (CAR) of the bank stood at 11.66 % at the end of the quarter.

The leading pharma company Lupin Ltd has announced its results this week. The sales for the quarter grew by 38% on a year on year (YoY) basis. This was mainly on account of robust growth in the sales in the US market. The operating profits for the quarter grew by 64.5% YoY with operating profit margins at 23.1%. The net profits for the quarter were up by 43% YoY. The growth in the bottomline was moderated due to the surge in tax expenses. Effective tax rate for the quarter stood at 38% as compared to 23% seen during the same period last year

Moving on from the news relating to results, Sun Pharma has announced that its shareholders have given the green signal to spin off its domestic formulations operations into a new entity called Sun Pharma Laboratories Ltd. The new entity will be a wholly owned subsidiary of Sun Pharmaceuticals Industries Ltd (SPIL). Reportedly, both the domestic and international segments of the company are growing well. And Sun Pharma's rationale for spinning off the domestic segment is that it will help the company maintain its growth momentum. Further, it will also help it focus on each of the operations individually. The assets of the domestic formulations business will be transferred to the transferee company.

Moving on to news related to the auto sector, Maruti Suzuki Ltd, India's largest carmaker is working on a strategy to become India's largest exporter of passenger cars. It intends to build a base for manufacturing 3 million cars in five years, which would include 10 new vehicles across segments. The move to build new capacities would also ensure that Maruti retains its leading market share in India, which has declined to 37.8% in 2012 from 44.6% in 2010. Maruti contributes to more than a third of Suzuki's total sales across the globe and around 40% to Suzuki's total profitability. Suzuki in collaboration with Maruti is also coming up with a world class R&D facility in Rohtak, Haryana. That would be the largest R&D facility outside Hammamatsu, Japan. Many of the 10 new vehicles across segments would be developed as global models targeting the ASEAN, Middle East, Africa and Latin American markets

Movers and shakers during the week

Company	25-Jan-13	1-Feb-13	Change*	52-wk High/Low
Top gainers during the week (BSE-A Group)
Suzlon Energy	21	25	19.2%	31/15
Essar Oil	77	92	19.1%	92/46
Pidilite Industries	213	246	15.4%	246/134
Adani Ports & SEZ	131	150	14.8%	153/105
Axis Bank	1,384	1,508	8.9%	1508/922
Top losers during the week (BSE-A Group)
Opto Circuits	87	80	-8.6%	223/78
Bharti Airtel	360	331	-8.1%	389/239
Allahabad Bank	173	160	-7.6%	207/103
Torrent Pharma	742	693	-6.6%	750/547
Dena Bank	115	108	-6.5%	127/67

Source: Equitymaster
As per a business daily, the possibility of India losing its investment grade credit rating from rating agency S&P has receded somewhat as a result of economic reforms undertaken by the government since last September. The government has launched a raft of reforms in recent months to revive an economy headed for its slowest growth in a decade. India has a BBB- rating from S&P, the lowest investment grade among the BRIC economies. A one notch cut would relegate it to 'junk' status. Better ratings are likely to have an impact on overseas borrowing rates for corporates as well.

As the December quarter corporate results continue to trickle in, investors need to overlook short term spurts and blips. Instead keeping long term visibility and the big picture in mind, a look at the valuations and asset allocation would be more worthwhile.