All world markets ended positive this week. European markets were buoyant after a report that the European Union will offer Greece a US$ 75 bn bailout. Furthermore, European industrial output jumped the highest in more than two decades. This was on the back of increase in production of goods, which included steel and machinery. In Asia, stocks rose, on speculation the Bank of Japan will add funds to the financial system while a lower-than-estimated U.S. unemployment rate boosted investor confidence in the U.S. economic recovery. Furthermore, reports from the US showed that inventories rose by 0.1% in January on the back of companies' replenishing inventories helping the US markets extend gains from last week. In India, during the week the markets extended the Union Budget rally.
India ended the week higher by 1% over the previous week. The top gainer this week was Japan, up by 3.7%, followed by Singapore, Hong Kong and Germany, which gained 3.3%, 2% and 1.2% respectively. China was up by 0.9% while Brazil was up by 0.7%. US and UK closed the week with a gain of 0.6% and 0.5% respectively. France was up by 0.4% over the week.
Source: Yahoo Finance
Moving on to the sectoral indices in India – We had a mixed result this week with the stocks in the IT and Banking while the top losers were stocks in the PSU and realty space. While the BSE-IT index closed higher by 2.1%, the BSE-Banking index closed up by 1.4%. Sensex, BSE-Oil & Gas and BSE-FMCG indices ended the week higher by 1%, 0.6% and 0.4% respectively. BSE-PSU index was the biggest loser for the week, ending lower by 2.7%. Among the other losers of the week, BSE-Realty index ended lower by 2.1%, BSE-Metals by 1.6% and BSE-Power and BSE-Smallcap ended lower by 1.2% and 0.8% respectively.
HUL's latest ad campaign has created a strong buzz recently. The company took on rival Proctor & Gamble Home Products Ltd. (P&G) by openly pointing out that Rin detergent (one of HUL's detergent powder brands) is superior in quality to Tide Naturals (one of P&G's new product launches). While P&G has not yet retaliated in a similar fashion (although it approached the court against this advertisement), it has reacted in a different way. P&G has increased the grammage of Tide Naturals product by about 25%, while maintaining the same price. It is reported that the grammage of the Rs 10 pack of Tide Naturals has been increased from 100 gm to 125 gm, while that of the Rs 20 pack has been increased from 200 gm to 250 gm. This is an indirect price reduction of 20% on the product. It may be noted that a few months ago, HUL had cut prices of its laundry portfolio by about 8% to 12%. Will we see another price war in the detergent space? While it is too early to say, it cannot be ruled out entirely.
Titan Industries' Rs 10 bn watch division, has ambitious overseas plans especially for the South-east Asian watch market. The company which forayed in the foreign watch markets a few years back has limited presence in the South Asian countries like Singapore, Malaysia, Thailand, Pakistan and Bangladesh. It believes that its target audience i.e. youth (below 35 years) in these markets has become highly westernized and fashion conscious. The company aims to redesign its offerings in-line with their changing demands. To this end, the company has collaborated with international design houses and plans to launch 4 to 6 collections every year. The new product ranges are expected to be introduced in south Asian countries as well as in the domestic markets simultaneously. It also plans to venture into the South African watch market shortly. It may be noted that because of the company’s strong brand portfolio, its ability to understand changing consumer preferences and accordingly streamline its products has helped Titan withstand the difficult economic situation better than others. In future too we expect the company to continue to grow on the back of its strong positioning and new initiatives.
NTPC has announced that it is aggressively looking at international markets to source coal for its future capacity expansion. The company is targeting a generation capacity of 75,000 MW by 2017, up from around 30,000 MW today. Given this target, it expects to consume around 300 m tonne (MT) of coal by that year as compared to about 126 MT currently. As the company is facing issues with sourcing coal from the domestic market (it imports 10 MT of its annual requirements currently), and that its coal mines will start producing coal only in a few years, imports is the best alternative it has. However, given that imported coal comes at an expensive price (almost double as compared to domestic coal), the company will most likely see its fuel costs rising. We believe that the main concern is whether the company will be able to meet its generation capacity target for 2017 as this means that the company would have to add round 6,500 MW of new capacity annually for the next seven years. This is almost double of what it is has managing to do till now.
Caraco, one of Sun Pharma’s US based subsidiary has got a reprieve from one of its bankers. RBS Citizens, Caraco’s banker has agreed to suspend the conditions on a term loan of US$ 18 m. Besides this, a line of credit of US$ 15 m will not be affected. This is a welcome move for Caraco and to Sun Pharma as this is likely to give some more time to the troubled pharma maker to recover from a slump in business. It should be noted that the US FDA had asked Caraco to shut down its facilities in the US as it was found to be violating FDA manufacturing norms. The company was running solely on the basis of marketing Sun Pharma’s products in the US and had posted a loss during the most recent quarter. We expect things to start looking up after a couple of quarters.
Wipro's India focused IT arm, Wipro Infotech has won a contract worth Rs 600-700 m from Financial Intelligence Unit (FIU) of India in order to develop an IT network for tracking all irregular financial transactions in the country. This IT system will also track the financing of terrorist organizations as well as money laudering trail in India. The length of the project is expected to be 5 years. First 2 years being spent towards development and implementation and next 3 years being spent towards maintenance and support. We believe that this is a very prestigious project for Wipro as well as for FIU. The financial IT network will also connect FIU to FIUs in other countries as well as to departments like CBI, income tax and all the banks in India. Even insurance companies as well as other non-banking financial institutions will be required to report all irregular financial transactions of customers in the network. While this is a great move to bring in effective governance for the country, it will help Wipro in strengthening its foothold in the growing Indian IT market. It may be noted that Wipro generates over 22% of its consolidated sales from India.
Suzuki Motor Corp has increased its stake in Maruti Suzuki by 0.8% to 55%. It may be noted that companies are allowed to make creeping acquisitions of up to 5% a year. However, any increase beyond 55% will require Suzuki to make an open offer for another 20%. Given that the Japanese auto giant has raised its stake right up to the permitted threshold, in our opinion raises the question of whether it seeks full control over India's largest carmaker. There is ample motive for doing so. The Indian auto market outshines its troubled global counterparts. Maruti Suzuki contributes nearly 80% of Suzuki's profits. Interestingly, German auto giant Volkswagen has recently picked up a 20% stake in the Japanese group. Hence, the increase in stake in Maruti Suzuki could be part of a larger strategic plan between Volkswagen and Suzuki Motor.
Coming to economic news, as per reports, food inflation in India for the week ending 27th February came in a tad lower at 17.81% compared to 17.87% registered for the previous week. While the essential commodities continue to be expensive, the rate of price increase has been falling for some time now. The declining trend would buttress the government’s claim that the prices would fall from April onwards. However, fuel inflation is spreading to other areas. RBI is of the opinion that overall inflation would hit double digits by end of March 2010 due to increase in prices of fuel. Inflation is now broad based and spreading to other areas including manufacturing. Budgetary increases in excise duty and customs duty has led to a 6% increase in price of fuel on a weekly basis while on a yearly basis petrol prices have increased by 16.8%. While the leveling out of food prices is a positive for consumers as well as for food companies like Britannia and Nestle, rise in fuel costs is expected to spur inflation, making a case for the RBI to tighten monetary policy.
While all the world markets have gained over the week, we believe that the investors should not lose sight of valuations and the fundamental problems facing the world economies.