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Economic concerns take toll

Aug 3, 2002

The US markets ended the week flat, marred by stream of worrying corporate earnings and dismal economy data. Despite the indices being considerably lower, investors are staying away from equities due to mounting fears regarding the prospects of the US economy.Early during the week, Qwest Communications joined the list of companies admitting loopholes in their accounting practices. Qwest indicated that it needed to restate its financials, as it improperly booked US$ 1.2 bn in sales previously. Nvidia, a chipmaker, weighed high on the markets as it lowered its revenue forecast for the year due to weakness in the demand for personal computers. Oil companies too disappointed markets. Both Exxon Mobil and Shell posted a sharp decline in profits.

Economic data released during the week, were also not so impressive. The US GDP growth slowed down to 1.1% in the June quarter from a robust 6.1% rise recorded in the previous quarter. Consumer spending, which fuels two-thirds of national economic activity, grew at a much subdued pace of 1.9%, after increasing at a 3.1% in the March quarter. Orders for US factory goods fell in June at their steepest pace in last seven months. Construction spending also declined to 2.2% in June, well below analysts’ expectations for 0.4% gain. The data pointed to the growth in the US economy tapering, thus scaring investors away from equities.

Dr. Reddy’s in limelight
(Price in $)27-Jul-022-Aug-02Change
Dr. Reddy's16.719.114.2%
HDFC Bank13.914.11.7%
ICICI Bank6.05.8-3.0%
Satyam Infoway0.50.5-7.7%

Indian ADRs were up selectively. Internet stocks were the largest losers. Dr. Reddy’s on the other hand flared up by over 14% on its commendable quarterly performance. Its revenues grew by 51% and profits were up by 176% on a consolidated basis for the quarter. The company also improved its operating margins sharply by 10%.

ICICI Bank lost ground towards the end of week, shedding all its gains. After the merger with ICICI, the bank reported operating loss of over Rs 1 bn as against profits of Rs 115 m, on a standalone basis for ICICI Bank, in the comparable previous quarter. High borrowings costs of ICICI impacted the bank’s overall performance. However, it aims to repay high cost funds of ICICI amounting to Rs 160 bn in the current year.

PSU telecom stocks also tumbled on their dismal quarterly performance. MTNL’s earnings fell by 34% on the back of a steep decline in operating margins. MTNL is losing revenues due to a drastic fall in DLD/ILD (domestic long distance) tariffs. VSNL also declared a 29% fall in profits. Lower ILD (international long distance) telephony rates have taken a toll on the company’s revenues and profits.

US markets still subdued.
Hang Sang 9,773 9,992 2.2%
FTSE 4,017 4,076 1.5%
Nikkei 9,591 9,710 1.2%
Dow 8,264 8,313 0.6%
NASDAQ 1,262 1,248 -1.1%
Dax 3,579 3,532 -1.3%
BSE 3,024 2,985 -1.3%

Contrary to the trend witnessed in the US markets, global indices managed to accumulated some gains on a selective basis. Although, stocks have declined to their lowest levels, in the near term corporate business outlook is likely to rule the markets trend.

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