More signs of an economic recovery coupled with rains unexpectedly reviving towards the end of the season, boosted the domestic markets during the week. India's reservoir levels and prospects for the winter crop received a boost after a downpour this week, which was in fact this season's heaviest rain. The Indian benchmark index - BSE-Sensex recorded a gain of 3.7%. While markets across regions were up on optimism about a global economic recovery, a stronger Yen impacted stocks of Japanese exporters causing markets there to witness one of the weaker performances in the region (Japanese markets ended higher by 2.5%). The gains in Hong Kong index (4.1%) came in primarily on account of buoyant Chinese economic data. All in all, a surprise upturn in Chinese industrial output, retail and production along with a weakening US dollar managed to send the world markets to new 11 month highs.
|Source: Yahoo Finance
Coming to the performance of sectoral indices in India, mixed sentiments were witnessed on the bourses during the week. While most stocks from most sectors ended with positive weekly gains, stocks from the FMCG, realty and auto spaces saw overall declines.
The pack of gainers was led by energy stocks, as the BSE- Oil & Gas Index ended higher by about 4.6%. It was followed by stocks forming part of the benchmark BSE Sensex (up 3.7%) and stocks forming part of the IT and capital goods sectors as their respective indices, the BSE-IT Index and the BSE-CG ended higher by 2.3% and 2.2% respectively. According to data released during the week, manufacturing output in the country grew for a seventh month in July, adding to signs of economic upturn. Industrial output rose 6.8% YoY in July, while June's annual growth was revised up to 8.2% from 7.8%. What further gave impetus to stocks was the revival in the rains and Finance Minister Pranab Mukherjee also making a statement that India's drought may not be as bad as expected if rains improve towards the end of the monsoon season. However, the BSE- FMCG index (down 3%), the BSE- realty index (down 1.2%) and the BSE- auto index saw declines during the week, despite their stellar performance in the week before, which could not be sustained this week.
Coming to the corporate news, aluminium major Hindalco displayed strength on the bourses during the week and in fact, made it to top gainers list by closing 18% higher than the week before. The company, which had gotten singed in the aftermath of the crisis owing to its leveraged buyout of Novelis, seems to be back on the investor radar if the past few months are anything to go by. And the interest does not seem to be without reason. While problems with respect to Novelis seem to be ebbing, it has got some strong expansion plans on the domestic side as well. The company is looking to enhance its alumina capacity to around 4.5 m tonnes while aluminium capacity will be expanded to 1.7 m tonnes. This is likely to take care of its growth needs over the long term. The expansion will involve a total outlay of Rs 210 bn and it also includes setting up captive power plants. Most of all, the fact that it may not involve excessive balance sheet leveraging, indicates the strength of its standalone business.
With regards to the banking sector, in an attempt to equip themselves for higher credit offtake as well as invest in their franchises, a few private sector banks in India are raising equity from institutional investors. Leading the pack is Axis Bank which plans to raise Rs 50 bn by issuing 71.4 m shares through preferential allotment. Also, ING Vysya Bank, which has one of the least capital adequacy ratios in the sector, is planning to raise Rs 3.3 bn through private placement at Rs 248 per share.
Further, in a conference held during the week, the top management of some of India's leading banks indicated that deposit and lending rates are likely to have bottomed out currently and as credit growth gathers pace in the coming months, rates are all set to go higher. While the heads of banks like HSBC India and ICICI Bank are of this view, the latter also indicated that rising bond yields will negatively impact treasury profits of domestic banks this quarter. This is in contrast with last year when banks witnessed windfall profits on the treasury side due to falling bond yields at the time. It may be noted that government bond yields have risen more than 2% so far in 2009, primarily due to the federal government's heavy borrowing program.
While Union Bank of India reiterated this grim outlook for banks' treasury income in the coming quarter, SBI's management stated that the bank's treasury income hasn't been hurt by the sharp rise in government bond yields so far. However, with some more time still left for the September 2009 quarter to end, the final impact of this drop in yields for the banks will be determined by the way the interest rates move during the remaining part of the quarter.
Movers and shakers during the week
Interestingly, as per reports during the week, the Union road transport and highways ministry plans to build more than 17,000 kilometer (km) long network of expressways by the year 2022. The ministry proposes to build about 5,000 kms of road on an annuity basis and 12,000 kms on a public-private partnership (PPP) basis, with the permission to levy toll. Stretches of roads expected to handle traffic volume less than 5,000 passenger car units (PCUs) should fall under the annuity basis, while those above 25,000 PCUs should fall under a toll basis. The cost of building 100 kms of four-lane expressways is about Rs 18 bn. The cost of the associated civil work is about Rs 14 bn. The cost of building 100 kms of six-lane expressways is about 26 bn, with associated civil work of about Rs 20 bn.
Sales numbers of medium and heavy commercial vehicles showed an uptick for the first time in 14 months. As per the Society of Indian Automobile Manufacturers, sales of medium and heavy commercial goods carriers have grew by 0.9% in August this year. This improvement was attributed to
government spending on infrastructure, which has a direct correlation with sales of large trucks. This is a positive development for the auto industry, which continues to do well in the two-wheeler and passenger car segments. In fact, their strong performance has percolated upwards to the steel industry, where the sales of flat products continue to be robust. Interestingly, the sales of buses continue to languish.
Overall, rains continued to be the key event to be tracked due to the positive news on this front. The late surge in the same seems to have rekindled hopes that the growth in India's GDP this fiscal may not be that bad after all. And with the spurt likely to continue over the next week or so, there could be notable improvement in the crop production in the country and also the income of rural India, which in turn could boost stock markets by driving earnings of companies upwards.