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High valuations worry investors, India down

Dec 19, 2009

Barring a few, most major indices across the world saw declines this week. India too, unfortunately found itself amongst the losers. India's benchmark index, the BSE-Sensex ended the week lower by 2.3%. This, after a subdued performance last week to when the index saw an almost flattish performance. The recent dull performance of the markets here in India come at a time when concerns about high valuations are taking centre stage.

As far as global markets are concerned, the German markets led the gains this week, with its index ending higher by about 1.3%. It was followed by Japan and Singapore, which ended marginally higher by about 0.3% and 0.1% respectively. Japanese markets were propped up by banking stocks in the country, which rose on the optimism that they'll have at least a decade to implement stricter capital rules. The Chinese and Brazilian markets saw the biggest declines this week, falling by a hefty 4.1% and 3.6% each. The fall in China was led by stocks of real estate developers in the country on concerns that the nation will step up measures to curb property speculation.

Source: Yahoo Finance

Coming to the performance of BSE indices, pharma stocks were in favour this week as the BSE-Healthcare index ended higher by about 3.8%. It was followed by the BSE-IT index which recorded gains of about 3% after gaining 2.2% in the previous week too. However, the list of loser far outstripped the sectoral indices that saw gains. Banking stocks were the worst affected by the selling. The BSE Banking index lost 5.6% this week. Expectations are on a rise that the RBI will raise interest rates soon to tame rising inflation. This is what possibly hurt banking stocks during the week. Pressure on bank stocks is simply because higher interest rates from the RBI will mean higher cost of funds for banks. This would subsequently force them to raise their own interest costs thereby leading to a possible decline in credit offtake. The losses of the BSE Banking index were closely followed by the BSE Realty and BSE Oil & Gas stocks which lost 5.5% and 4.1% respectively. Defensive FMCG stocks too took a hit with the BSE FMCG index seeing declines of 3.3% during the week.

Source: BSE

Moving on to the key corporate developments during the week, in an unexpected move, telecom regulator TRAI is planning change the rules in the telecom industry, wherein operators would have to start presenting a business case each time they come out with a tariff package. Only once the regulator is convinced the new tariffs are profitable would they be approved. This is in contrast to the status quo in the past wherein operators did not require prior approval for tariff packages, but were left to market forces. As per a leading business publication, TRAI has already begun work on examining tariff packages and the regulator will soon invite companies to present their business case. It may be noted that the exercise will also cover existing tariff packages. TRAI is doing this with the intention of ensuring the long term health of the telecom sector and its attractiveness to investors. This will come as relief to established players like Bharti Airtel who have been nervous about the predatory pricing that many new entrants in the industry have resorted to.

Steel giant SAIL during the week asked the government to levy anti-dumping duty to curb cheap steel imports at a time when profits are under pressure due to falling prices. Earlier, the steel ministry had requested the finance ministry for a 10% duty on steel imports, which was turned down. The imports come from China and Ukraine at US$ 400 per tonne at a time when rates are US$ 500 to US$ 550 per tonne in India. Given the global overcapacity situation in the sector, we believe the Indian steel makers will have to lobby hard to insulate themselves from low prices. It may be noted that even if the quantity of import is not significant, import prices set the benchmark for the industry.

Cement major ACC said that it does not expect any slowdown in the demand for the commodity on account of prospective rollback of government stimulus. It may be noted that due to the cut on excise duty, cement companies were able to save Rs 4 to 5 per bag which was passed on to the customer. However as the government might roll back these excise cuts in the next Union Budget, the price of cement and related products are expected to move northward. However, ACC does not expect this to impact the retail demand for the cement. It is for this reason it plans to invest Rs 15 bn in capex during 2010 especially in its readymade concrete (RMC) segment which mainly caters to the Indian real estate sector. The company will be expanding the capacity at its Karnataka (Wadi) plant from 5.8 mt to 8.8 mt by April 2010.

The buoyancy in the IT sector during the week seemed a result of strong economic data coming out from the country these IT majors get their maximum revenues from, the US. As per reports, retail sales came in stronger than expected in the US and consumer sentiment also showed a significant improvement on a month on month basis. It should be noted that consumer spending accounts for nearly 2/3rd of the US GDP and hence, positive reports on this front does raise expectations a great deal of a economic recovery in the US and thus, higher sales for Indian IT companies. Furthermore, a strong US economy also means a stronger dollar, another positive factor for Indian IT companies.

Infosys, India's second largest IT services exporter is considering prospects of a joint venture with the IT arm of German engineering major Siemens AG. If the deal with Infosys goes through, it will help the Indian IT major to boost its revenues from the European markets. The company has already hinted that it aimed to increase its revenue contribution from Europe to 40% in the next couple of years. At present it generates over 60% revenue from the US, 25% from the Europe and the remaining comes from rest of the world. The cash rich company has also hinted that it plans to take the inorganic route for gaining strong foothold into the target markets.

Movers and shakers during the week
Company11-Dec-0918-Dec-09Change52-wk High/Low
Top gainers during the week (BSE-A Group)
Apollo Hospitals455 565 23.9%625/350
Bajaj Holdings & Invst.560 649 16.0%664/210
Dr. Reddy's1,113 1,205 8.3%1,226/357
Asian Paints1,698 1,800 6.0%1,811/681
Ultratech Cement852 900 5.6%917/325
Top losers during the week (BSE-A Group)
Andhra Bank119 102 -13.9%125/37
Rei Agro50 44 -11.9%104/38
United Spirits1,390 1,228 -11.7%1,415/426
IVRCL Infra380 337 -11.4%425/82
IFCI57 51 -11.2%61/16
Source: Equitymaster

Bank credit growth stood at 10.5% YoY during the fortnight upto 4th December 2009. This was faster than the credit growth during the previous 3 fortnights. However, the sustainability of this faster pace of credit growth is at question. This is much lower than the RBI's target of around 13% to 14%. It shows that Indian banks are still wary of lending to segments such as personal loans and credit cards. Borrowings from corporate clients too has not picked up a good pace. This is in contrast to the enthusiastic lending by banks to segments such as home loans which have a collateral backing them and are considered more safe. It may be noted that the total outstanding deposits of banks as of the 4th of December grew 18% YoY.

In what might burn a deeper hole in your pocket, India's food price inflation is now nearing 20%. This is as per data compiled by the commerce ministry. It shows that food prices on an average increased by 19.95% during the week ended December 5. This is higher than the 19.05% food price inflation that was recorded in the previous week. The wholesale price index on the other hand more than trebled to 4.8% during November as rising prices of food items like potato, sugar and pinched consumers in a big way. This led the investors to speculate that a rate hike or a liquidity tightening measure could be in the offing, which in turn could also apply brakes to the Indian GDP growth.

But as unpredictable as macroeconomic developments have shown themselves to be, it would probably be wisest for an investor in stocks to devote as little time as possible in anticipating such events. And least of all, make their investment decisions on the basis of these anticipations. Spotting and investing in a company that has show for many years past that it can navigate such macroeconomic vagaries with ease, and is available at fair or attractive valuations is the best bet an investor can have.

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