End to the Egypt crisis fuels rally

Sat, 19 Feb RoundUp

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Both Asian and the European markets closed the week on a positive note. China and Brazil (each up 3.5%) were the biggest gainers of the week followed closely by Hong Kong (up 3.4%) and India (up 2.7%). Easing political tensions in Egypt led to broad based buying across the globe. While drop in food inflation lifted the Indian markets, developed markets registered modest gains for the week as upbeat corporate earnings forecast overshadowed China’s latest monetary tightening move.

As for the other markets, Japan and France closed the week in the green and were up 2.2% and 1.4% respectively. US was up by 1.0%, while UK and Singapore closed the week with modest gains of 0.3%.

Source: Yahoo Finance

Moving on to the performance of sectoral indices in India, baring BSE-Realty index all indices closed the week in the green. Stocks from the banking and smallcap space were the biggest gainers. BSE-Banking and BSE Small cap indices both closed the week by registering gains of 4.9% and 4.1% respectively. BSE-Metal and Cap Goods indices also registered a sharp up move with gains of 4.0% and 3.9% respectively during the week. However, BSE-Realty and BSE-Pharma were the worst performers with the Realty index losing 2.2% during the week, while the BSE-Pharma index posted a modest gain of 0.6%. Amongst others, BSE-Oil & Gas and IT indices were up 1.0% and 1.4% respectively.

Source: BSE

Moving on to key corporate developments during the week, several companies announced their results for the quarter ended December 2010. We discuss the results of some large cap companies here below:

Tata Steel announced its 3QFY11 results. The company reported rise of 11% YoY and 112% YoY in consolidated sales and net profits during the period. The growth in the topline was mainly on account of higher realizations compared with the corresponding period in the previous year. However, the total deliveries for the group fell by 5.7% YoY to 5.68 m tonnes in 3QFY11 from 6.02 m tonnes in 3QFY10 due to weaker demand from Europe and Thailand. The consolidated operating margins improved marginally from 11.3% in 3QFY10 to 11.8% in 3QFY11 due to lower profitability from the European operations and an operating loss from the South-east Asian region. While the company's European operations witnessed a drop in the operating profit mainly due to high raw material costs and lower deliveries, the South-east Asian operations were affected during the quarter by rising scrap prices and a lag in implementing higher finished product prices. Nonetheless, bottom line increased 112% YoY due to lower interest and depreciation charges and a significantly lower effective tax rate.

From the power sector, Tata Power declared its 3QFY11 results. The company reported 2% YoY decline in consolidated sales while net profit surged by 348% YoY. Decline in the top line was mainly due to fall in the sales from the power business. This was a result of lower realisation per unit on the company's merchant sales, and was despite the fact that total volume sales of electricity increased by 3% YoY during the quarter. As for the company's coal mining business, sales grew by 17% YoY during the quarter. This was on the back of better realisations even as the company sold lesser coal during the quarter as compared to its volume sales in 3QFY10. Tata Power's operating margins improved to 23.7% during 3QFY11, from 12.1% in 3QFY10 on account of the fall in power purchase costs. As percentage of sales, these costs declined from 24.3% in 3QFY10 to 19.1% in 3QFY11. The company also recorded a decline in its other expenses, from 26.9% of sales in 3QFY10 to 17.8% in 3QFY11. Consolidated net profits grew by a substantial 348% YoY during 3QFY11, largely as a result of the rise in operating margins and higher other income. This rise in other income was due to a higher forex gain recorded during the quarter.

Pharma major Aventis announced its result in the past week. The company reported 10% YoY and 47% YoY growth in sales and net profits respectively. Sales growth was led by sales from its core pharmaceutical business. While exports declined by 6.5% YoY, the encouraging sign was that this segment reported a growth of 15% YoY during the fourth quarter. Operating margins fell by 2.7% to 18.8% during the year on account of a rise in overall expenditure as a percentage of sales. Other expenditure increased from 19.1% of sales in CY09 to 20.7% in CY10, while raw material costs increased from 45.8% of sales in CY09 to 46.5% of sales in CY10. Bottomline grew at a faster pace of 47% YoY largely due to the extraordinary income that the company received on sale of its stake in the Chiron Vaccines JV. On excluding the same, net profits fell by 1.5% YoY on account of the fall in operating profits and higher interest expenses.

Coming to other big corporate news of the week, Infosys Technologies is anticipating an increase in budgets across several verticals in Europe as its clients are experiencing an increase in their own demand. Unlike last year when there were budget cuts, the company is seeing an increase of 2-3% in many verticals like financial services, manufacturing and telecom. This has led to increase in local hiring by the company this year. In fact, Infosys plans to hire about 500 people in the next 2-3 years across its sales, consulting and technical teams to add to its 4,000 employees in Europe. Infosys is trying to boost its European business as it seeks to reduce its reliance on the US from where it derives a majority of its revenues. Key European markets for the company include Germany, France, the Nordic countries and the UK.

Movers and shakers during the week

Company	11-Feb-11	18-Feb-11	Change	52-wk High/Low
Top gainers during the week (BSE-A Group)
Hindustan Copper	250	324	29.9%	586/237
GMR Infra	31	40	28.2%	69/31
Educomp Solutions	401	489	21.9%	790/401
Yes Bank	238	284	19.5%	388/226
Century Industries	286	341	19.1%	575/286
Top losers during the week (BSE-A Group)
Jubilant Lifesciences	191	169	-11.7%	413/175
Shree Renuka Sugars	88	78	-11.0%	108/53
Unitech	38	34	-10.6%	98/35
Petronet LNG	125	113	-10.0%	136/70
Gujarat NRE Coke	51	47	-7.4%	85/49

Source: Equitymaster
Coming to economic news, India recently launched a new CPI that combines data from rural and urban areas and includes sectors that were not part of the existing index. The aim is to capture price trends more accurately. The new index will use 2010 as the base year. Basically, the government has taken this move to address inefficient and archaic data-collection processes so that the reading of price trends will be easier now for central bankers, government officials and the like. As per this new calculation the retail prices have increased by 6% in January against the average price level in 2010. The price increase is more in the rural areas than the urban areas. The new index is in line with the global trend as most countries use retail price index as a measure of inflation. However, in India changes to WPI are taken as headline inflation. If this new index is adopted as a measure of inflation over time, RBI and government will gradually focus their policies on containing retail price inflation rather than WPI.

Coming to another set of economic news, commerce minister Anand Sharma has revealed that the plan to open up the country’s multi brand retail sector to foreign investors is at an advanced stage of discussion. It may be noted that the move to open up the US$ 450 bn retail sector to foreign investment has been pending for years but no amicable solution has been arrived as yet. Opening up the sector to foreign retail giants like Wal-Mart, Carrefour and Tesco is likely to create jobs and reduce waste but at the same time it can have a cascading impact on the small shopkeepers in India. As the small shop owners do not have the scale and competitive advantage (in terms of price) when compared to the larger players they run the risk of going out of business. As a result there have been quite a few bureaucratic delays in getting the approval as envisaged.