Strong cues uplift global markets

Sat, 26 Mar RoundUp

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After a continuous losing streak since the past two weeks amidst tensions in the Middle East and Japan, the global markets have finally shrugged off the bad news and have managed to register healthy gains for the week. The US stock markets witnessed healthy gains (+3.1% WoW) due to strong earnings reported by the heavyweights coupled with signs of an expected pickup in economic growth. As far as the Indian stock market indices are concerned, the Sensex registered a gain of close to 1,000 points (+5.2% WoW) during the week due to rising fund flows and improved global cues (jobless claim data in US signaled that the unemployment rate was on a decline). Apart from this, short covering also fuelled rally in the Indian markets. However, with crude prices and inflation remaining high it will be interesting to see whether the market is able to carry forward the gains on to the next week.

Amongst the other world markets, Singapore was up 4.6% while France was up 4.3%. After losing heavily during the past two weeks even Japan posted a strong comeback by registering a gain of 3.6%. However, stock markets from Brazil and China registered modest gains of 1.3%.

Source: Yahoo Finance

Moving on to the performance of sectoral indices in India, not surprisingly all the indices closed the week in the green. Realty stocks were the biggest gainers during the week as buying interest resurfaced post the huge correction witnessed over last month. Even the banking stocks posted healthy gains (+6.1% WoW) after the government tabled the banking sector amendment bill in the parliament. IT stocks also joined the bandwagon and were up by 5.7% on better than expected US-tech earnings data.

Amongst the other sectoral indices, PSU was up by 3.2% during the week followed by Pharma and Oil & Gas which registered modest gains in the region of 3.1% and 3% respectively.

Source: BSE

Moving on to key sector news/economic developments that concluded during the week, it is interesting to note that prices of iron-ore came down for the first time in five years during the past week. Iron-ore is an essential raw material for the manufacturing of steel. The prices have come down as several Japanese firms have cut down the production of steel. As a result, the demand for the key input iron ore has come down leading to softening in prices. The Japanese steel mills account for nearly 13% of the global iron-ore consumption. As a result, these firms sort of set the benchmark for iron-ore prices globally, including India. If prices of iron-ore were to come down, then it would lead to stronger margins for the steel makers. However, most steel makers view this as a short-term phenomenon. As and when Japan starts the massive task of rebuilding, prices would shoot up again as demand for steel and other metals would go up. But for the short term, looks like the steel manufacturers would enjoy better margins.

Moving on from steel to sugar, after an expectation of bumper harvest this season, the government allowed sugar companies to export 500,000 tonnes of sugar under the open general licence (OGL) scheme. It may be noted that OGL is a permit given by the government that allows the companies to export sugar without any restrictions or conditions. The announcement for the export was made in December 2010. However, the decision was put on hold in the light of high food inflation. Subsequently, the Empowered Group of Ministers (EGoM) allowed exports after an expectation of bumper harvest. The government has also extended the stock holding limit on sugar, a move aimed at controlling inflation. It may be noted that allowing the mills to export the additional produce would enable them to make timely payments to the farmers.

It may be noted that the IT industry which was suffering from the slowdown in the global economy has seen its order pipelines growing in recent times. And the signs of its revival are evident in its hiring plans. For the 9 month period from March to December 2010, the top 5 IT companies have hired 114,038 new employees on a net basis. The top 5 hiring companies include Infosys, TCS, Wipro, HCL Technologies and Cognizant. This is compared to the 47,462 net additions during the corresponding period last year. The increase in hiring directly reflects the growing fortunes of the IT companies. The lull of the recession is almost over. The companies are expecting and also receiving larger and more valuable orders as clients have opened up their purse strings to spend more towards IT. As a result the companies have been building up on their employee strength to take care of the size as well as the diversity of the projects coming their way.

In news from the pharma sector, Mylan Inc. has sued the US Food and Drug Administration (FDA), seeking to block India's Ranbaxy Lab's exclusive rights to sell a generic version of Pfizer's cholesterol pill Lipitor, the world's best- selling medicine. Lipitor with sales of nearly US$ 8 bn in the US, is a cholesterol-lowering drug. Ranbaxy is expected to launch the generic version of Lipitor in November this year, once Pfizer's patent on the drug expires. Ranbaxy has the first-to-file (FTF) status on the drug which will ensure 180-day marketing exclusivity once it is launched in the US market. Ranbaxy is yet to get final approval from the FDA, and normally that comes close to the launch date. In a complaint filed on March 18, Mylan has said that the USFDA should allow other generic-drug makers, including itself, to enter the market as soon as a patent expires. In its complaint, the company has argued that Ranbaxy is not eligible for marketing exclusivity because of manufacturing violations at two Ranbaxy factories in India. Following this unanticipated event the Ranbaxy stock lost about 6% during the week.

In news from the auto sector, Mahindra & Mahindra (M&M), the leading tractor manufacturer, will set up a tractor manufacturing unit at its existing facility at Zaheerabad in the Telangana region of Andhra Pradesh. The company will invest Rs 3 bn on the tractor manufacturing facility over the next three years. The proposed facility is intended to manufacture 90,000 tractor units per year and also 3 and 4-wheeler commercial vehicles. It will provide direct employment to about 2,000 people and indirect employment to another 5,000. This will give a major boost to industrialization in the backward region of Telangana.

M&M has not sought any new land for its new facility. It would utilise the vacant land at its existing unit which is spread over 343 acres at Zaheerabad. Here, it currently manufactures its products like UV (Maxx), 3-wheelers (Champion Alfa), Light Commercial Vehicles and buses. The state government has agreed in principle to consider 100% reimbursement of VAT for 10 years from the date of commencement of production. The state government will also recommend to the central government allocation of natural gas for M&M's project on a priority basis.

Movers and shakers during the week

Company	18-Mar-11	25-Mar-11	Change	52-wk High/Low
Top gainers during the week (BSE-A Group)
Tata Communications	211	237	12.1%	354/195
DLF Ltd	224	249	10.8%	397/215
Mahindra Finance	707	781	10.5%	913/371
REC	225	246	9.4%	410/220
Chambal Fertilizer	70	77	9.3%	105/54
Top losers during the week (BSE-A Group)
Central Bank	145	135	-6.8%	224/125
Jet Airways	471	441	-6.4%	926/398
Ranbaxy Labs	469	441	-6.1%	625/364
REI Agro Ltd	29	27	-4.7%	38/19
KSK Energy	104	99	-4.5%	207/99

Source: Equitymaster

The government is likely to borrow Rs 2,500 bn (approx. 60% of its total budgeted borrowings for FY12) in the first half of the next fiscal. It may be noted that in the light of robust economic growth and improving tax buoyancy, the government's dependence on market borrowings has been reduced to a certain extent. While lower government borrowing increases the availability of funds for the private sector, higher government borrowings typically crowds out private consumption due to increase in interest rates. And since the private sector typically borrows in the second half, the decision to front load the borrowings would provide private sector enough leeway to access the borrowing market without impacting their overall interest cost.

During the week two of the most iconic figures Bill Gates and Warren Buffett visited India in order to promote philanthropic drive amongst Indian corporates. While on the one hand, India Inc has welcomed such a move, on the other they have criticized the government's proposed mandatory Corporate Social Responsibility (CSR) proposal. It may be noted that the government has plans to make CSR mandatory for corporates by asking them to earmark certain proportion of their profits. While it is true that CSR can't be dictated drafting a guideline can certainly serve the purpose, if the corporate's have some social consciousness.