The world stock markets with the exception of Brazil closed the week on a flattish note. The US stock markets were down 0.04% during the week. However, both Dow and NASDAQ reached historical milestones and touched 13,000 and 3,000 respectively during the week. But the rally fizzled out soon and the markets ended with a third losing week of the year. The stock markets in Europe ended the week on a mixed note (positive bias) as European Union Summit on Greek debt crisis eased tensions amongst investors.
The Indian stock markets were down by 1.6% during the week as investors chose to stay away from the markets ahead of key announcements scheduled in the upcoming weeks. Election results, monetary policy and union budget are key events eyed by the investors that will determine the course of the markets in next few weeks. It would be interesting to see whether markets embrace the policy action/poll results and extend the current rally which so far has been driven by easy liquidity.
Amongst the other world markets, Brazil (up by 2.8%) led the gains followed by Japan (up by 1.3%). However, the UK stock markets were down by 0.4% during the week.
Most of the sectoral indices registered losses during the week with realty (down by 4.7%) being the biggest losser followed by IT (down by 3.0%). Pharma was the biggest gainer (up by 2.0%) followed by the mid cap index (0.9%)
Let us now take a look at key developments during the week. India's Gross Domestic Product (GDP) growth figures for the December quarter were announced during the week. The GDP growth for October-December 2011 quarter came in at 6.1%, lower than the 6.9% and 7.7% growth reported in the second and first quarter respectively. This is not surprising given that industrial production data had also been poor for the past couple of months. One of the reasons for the slowdown in GDP has been attributed to the rise in interest rates as the Reserve Bank Of India (RBI) chose to hike rates with the aim of taming inflation. This coupled with rising fuel prices only served to dampen demand and thereby contributed to the economic slowdown. The government's poor state of finances is also a cause for concern and its inability to reduce fiscal deficit has only piled on the pressure on the central bank to rely on monetary policy to control inflation. While electricity, construction, transport and communications did well during the quarter, agriculture, manufacturing and mining fared poorly.
State run oil refiners are expected to cut down crude oil imports from Iran as it is facing US sanctions. However, the refineries are citing diversification as the official reason for the move to avoid offending significant oil supplier such as Iran. The shift is now suggested to relatively cheaper new grade of crude oil from Africa and Latin America which can improve gross refining margins for the complex refineries. The sourcing from Iran has already declined significantly from 22 million tonnes in 2008-09 to 13.1 million tonnes in the current fiscal and is expected to see further decline. In India, Mangalore Refinery and Petrochemicals (MRPL) is the biggest buyer of Iranian crude but is now eyeing supplies from in Africa and Latin America on a long term basis.
Now let us take a look at key corporate developments during the week. The sale of 5% stake by the Government in ONGC has received a tepid overall response. The auction offer managed to sail through with a last minute rescue from public sector banks (PSBs) and Life Insurance Corporation of India (LIC). The auction process was technical glitch ridden and just 98.3% of total shares offered for sale were taken up. The proceeds from the offer are estimated at Rs 120 bn. The lack of enthusiasm can be traced back to lack of a clear subsidy sharing mechanism and a high floor price (Rs 290 per share) set for the auction. This was the first divestment by the government which saw negligible participation by the retail investors as auction route method is not really meant for them.
Engineering major Bharat Heavy Electricals (BHEL) has bagged a Rs 7.7 bn contract from upstream oil company Oil and Natural Gas Corporation Ltd. (ONGC). The contract involves manufacturing and supplying 6 onshore drilling rigs. Mechanical equipment will be manufactured by BHEL's Hyderabad plant, while electrical equipment will be manufactured by the company's Bhopal plant. BHEL has so far supplied 84 rigs, of which 71 have been supplied to ONGC and 13 to Oil India Ltd. Besides this, the company is also in the process of completing refurbishment and upgradation work of 7 more rigs of ONGC. It must be noted that this is a positive for the company given that its order book at the end of the December 2011 quarter stood at Rs 1.46 trillion, a decline of 9% on a sequential basis. The company had not managed to bag any material orders during the quarter. In fact, orders worth Rs 58.5 bn were cancelled amidst uncertainty in the business environment.
The U.S market has seen price erosion of upto 70% in sales of Lipitor over past few months. As a result, Indian pharmaceutical majors such as Dr Reddy's and Lupin that are set to sell Lipitor in the US market by middle of 2012 are likely to be hit. The drug lost its patent protection in November last year and since then it is being sold by three players in US. Of these, Ranbaxy which is the only Indian company selling the drug currently in US (with 180 day marketing exclusivity ending in May 2012) has indicated price erosion of 60 to 70 % in generic Lipitor, much higher than the typical price erosion of 40 to 50 % in other products within such period. Lipitor's sales that had achieved a level of US$13 billion in 2006 came down to US$ 5.5 billion when it went off-patent on November 30, 2011.
We will now discuss the other important corporate/economic events that took place over the week.
The nation's largest lender State Bank Of India (SBI) has decided to cut interest rates on its education loans. The bank has lowered its rates on education loans by 25 to 100 basis points (0.25% to 1%). Following this, SBI's big ticket education loans would now be the cheapest in the country. The interest rates on the loans above Rs 0.75 m, would now stand at 12%. The rates offered by SBI's peers Indian Bank and PNB are in the range of 13.75% to 14.25%. The interest rate on loans between Rs 0.4m to Rs 0.75 m would now be 13.25%, which is again lower than the other banks. However, for loans below Rs 0.4m, SBI's rates are still slightly higher than that of its peers.
Infrastructure projects in the areas of power, irrigation and roads have encountered serious environmental concerns. However, recently the project award activity in the road segment has shown signs of momentum. Against an estimate to award 7,300 kms of road projects in FY12, approximately 4500-5000 kms have already been awarded till date. But competition has intensified considering that the activity in the other sub-segments like power, irrigation and airports is muted. Although fund raising remains an issue many companies are looking out for divesting their stakes in road projects. Debt finance is also expected to get cheaper with interest rates showing signs of cooling down. All this is likely to translate into better performance and higher earnings for companies engaged in road infrastructure projects.
We believe that the next two weeks would appear to be quite interesting for the markets as key events relating to budget, poll results and monetary policy are likely to unfold during the same time.