Just the week before this one the Indian markets had much to celebrate about; the country's benchmark index, the BSE-Sensex crossed the 17,000 mark after a span of nearly sixteen months. But disappointingly, this good performance failed to continue this week. Infact, it was quite the opposite wherein the Indian markets stuck out like a sore thumb amongst its global peers by being the only loser during the week with a decline of almost 3%. Concerns about valuations took centrestage here in India, after an almost continuous run up in the past few months without any significant correction along the way. In contrast, Chinese stocks ended the week on a strong note (up 4.8%) as its markets opened yesterday after an eight-day holiday. Its benchmark index posted its biggest gain in five weeks on the back of optimism about a sustained recovery. Brazil and Germany were not too far away witnessing gains of 4.7% and 4.5% respectively.
|Source: Yahoo Finance
Coming to the performance of sectoral indices in India, IT stocks were plagued by profit booking as their high valuations after a good run up may have seemed too tempting for many. The appreciation of the rupee did not help things too much either, with the BSE IT seeing an abysmal fall of 7.2% during the week. This compares to a fall of 2.9% for the BSE-Sensex, and the BSE Smallcap index seeing a similar fall of 2.8%.
And now that we've got the bad news out of the way, here comes the good news. FMCG stocks had a great week with the BSE FMCG turning out to be the highest gainer among all other indices (up 6.2%). Perhaps market participants are looking at the fact that the amount of demand destruction earlier expected due to the drought has not taken place, and companies might not take that big a hit after all. This was followed by the BSE Consumer Durables index which posted a gain of 5.6% during the week as the festive season nears.
Telecom stocks were at the center of the action this week. Trouble began with telecom major Reliance Communications (RCom) slashing its call charges to 50 paise a minute. The company will have just 'one market facing plan' charging 50 paise a minute for all local and STD calls made from both its GSM and CDMA networks to any other landline or mobile phone in India. According to the company, this rate would apply on all roaming calls and at all times of the day or night, without any hidden charges. This will set a new price floor for call rates and will force competitors to retaliate with their own price cuts. Even though RCom has adopted this strategy with an eye on aggressively garnering market share for itself and restricting new entrants in the market, the profitability with which it will be able to sustain this strategy is at question. Thus investors continued to remain concerned that the price war that has erupted will take a heavy toll on the profitability of the companies in this sector.
The IT bigwigs also put a substantial pressure on the index. The weakness seemed a consequence of the strengthening of the rupee against the dollar as the former reached a one year high. The memories of late 2007 and early 2008, when the rupee touched the Rs 40 mark, perhaps came flooding back. With the sentiments and the fundamentals as they are, a repeat act can indeed not be denied. In the eventuality that it will, the IT companies surely have some thinking to do as a stronger rupee does not bode well for their business.
FMCG major HUL received some admonishment from its UK based parent. The top management of Unilever, Hindustan Unilever's parent company, has given it a stern directive to not lose market share to competition any longer. Its 'Thirty Day Action Plan' will attempt to get the management of HUL to quickly fix its brands and marketing strategy to drive growth once again. It has asked HUL's managers to take quick decisions based on what the competition does amidst a scenario over the past few months which have seen HUL losing market share in the mass market for its soaps, shampoos, toothpastes and skin-care products. In the face of this, HUL has started aggressively advertising its products across all media, and also launched a micro marketing strategy to take on regional competitors. The company is now drawing up a district wise pricing and distribution strategy, and has also increased its advertising spends by 15% to 20% YoY.
However, on the positive side, it is now being speculated that food price inflation is not going to be as bad as expected, thus helping FMCG companies save costs on the raw materials front. Secondly, with the rural income not expected to take as big a hit as was previously anticipated, there could be some cheer on the topline front as well for these companies. Hence, it was little surprise that companies like ITC, HUL, Nestle and Godrej Consumers reported strong gains on the bourses during the week catapulting the BSE FMCG into the top gainer position compared to other indices.
Big steelmakers like Tata Steel, SAIL and JSW Steel ended strong this week amidst reports that the ambitious 24 m tonne project by the world's largest steelmaker Arcelor Mittal could be delayed due to land acquisition problems in the states of Orissa and Jharkhand. This most likely means that the earlier date of commissioning of the projects, which is 2014-15 may not be met after all. Hence, this will keep the field open to fewer players for a longer period of time, helping these companies to not only record good volumes but also keep prices firm. It should be noted that the large Indian companies are themselves looking to expand capacities but since most of it is brownfield in nature, significant delays may not happen.
Movers and shakers during the week
In another development, the petroleum ministry announced that it is thinking of setting up a national gas highway development authority on the lines of the National Highways Authority of India. This body will help facilitate the setting up national gas highways to ensure distribution across the country. These highways will be built under the public-private partnership mode. While this is a positive development, there already exists a plan of building a national gas grid. It is not clear if this proposal is an extension of the earlier plan or a new one. In any case, we remain positive on the prospects of the natural gas sector in India. Given the success in exploration for natural gas in domestic fields and the robust demand that exists from the power, fertiliser and city gas sectors, there is a strong case of a pan India pipeline network. At present the northern and western regions dominate the consumption patterns. We believe this move will further boost the prospects of India's premier natural gas transporter GAIL as it can expect to play a key role in the project.
The week came to an end with Infosys, India's second largest IT company, declaring its 2QFY10 results on Friday. The company registered a 2% QoQ growth in topline on the back of increase in volumes primarily on the offshore front. The operating margins expanded marginally by 0.5% QoQ on back of increased sales & marketing and training expenses. The bottomline grew by 1% QoQ on back of increased tax and depreciation. On a YoY basis, the topline and bottom line grew by 3% and 8% respectively. The company declared an interim dividend of Rs 10 per share. Hinting on the slow revival in the business environment, the management has raised its EPS guidance for FY10 by 4% to Rs 100 per share. As a positive fallout of recession, the company saw a lot of traction in the system integration services as a number of mergers and acquisitions occurred during the crisis. We believe the better than expected results posted by the IT major hints to a slow but steady recovery taking place in the business environment globally. We expect similar performance from the other IT majors like TCS and Wipro which will announce their results later this month.
And with that, another action filled week came to an end setting the stage for next week's reckoning of what corporate India has been upto for the past quarter. You can safely expect a deluge of results and drama, which will once again come with their own set of surprises...