Key world markets fell like a stack of bowling pins this week. They were seemingly rattled by the US markets. US financial stocks fell on the news that Barrack Obama plans to put new limits on the size and activities of big banks. Bank holding companies will be banned from owning, investing in or sponsoring hedge funds or private equity funds. They will also be banned from engaging in proprietary trading, or trading on their own accounts, as opposed to the money of their customers. Consolidation in the financial sector will also be discouraged.
India's benchmark index, the BSE-Sensex ended the week as one of the top losers. It fell by 4% during the week. The markets here in India were affected not only by unfavourable global cues, but they also witnessed selling pressure over some negative surprises from a few December quarter results this week.
Coming to global markets, the US led the list of losers and ended lower by 4.1% during the week. While Brazil also recorded losses of similar magnitude, Japan ended lower by about 3.6%. The ones that saw the least amount of losses were China and the UK, whose markets declined by 3% and 2.8% during the week.
Source: Yahoo Finance
Coming to the performance of BSE indices this week - the BSE Realty index led the declines this week, falling by a significant 8%. The BSE Capital Goods index was next, in which selling was spurred off by a disappointing set of results from engineering behemoth L&T (discussed below). The oil & gas and pharma spaces saw a similar sentiment, with their respective indices falling 6.1% and 6% respectively. Infact, not a single sectoral index managed to notch up gains this week. Amongst the ones that lost the least were stocks from the auto, consumer durables and FMCG sectors, whose respective indices ended the week with losses of less than 1%.
Corporate India's 3QFY10 results continued to pour in through the week. There was a combination of surprises on both the upside and the downside. A poor set of numbers from L&T during the week spoiled the mood on the street. For the quarter ended December 2009, L&T reported a 6% YoY decline in its net sales. Net profit (before extraordinary items) managed a 15% YoY growth owing to improved operating margins. The company has cited slow execution of some contracts and delayed financial closure as the key reasons for the drop in topline during the quarter. The company also deferred release of some high value orders, which affected sales during the quarter. This has led to the company lowering its full-year FY10 growth estimate to 10% from 15% earlier, which seemingly soured markets' sentiment. The management has however indicated of better times in the future.
The largest mortgage financer in the country, HDFC announced its third quarter and nine month ended December 2009 results. The institution grew its advances by 18% YoY during 9mFY10. These were on the back of 22% YoY growth in approvals and 23% YoY growth in disbursements. The gross and net NPAs remained at 0.6% and 0.2% respectively. Profits grew by 23% for both the quarter and the nine-month periods.
Bharti Airtel announced its 3QFY10 results towards the end of the week. The company's sales grew by 7% YoY during 3QY10, 15% YoY during 9mFY10. Growth during the quarter was led by the company's passive infrastructure business, wherein revenues increased by 35% YoY during the quarter. Revenues of mobile services segment increased marginally. Mobile subscriber base stood at almost 119 m at the end of December 2009, higher by about 39% YoY. Operating margins contracted by 0.8% YoY to 39.3% on the back of higher network operating costs (as a percentage of sales). Net profits grew by 13% YoY during 3QFY10, 23% YoY for the 9mFY10 period.
Moving on to other corporate developments during the week, NTPC is looking to set up a merchant power capacity of about 6,000 MW by 2017. Since this capacity will be of a merchant nature, the electricity produced by these plants would be sold on auction to the highest bidder, as opposed to a particular buyer through a power purchase agreement (PPA). As a matter of fact, while the company currently sells power at an average cost of Rs 1.6 per unit to state electricity boards, it hopes to get between Rs 5 and Rs 6 per unit from the sale of power from these merchant plants, especially during peak hours. However, we believe that this business will form not more than 5% to 7% of the company's total revenues going forward.
According to the view expressed by Fitch during the week,
the Indian auto sector is expected to grow by 10-12% in revenues in 2010 on the back of decent domestic and overseas demand. However, the credit rating agency in its 'Indian Auto Sector Outlook' indicated that Indian automakers will witness pressure on margins on account of high competition in the sector. With the increasing penetration of global original equipment manufacturers (OEMs) and a plethora of new players entering the lucrative Indian small car segment, the competition is bound to intensify.
It may be noted that many global OEMs are setting up shops in India, either independently or as joint ventures with the existing players in order to leverage their established distribution networks. The segment leaders like Maruti Suzuki, Tata Motors and Hyundai Motor India are expected to find a tough time guarding their market shares. Apart from increase in competition, this inundation of automakers and OEMs is expected to result in under-utilisation of capacity in the medium term on back of mismatch in demand and supply.
In what came as a relief to power equipment manufacturers in the country, the government has now ensured that all the orders for future ultra mega power projects comes to them, instead of going to foreign vendors (particularly the low cost Chinese manufacturers). The government is reported to have approved a provision requiring such plants that will be awarded in the future to use local power generation equipment. The move, which is expected to provide a fillip to domestic manufacturing, comes after some serious lobbying by local power equipment makers. The decision on the ultra mega power plants or UMPPs will benefit domestic power generation equipment manufacturers such BHEL and L&T.
Food inflation softened to 16.8% for the week ended January 9, 2010. According to the government data, while the prices of vegetables rose by 7.9% and that of fruits by 3.8%, milk prices soared by 13.9% YoY. Controlling higher food inflation has been on the government's and the central bank's agenda for a while now and the near term action on interest rates and monetary policy is expected to be guided by this concern. Having said that, the necessity of stimulus withdrawal is no less pertinent in India than in China to avoid bubble-like situations.
As per reports during the week, there appears to be a significant improvement of credit offtake in the Indian economy suggesting a distinct change in business environment and corporate sentiments. In the period from mid-November 2009 to the end of December 2009, banks lent over Rs 1,180 bn which is nearly 4 times the money lent in the corresponding period of 2008. Lately, banks are seeing a significant rise in demand for loans as the companies' surplus inventories are drying up, triggering the need for working capital loans. The demand for retail loans is also picking up as home buyers are going ahead with their purchases. Also demand increase has been seen from the auto as well as infrastructure sectors. It appears that corporates, which so far tapped the capital markets for funding their working capital needs, are going back to the banks. This appears to be a positive sign for the Indian banking sector. However, despite this surge in credit offtake, banks are estimated to miss the RBI's target of 18% YoY credit growth for FY10.
The sudden fall in stocks during the week came as a surprise. But a pleasant one at that. That's because if you are going to be a net buyer of stocks in the short to medium term, the companies that you may have been looking to buy just got a tad cheaper. Now, that cannot possibly be such a bad thing, can it?