The combination of negative and positive news led to considerable volatility in the indices during the week. Even though the Indian markets ended the last trading session on a positive note on account of positive vibes from the government regarding its preparation to tackle drought situation, they ended the week on a weak note. The benchmark index, the BSE-Sensex declined by about 1.1% over the previous week. This was mainly on concerns that the economic recovery fuelled by liquidity is not sustainable. As for global markets, European markets led the pack of gainers with France, UK and Germany closing higher by nearly 3% each. They were followed by the US markets that ended higher by about 2% each. However, the Asian markets were at the receiving end. The pack of lowers was led by China (4.4), Japan (3.4%) and Hong Kong (3.3%).
|Source: Yahoo Finance
Coming to the performance of sectoral indices during the week, capital goods stocks took the cake with the BSE-Capital Goods index gaining by 1.1% over the previous week. It was followed by stocks forming part of the Smallcap and power sector indices. While the Smallcap Index ended higher by 0.8%, the BSE-Power index ending marginally higher by 0.1%. The BSE-Banking sector index managed to hold on to its gains with no change. Stocks from the metal, oil & gas, pharma were the worst hit, with the BSE- Metals and the BSE-Oil & Gas indices ending lower by nearly 3.9% and 3.7% respectively, while the BSE- Healthcare ended lower by 2.5%. These were followed by consumer durables and auto, which also bore the brunt of profit booking as their respective indices, the BSE-Consumer Durables and the BSE- Auto, indices ended lower by about 1.7% and 0.6% respectively.
Moving on to corporate news, telecom major Bharti Airtel has extended its exclusivity period talks with the South African telecom company MTN by another month. This has puzzled many about two aspects of the deal - what is the reason behind the extension and what could possibly be the outcome of these talks. Viewed from a pure business perspective, the proposed merger could be a win-win situation for both the companies. Further, with both the parties looking at reviving the merger talks for the second time (first attempt failed last year on the back of differences in the proposed structure), it does give an indication that Bharti is looking at working on newer strategies to drive its revenues going forward, especially after considering the intensity of competition that has built up in the Indian telecom space in recent times.
In the interim, there have been rumors hinting that Bharti is expected to offer a higher price in response to the demands of the MTN shareholders. However, Bharti's management has clarified that it is not sweetening the MTN deal. In a conversation with a leading business daily, they have mentioned that there are no issues relating to the deal structure, but the extension has more to do with resolving administrative issues, process of seeking permissions and working towards a scheme of arrangement that is acceptable to all. In addition, the management has also added that it was MTN that initiated the talks with the Indian telecom major this time around. However, this does not clearly indicate that the deal will indeed go through. In fact, in its recent press release, the company has stated that the deal may or may not indeed see the light of day. These mixed statements only indicate there are still many hurdles in concluding the talks.
Everyone is aware of the gas dispute issue between government owned electricity firm NTPC and Reliance Industries. NTPC is fighting a case against RIL for the latter's denial of supplying gas to the former's power plants in Kawas and Gandhar below a price of US$ 4.2 per mBtu. However, the case has been long pending.
Meanwhile, NTPC has announced that it will be buying gas from another PSU, GAIL for a period of 10 years at a delivered price of US$ 8 per million British thermal unit (mBtu). As per the company, it will buy around 2.5 mscmd of gas (out of its annual requirement of around 15-16 mscmd) from GAIL at this price, which is around 19% higher than what Reliance Industries' (RIL) disputed deal would've cost the electricity generation firm. Including the cost of transportation, taxes and marketing margins, the gas sourced (at a price of US$ 4.2 per mBtu) from Reliance Industries would've cost NTPC US$ 6.7 per mBtu, which is still lesser than its latest contracted price with GAIL. This raises the question, why the company has chosen to buy this expensive gas from GAIL when it has been crying hoarse all this while for the 'high' price that RIL is asking for!
Investors dumped the Glenmark Pharmaceutical stock during the week. This was due to a setback for the company with respect to its lead molecule 'Oglemilast' (for the treatment of COPD, which is a smoker's disease). The company had out-licensed this molecule to Forest Laboratories in a landmark agreement of US$ 190 m. The results of the Phase IIb trials for the molecule were released by the company during the week which showed that the molecule did not exhibit any significant benefits. Both the companies are still studying the molecule for the treatment of asthma with results expected during the first quarter of 2010. The company's R&D pipeline, which had evinced considerable interest in the past, has of late suffered a series of setbacks. Besides 'Oglemilast', two other molecules out-licensed to global innovators were returned thereby putting an end to potential milestone payments from the same. The company's core business was also impacted during the last three quarters due to the global economic slowdown. Having said that, despite these developments, which are likely to mar the performance of the company in the medium term, the growth prospects of the company from a long term perspective remain intact.
Movers and shakers during the week
Moving on to economic news, the fear of a spike in food prices has been palpable ever since rains have played truant in the country this year. August is coming to an end and monsoons have been 29% below normal with almost 50% of the total districts in India reeling under a drought. In comparison to the long term average, India's annual monsoon rainfall so far has been 27% lower. The government has assured that it would use its reserves to put a cap on rising food prices and also increase ration supplies. On the other hand, the government has hiked the minimum support price (MSP) or floor price for paddy by Rs 100 per quintal and pulses by up to Rs 240 per quintal. While the MSP does provide a support price to the farmers, the flip side to the issue is that it will put pressure on the common man as the prices will be raised artificially. The growth in prices of primary food articles is likely to further boost inflation, which is currently in the negative on account of higher base effect.
Though inflation is still in negative, it rose to -1.53% for the week ended August 8 after falling for three weeks in a row. The inflation rate for the week ended August 1 was -1.74 % and for the corresponding week a year earlier it stood at 12.82%. Inflation rose marginally mainly on account of dearer primary articles, especially food items and manufactured goods. While the index of primary goods rose by 0.2% and that of manufactured goods was up by 0.1%, the price index for fuel and power saw a marginal decline. The prices of essential food items are already on the rise. Increasing the MSP amidst a drought like situation would certainly further boost the already high food prices raising the fears of higher inflation.
Coming to international news, after much dilly dallying, the IMF has declared that the global economy is finally recovering from the deepest recession since World War II. What has prompted it to do so is the growth in GDP of Germany, France and Japan during the second quarter. Of course, while the US and Britain still reported a fall in GDP there are expectations that growth in these two countries should start taking place later this year. This is what the chief economist of IMF Mr. Olivier Blanchard had to say, "The recovery has started. Sustaining it will require delicate rebalancing acts, both within and across countries." We could not agree with him more. The key really here is the sustainability of this growth in the coming quarters. After all, concerns such as massive government deficits and surging unemployment are not expected to abate anytime soon. Certainly, governments and central bankers of the advanced economies at least are walking a tight rope.