The world markets ended on a mixed note this week. Most Asian markets along with European and American markets ended with weekly losses. The only gainers for this week were India, China and Hong Kong. The weakness in the world markets was a reflection of the unexpected drop of 7.2 % in sales of previously owned homes in the US. This indicates that lack of job growth is undermining US government's incentives to bolster the housing market. Further, there was concern regarding Greece defaulting on its sovereign debt. In case of a default, a downgrade in the credit profile of the European countries is expected. This will push up borrowing costs for the countries putting pressure on their fragile recovery.
India managed to end the week on a positive note, ending higher by about 1.5% over the previous week. Germany was the top loser this week, ending lower by about 2.2% followed by Brazil and France, both of which ended lower by 1.6%. Amongst the gainers were Hong Kong (up 3.6%) and China (up 1.4%). UK was marginally down while Japan ended flat.
Source: Yahoo Finance
Moving on to the sectoral indices in India - leading the pack of gainers were stocks forming part of the metals, banking and capital goods. While the BSE-Metal ended higher by 3.8%, BSE-Bankex Index ended higher by about 2.8%. BSE-Capital Goods Index ended higher by about 2.5%. Amongst the key losers were stocks from the FMCG Index, which ended lower by about 3.3%. Stocks in the consumer durable and in the oil and gas space were also under pressure ending the week with a loss of 1.9% and 0.6% respectively.
Coming to the key corporate developments this week. Union Budget 2010-11 was announced on Friday. The key highlights of the budget include increase in capitalization of PSU banks and partial withdrawal of stimulus by rolling back of excise duty rates and increase in duty on petrol and diesel. However, stimulus will continue for small exporters. Further, there was an increase in allocation for rural development and focus on the power sector. Fiscal deficit roadmap was also unveiled which shows how the government aims to bring the fiscal deficit down to 4.1% of GDP by FY13. The Finance minister also provided for relief to individual taxpayers by readjusting tax slabs. On the negative side for corporate, MAT was raised from 15% to 18%. This will affect companies that are operating in tax-exempt zones and paying tax only on MAT rates.
Rural Electrification Corporation Limited was the top gainer of the week on the bourse with a gain of 14%. The interest in the stock seems to be an outcome of the favorable response that the company's FPO has generated especially from large institutions. As per latest reports, the offer was subscribed over three times with the heartening aspect being the lack of any support from LIC and SBI. Mostly FIIs and a clutch of domestic mutual funds helped the issue to sail through without any major hiccups. The retail portion however, remained undersubscribed, with only 23% of the portion reserved for retail receiving bids. The company was looking to raise nearly Rs 35 bn through the offer with the sole objective of augmenting its capital base so that the company's capital requirements are met.
Shree Cement plans to derisk its income from the cyclical downturn of the cement industry by diversifying into power. The company consumes a major part of the 120mw it generates leaving about 20 to 30 mw available for the grid. However, the company plans to expand its power generation capacity to 560 mw by the next year and has a sales target of Rs 4.6 bn next year from power, up from Rs 0.6 bn this year. Shree Cement plans to invest Rs 12 bn for the same. It plans to initially sell power to states like Rajasthan and Punjab on a spot basis in the open market. Gradually it will seek to move to long-term contracts.
The Indian IT industry is likely to see projects coming its way soon. It is believed that the governments - central and state - are likely to call in bids for three major IT projects this year. These are believed to be the home ministry's police mission mode, the agriculture ministry's pilot projects and the ones under the Jawaharlal Nehru National Urban Renewal Mission (JNNURM). While the Mission Mode project for police, which would be a crime and criminal tracking system by the ministry of home affairs, would be worth about Rs 25 bn, the ministry of agriculture projects would be worth about Rs 2 bn. This would be towards understanding of the requirements in six states. Further, some parts of the JNNURM initiative, which is worth Rs 50 bn are also expected to see bids being invited for citizen-centric services.
It may be noted that the above mentioned projects are part of the overall Rs 230 bn National e-governance Plan (NeGP), which is expected to be spent over the next few years. We believe that this is a win-win situation for the government as well as the Indian IT companies. While the government can improve the delivery mechanism and operations of its projects, Indian IT industry has a lot to gain from the widening Indian IT market.
The budget brought some bad news for tobacco companies. The Finance Minister recommended increasing the excise duty on cigarettes, cigars, non-smoking tobacco and branded tobacco leaves. ITC, which derives about 65% of its revenues from tobacco, and tobacco products, fell about 6% on the bourse. It has been seen that cigarettes is a price inelastic product and ITC has in the past been able to pass on increase in excise duty to its consumers with little or no loss of volumes. For this reason, we do not expect ITC's bottom-line to suffer much on account of this higher excise duty levied on its products.
Coming to economic news, the US economy expanded by 5.9% in the fourth quarter, reflecting stronger business investment and a greater contribution from inventories. This growth was higher than previously anticipated. According to Commerce department in Washington, inventories added 3.88 percentage points to GDP while investment in software and equipment grew at a faster pace than was anticipated which added to economic growth. However, consumer spending, which accounts for 70 percent of the economy, is likely to be constrained by a high unemployment rate, which is expected to average around 9.8% this year. Household purchases meanwhile dropped 0.6 percent last year, which reflects the lack of consumer confidence.