India bottom of the heap again

Sat, 15 Jan RoundUp

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The past week has been a negative one for the Asian markets. Among the Asian countries, only Hong Kong (up 2.5%) closed the week in the green. China, Singapore and Japan closed the week down 1.7%, 0.5% and 0.4% respectively. India, down 4.2%, has been the biggest loser for the second consecutive week. The top gainer of the week was France, up 3%. Germany and UK also ended the week in the green, up 1.8% and 1.3% respectively. This performance came on the back of successful bond auctions held by Italy and Spain last week that took the edge off the euro zone’s debt tension, even though buyers demanded higher interest rates for both issues. In Americas, Brazil was up 1.3% while US closed the week up 1%.

Source: Yahoo Finance

Moving on to the performance of sectoral indices in India - the past week saw all the sectoral indices end on a weak note. Stocks from sectors that are more sensitive to interest rates - capital goods, realty and banking, were the biggest losers. Leading the pack of losers were stocks from the capital goods space. The BSE-Capital Goods Index dropped by a huge 5.9% this week. Real estate and banking stocks followed suit with their respective indices, the BSE-Realty and BSE-Bankex falling by about 5.3% each.

Being a volatile week, defensive stocks were amongst the top performers this week with the BSE-FMCG and BSE-Healthcare indices falling by about 1.5% and 2.8% only. BSE-Auto index was amongst the top performers (down 2.4%) after being the biggest loser last week. BSE-Consumer Durable and BSE-Midcap Indices were also amongst the top performers, down 2.5% and 3.3% respectively.

Source: BSE

Moving on to key corporate developments during the week - a handful of companies announced their results for the quarter ended December 2010. IT major Infosys came out with its 3QFY11 results during the week. The company’s top line grew by a tepid 2.3%. Geography wise, the rest of the world (not including North America, Europe and India) was the key contributor with a growth of 12.2% QoQ. North America remained flat QoQ. At the operating level, the company’s margins remained flat at 30.2%. Net profits for the quarter rose by 2.5% QoQ, marginally higher than operating profits as a result of higher other income. The subdued performance wasn’t the only concern for Infosys as its attrition rate climbed up during the quarter. Attrition for December 2010 was 17.5% as compared to 17.1% for September 2010.

Moving to metals sector, Steel major SAIL released its 3QFY11 results. The company’s top line grew by a robust 15% YoY as a result of strong demand. The company registered sales of 3.25 m tonnes during the quarter, a jump of nearly 11% over the same quarter last year. The balance growth in top line was aided by increase in realization and a better product mix. Operating margins however declined by 10% to stand at 15.9%. This was a result of an increase of 60% in raw material costs. Staff costs also increased (up 18% YoY) sharply, leading to further pressure on margins. Bottom line for the company fell by 34% YoY. This was due to the fall in operating margins.

In news from the banking space, HDFC declared its 9mFY11 and 3QFY11 results during the week. The company’s interest income grew by 7% during 9mFY11 on the back of a 22% YoY growth in advances. Net interest margin however fell by 0.5% to stand at 3.8%. Other income increased by 34% on the back of gains booked on sale of investment. As a result of this, net profit increased by 26% YoY. For 3QFY11, net interest income increased by 16.4% YoY while other income increased by 204% YoY. Net profits as a result increased by 33% YoY. Capital adequacy ratio stood at 14.1% while gross NPAs stood at 0.5% at the end of 3QFY11.

Coming to the FMCG sector, consumer goods major, Marico is in the final stages of acquiring 51% stake in Unibic India. Marico is reportedly paying Rs 1.3 bn for the stake. Unibic India is a subsidiary of Unibic Australia and has a portfolio of cookies. These include Chocolate Chip cookies and Oatmeal Cookies, called ANZAC. Unibic India supplies cookies to the Cafe Coffee Day chain, and also exports cookies to West Asia and South East Asia. The company is believed to have annual sales of Rs 500-600 m. Marico is expected to buy the remaining 49% stake over the next 4 years.

With the entry of Marico in the biscuit market, competition is expected to get fierce. Britannia is already a well established player in this space while Kraft and Orion Confectionery are new entrants. It may be noted that to be classified as a cookie, it should have 18% butter content. Cookies is still a niche market in India but the segment is growing at a fast clip as more and more consumers are graduating from biscuits to cookies.

In news from the auto sector, rising input costs is forcing Maruti Suzuki to increase prices of its products. The company’s management will decide on the quantum of the price increases in a meeting next week and new prices will be applicable from the same day itself. It may be recalled that the company had indicated while announcing results for September that that its profit margins were under pressure due to high commodity prices. This trend has been seen across the auto sector as other players have either raised or are planning to raise prices of their products. Tata Motors has increased prices of its passenger cars between Rs 3,000 and Rs 15,000 and for commercial vehicles the rise ranges between Rs 1,500 and Rs 30,000. M&M is planning to raise prices of its products this month. However, so far the company has not announced the quantum of this rise. Hyundai Motor India and General Motors, too, are looking at increasing prices.

Movers and shakers during the week

Company	7-Jan-11	14-Jan-11	Change	52-wk High/Low
Top gainers during the week (BSE-A Group)
Rei Agro Ltd.	27	28	3.4%	47 / 19
Grasim	2,382	2,458	3.2%	2,510 / 1,748
Praj Ind.Ltd	82	84	2.9%	110 / 68
Apollo Hospitals	456	469	2.8%	599 / 325
Ultratech Cement	1,000	1,020	2.0%	1,175 / 834
Top losers during the week (BSE-A Group)
Koutons Retail	54	44	-18.6%	451/42
Ksk Energy	127	105	-17.0%	207/108
Pantaloon	375	316	-15.6%	531/330
Zee Ent	137	118	-13.9%	163/123
Nagarjuna Construction	138	119	-13.9%	197/116

Source: Equitymaster
Coming to economic news, despite assurance by the government, food prices continue to be high. While food inflation came down to 16.91% for the week ending 1st January from 18.32% for week ending 25th December. Wholesale price index rose 8.43% YoY in December compared to the same period last year. This high inflation is adding to the case for another interest rate hike. It is being felt that RBI would be under pressure to further tighten monetary policy as previous rate hikes and a series of fiscal measures have failed to check runaway prices. It is widely believed that RBI would raise its lending and borrowing rates during the policy review meet on 25th January. It may be noted that RBI has raised interest rates 6 times since March 2010. While the tightening of liquidity has little effect on inflation, it is having a negative effect on other segments of the economy. Data has shown that industrial output growth slowed to a 20-month low in November, up 2.7% YoY on-year after October's 11.3% YoY rise.

Meanwhile the President of the World Bank has stated that India’s inflation is due to supply bottle necks and not due to a demand. surge However, while rain in some parts of the country has damaged crops chocking supplies, demand for protein rich foods is growing as Indians become wealthier. This has so far been ignored by the government. Authorities have been scrambling to address the problem. But after days of wrangling, a government announcement on inflation contained no major policy steps on food or other prices. The government instead sought to downplay concerns about prolonged price pressures and warned of stern action against hoarders of essential commodities. This goes to show that the government is reluctant to take concrete steps to address the problem for fear of them being unpopular.