After witnessing a recovery in the previous week, key markets worldwide staged another positive performance this week. India's benchmark index, BSE-Sensex, which gained about 5.4%, last week, ended higher by another 4.3% this week. As for global markets, Germany led the pack of gainers (up 3.6%). Following Germany were the Hong Kong and French markets, recording gains of 3.3% and 2.7% respectively. The other important markets of China and the US saw gains of 0.7% and 2.5% respectively. Japan stuck out like a sore thumb; it was the sole loser amongst the key markets, recording a weekly loss of 0.2%.
What lent overall confidence to the global markets was the meeting of G20 nations where it was agreed that interest rates would be kept low and the governments would continue to support stimulus packages despite budget deficits. Indeed, this helped lift the huge cover of uncertainty that had begun to descend upon the participants, many of whom had started believing that with the worst behind us, central bankers would perhaps be keen to wind back the loose monetary policies. But since that has not happened, it gave the investors the excuse they wanted to inject a fresh dose of buoyancy into the markets.
|Source: Yahoo Finance
Coming to the performance of BSE indices, metal stocks stole the limelight this week. Recording a strong weekly gain of 7.1%, the BSE-Metal index was the top gainer. It was followed by BSE-IT (up 6.5%) and BSE-Oil & Gas (up 5.3%).
Amongst the major underperformers were stocks from the realty, FMCG and pharma spaces. The BSE-Realty index was the sole loser this week, ending lower by 2.3%. The BSE-FMCG and BSE-Healthcare indices ended higher by about 1.7% and 2.2% respectively. Amongst other things, the relatively poor showing of FMCG stocks seemed a result of untimely monsoons that lashed certain parts of the country during the week. With the FMCG demand already likely to take a hit on account of the below par Kharif crops, the untimely monsoons, it is being feared will damage some crops further thus hurting income of the farmer and in turn, rural demand for FMCG products.
Let us now have a look at some of the major corporate developments during the week. The week saw top IT companies such as TCS, Infosys, Wipro, IBM and HCL in the race for winning contracts worth Rs 20 bn from nationalized banks to help them automate their affiliated banks that are located in rural parts of the country. Banks such as SBI, Punjab National Bank, Indian Bank, Bank of Allahabad are amongst the few banks that are looking to do the same in order to extend their rural reach. It may be noted that revenues from the domestic markets and clients (including the government) have not been a strong focus of the Indian IT firms due to lower profit margins as compared to international business. However, in the recent past the companies have shifted focus on domestic markets, especially the e-governance projects considering that the opportunities are immense. The global economic downturn also resulted in this shift of focus as it brought a slump in IT spending in the traditional western markets for IT majors.
In another development in the IT sector, industry body Nasscom evinced that the Indian IT sector is likely to return to the double growth figures by FY11. This optimism is on the back of the improvement in the overall business environment. As for the current financial year, Nasscom is of the view that the sector will grow at a rate of 4% to 7%. The growth levels are, however, expected to remain well below what has been witnessed over the past decade or so, when the industry was growing at a pace of about 30%. In fact, Nasscom is of the opinion that the industry will grow at a compounded rate of about 14% over the next 10 to 12 years.
Continuing to remain at the core of investor anxiety, telecom major Bharti Airtel shared its views on the current price war situation as also on the company's future plans this week. Regarding the price war, the management believes that it will not last for long and that it is a short term situation considering that new and loss making operators will not be able to run their business with such low tariffs. It may be noted that during the company's earnings call, the management had stated Bharti would not look to try and match the lowest tariffs. Instead it would rather focus on competing with the top three players. While the company expects ARPUs (average revenues per user) to decline on the back of the high addition of rural customers, the company intends to focus on cutting costs and protect its margins. This it plans on doing by continuing its model of outsourcing.
Bharti Airtel does follow the model of outsourcing its IT and managing services needs to companies such as IBM and Alcatel-Lucent. In fact, it plans to do similar kind of deals going forward as well. While the company may be feeling the pressure of high competition, we believe that its strategy of protecting margins will only help it emerge as a stronger player. Plus, with the company planning to outsource more, it would enable it to focus on its core competency, which is marketing.
The Society of Indian Automobile Manufacturers (SIAM) announced the total number of vehicles sold during October 2009. As per the data, the total domestic passenger car sales increased by 39% YoY as compared to the corresponding month last year, while two-wheeler sales volumes stood at nearly over 750,000 units, higher by nearly 11% YoY. The sales of two-wheelers was largely led by sales of motorcycles, which formed nearly 81% of total two wheeler sales (volumes increased by 14% YoY) during the month as compared to about 79% of total two-wheeler volumes last year. The commercial vehicle (CV) manufacturers also saw a good month as the total volumes of CVs rose by 52% as compared to the last year. In total, the auto industry saw a great month as the total sales volumes (across all categories) were higher by about 16% YoY.
Movers and shakers during the week
PSU power major, NTPC announced its ambitious plans to invest Rs 810 bn for setting up over 1,000 MW renewable energy projects by the end of the next 5-year plan period i.e. 2017. This capacity addition is likely to include a 650 MW wind energy project, a 350 MW hydro electric project consisting of several small units and a 50 MW solar power project. It may be noted that setting up a MW of power generation capacity for hydropower costs around Rs 70 m, while the same costs around Rs 80 m and Rs 100 m from wind and solar energy respectively. The first 100 MW plant is likely to be commissioned by end of 2010 and feasibility studies are on-going for the entire plan. We believe this will a positive for the company in the long run to aid reducing the country's carbon footprint.
The Tamil Nadu government cleared the proposal of SUV maker Mahindra & Mahindra (M&M) to set up a large automobile facility at Cheyyar (near Chennai) having a total investment of about Rs 18 bn. It is believed that the government has already allotted about 45% of the total 450 acres of land required for this project. This project is believed to have a capacity of producing 150,000 units of tractors, SUVs and commercial vehicles. In addition, it will also be manufacturing certain auto parts. In addition, M&M is also expected to utilize nearly 100 acres of land at Mahindra world city at Maraimalainagar to set up one of the largest R&D and vehicle design centres in the world. The MoU for the same project is expected to be finalized within a period of two months.
In an important macroeconomic development, data released on Thursday showed that industrial output in India grew by 9.1% in the month of September, further evidence of the rising domestic demand in the country. And even though this is lower than the 11% growth seen in August, the fact that industrial output has sustained a relatively high growth momentum from June of this year adds comfort to the view that the recovery has so far proven to be a sustained one.
80% of this industrial output is comprised of manufacturing, which grew 9.3% during September, thus leading the overall growth for the month. Consumer durables posted the most impressive growth of 22.2%, evincing a higher purchase of goods like TV, ACs and refrigerators. Consumer goods as a whole grew by 8.2% in September, compared with 7.4% in August. It may be noted that auto sales too have seen a robust performance recently, growing 15.6% in October. Export figures for the month of October released this week also showed that key sectors are heading for a recovery as the decline slowed to 11.4%, compared to a fall of 13.8% in the month before that.
While these development have led to a consensus amongst market participants that the momentum will continue into the second half of FY10, we believe that long term investors should not ignore valuations and underlying fundamentals while buying into the stories.