Most major markets around the world saw declines this week. Asian and most European stocks were amongst the worst hit this week. There was no escaping the selling, even for India. Concerns that some European nations may be on the verge of defaulting on their debt payments was on top of investors' minds. India's benchmark index, the BSE-Sensex ended lower by about 3.5%, making it amongst the top losers.
Moving on to other Asian markets - benchmark indices of Brazil (down 4%), Germany (down 3.1%), the UK (down 2.5%) and Hong Kong (down 2.3%), all ended in the red this week. As the European nations of Portugal, Italy, Greece and Spain (together mockingly termed as 'PIGS') reel in their debt woes, financial markets across the globe were not spared from the selling. As for other global markets, US, Japan and China were amongst the lowest losers this week, with their respective indices ending lower by between 0.5% to 1.7%.
Source: Yahoo Finance
Moving on to the performance of the various sectoral indices - the past week saw only one gainer. Consequently, barring the BSE - Consumer Durables index, which saw gains of 2.9%, all other indices ended lower. Amongst the top losers were realty, banking and PSU stocks. While the BSE-Realty index ended lower by about 7%, the BSE-Banking index ended lower by about 4.5%. The BSE-PSU and BSE-Power indices ended lower by about 4% each. Evidently, with investors becoming edgy about sovereign debt defaults in Europe, the highly leveraged real estate sector was at the forefront of the selling.
Let us now look at the key corporate developments of the week. Indian software industry body NASSCOM believes that the IT sector will take a couple of years more to recover from the global economic slump. NASSCOM has projected export revenues to grow by 13% to 15% YoY to US$ 57 bn in 2010, below the previous outlook of US$ 62 bn. The
growth rate in the current fiscal would be 5.5%, within the 4-7% expansion projected earlier. NASSCOM believes that although software companies in Asia are leading the IT service exports as companies in US and Europe restart their technology spend, growth will be lower than earlier estimates.
Meanwhile the largest PSU banking entity in the country, State Bank of India (SBI) came under the government scanner for pursuing profitability too aggressively. In the week gone by, the government noted that had SBI made adequate provisioning for NPAs arising out of the farm loan waiver scheme, it would have reported a negative growth in profits for 9mFY10. The government feels that the largest bank should have set an example rather than concentrating on posting better results. SBI's provision coverage ratio at 57% in 9mFY10 is amongst the least in the sector and well below RBI's mandate of 70% coverage. SBI has, however, argued that it has followed all the banking norms and there is little cause for concern.
Investors in the downstream oil and gas companies looked towards hopes of recovery of losses by state owned oil marketing companies. The Oil Ministry stated that it will take a decision on the merits of raising the price of natural gas supplied by PSU oil and gas companies in coming weeks. It may be noted that the Finance Ministry is in favour of giving state-run oil firms freedom to fix prices of petrol and diesel in tune with their cost. While ONGC, Oil India and GAIL bore the entire Rs 84 bn under-recovery on petrol and diesel in 9mFY10, the government has agreed to give only Rs 120 bn in cash against the Rs 210 bn revenue loss on cooking gas. PSU energy firms, which account for about 40% of India's gas output of 140 m standard cubic metres a day, are seeking higher prices to make up for the under-recoveries.
As far as cement manufacturers are concerned, they reported good set of numbers for the quarter ended December 2009. The growth was driven by driven by increased demand from the housing sector, especially for low-cost homes, and infrastructure. Generally, cement sales start picking up from January and the peak period ends with the arrival of the monsoons in June. While the industry is likely to report volume growth of 10% in FY11, upcoming capacities are likely to exert pressure on margins. The industry capacity in FY09 was 204.8 m tonnes (MT). By the end of FY10, the industry capacity is expected to reach a size of 270 MT, an addition of nearly 65 MTPA. However, the annual demand is expected to rise by 20 MTPA to 198 MT and in FY11 the demand is expected to be 220 MT. Thus, the cement industry is likely to witness an excess capacity scenario in the medium term, which will impact realizations and growth in earnings of cement manufacturers.
Maruti, with a view to grow out of its reliance on its foreign parent's (Suzuki) R&D capabilities, announced that it will turn its upcoming R&D facility at Rohtak into a self-reliant setup by 2012. It may be noted that this will also coincide with the introduction of its first India made small car. The company's target is to make its R&D capability independent and self sufficient by 2012. Maruti management would like to have the development of small cars particularly for India to be done more and more in India itself. The company sees an expenditure of up to Rs 15 bn at its R&D centre over the next 3 to 4 years. The company plans to hire around 1,000 engineers this year and has set up a separate HR cell for the R&D centre, which further shows the company's seriousness of intent.
It what may come as a delight to Indian power equipment manufacturers, the Central Electricity Authority (CEA) made it compulsory for winning bidders to order core equipment for supercritical power plants from indigenous manufacturers. It will implement this by asking state and central utilities to incorporate an 'indigenous manufacturing clause' for all equipment bids. This will effectively shut out Chinese equipment manufacturers. Chinese power equipment companies have been the bane of their Indian counterparts, as their products are 10% to 15% cheaper. Interestingly, this move comes on the back of another recent move by the empowered group of ministers barring the import of supercritical power plants for future ultra mega power plants (UMPP). Apart from BHEL, which will benefit from this, numerous other players who are readying their own power equipment capacities in joint ventures with foreign partners will also receive boost of confidence. This includes L&T, which has tied up with Mitsubishi Heavy Industries to indigenously manufacture such equipment.
As per data released during the week, India's food price index rose 17.56% in the 12 months to January 23, while the fuel price index was up 5.88%. This rise in the food price index was higher than an annual rise of 17.4% in the previous week. Further, India's annual wholesale inflation (WPI) picked up to 7.31% in December 2009. This is in contrast to a much lower 4.78% in November 2009. Industry chamber Assocham expects WPI inflation to surge to double digits by the end of FY10. It may be noted that this is much higher than RBI's projections of 8.5%. The main culprits for this are the rising prices of commodities like steel, cement and coal due to the shortage of supply.
In another macro development, the IMF urged India to begin fiscal consolidation with the next budget given that India's fiscal deficit has soared due to various stimulus measures introduced to bolster the economy. It must be noted that India's fiscal deficit surged to 6.2% of GDP in FY09 and the government had pegged this deficit at 6.8% of GDP in FY10. Given that India has started displaying signs of recovery and is growing at a stronger rate than the developed world, the IMF is of the opinion that it is the right time to withdraw the stimulus. However, this may not happen anytime soon. This is because the chief statistician Pronab Sen has stated that India may defer taking a call on exiting stimulus measures and the finance minister could take appropriate steps later in the next fiscal year. Indeed, after the global economic meltdown and the serious problems that it posed, dealing with such a high fiscal deficit is the next big issue that the government will have to tackle going forward.
All in all, the week gone by saw investors wake up to the economic reality that the world is not still a very safe and stable place. Ignoring that fact, and in the process agreeing to pay high valuations for stocks can only lead to trouble.