World markets continued their positive run for the third week in a row. The biggest gainer of the week was Hong Kong up 2.5% while the only loser of the week was Brazil down 0.8%. The continuing strong performance of the world markets is due to the liquidity injected as a result of U.S. Federal Reserve’s quantitative easing programme (QE-II). This has helped boost markets despite the negatives like Japan’s nuclear crisis, tensions in the Arab world, the euro zone’s debt crisis and rising interest rates. In Asia, Indian Stock markets were the worst performers up by a subdued 0.2%. However, Singapore and, China performed strongly, both up 2.1%. Japan also closed the week up 0.6%.
In Europe, UK was the best performer up 0.8% closely followed by Germany up 0.5%. France closed the week up 0.2%. US closed the week flat.
Source: Yahoo Finance
Moving on to the performance of sectoral indices in India, focus has shifted from the heavy weights which had started to look expensive as compared to the small and mid cap stocks over the past weeks. As a result, the best performer of the week was the BSE Small cap index. Worries of high oil prices continue to weigh on markets. As a result the worst performer and the only index to close the week in the red was the BSE-Oil & Gas index, down 0.8%.
Among the other top performers was the BSE-Capital Goods index up 3% closely followed by BSE-Realty and BSE Midcap indices up 2.8% and 2.7% respectively. In the worst performers, BSE-Sensex was up by a mere 0.2% on the back of worries surrounding inflation and oil price; while BSE-Auto index was up by a subdued 0.4% on concerns that higher interest rates would slow down growth in the sector.
Moving on to key sector news/economic developments that concluded during the week. The domestic passenger car market crossed the 2.5 m vehicle sales mark for FY11. In fact, the vehicle sales mark is expected to be closer to 3 m for the last fiscal year. Interestingly the stellar performance extended beyond the passenger car segment. Almost 12 m two wheelers and 676,408 trucks and buses were sold during the year. In fact expects believe that if the current growth momentum is sustained then India could overtake Brazil as the world’s sixth biggest automobile market.
However, red flags have already been raised. This is because the sales growth in passenger vehicle in March has been the slowest in the last eight quarters. The sales growth in March was clocked at 23% YoY. Same was the case for two wheelers, which grew by 20% YoY for March and commercial vehicles which grew by 13% YoY for the same period. Going forward Society of Indian Automobile Manufacturers (SIAM) has forecast that domestic vehicle sales growth will fall from 26.1% YoY, seen last fiscal to stand between 12-15% YoY for the current fiscal. The slowdown is evident by the higher incentives and discounts being offered by car manufacturers in March. However, sales of luxury cars continue to be robust.
SIAM president Mr Pawan Goenka believes there are several challenges being faced by the auto sector. These include significant increase in vehicle finance rates, continuous rise in input costs and differential excise on large cars. It may be noted that auto loan rates have touched 15% while trucks and buses loan rates have touched 19%. On the input cost front, commodities prices are expected to increase by nearly 8-10% YoY in the current fiscal.
On the automobile export front, exports from India grew by a strong 29.64% YoY. This performance came on the back of strong two wheeler and commercial vehicle demand from Europe. As per SIAM, total exports from India stood at 2.3 m units in FY11 up from 1.8 m units in FY10. However, passenger car exports disappointed as a result of slow European market recovery.
In more news from the auto sector, higher commodity prices are forcing auto manufacturers to raise prices. Last week Mahindra & Mahindra announced that it is raising prices of its entire range of vehicles. This increase would be between Rs 7,000 and Rs 15,000 per vehicle. This translates to an increase of 1.5% to 2% on all vehicles. It may be noted that this is the second price increase taken by the company in 2011. Earlier in January, the company had raised prices of its vehicles by 1.5%. Maruti has already announced an increase of Rs 1,100 to Rs 9,000 (an increase of 0.2% to 2.4%) on its vehicles for a similar reason. Tata Motors had previously hiked prices of its passenger vehicles by up to Rs 36,000 effective from April 1.
In news from the power sector, NTPC ,which is the biggest loser for the week, announced its provisional results for the quarter ending March 2011. Net sales for the company increased by 17.7% YoY to stand at Rs 144.8 bn for the quarter while the company’s net profit increased by 24.4% YoY to stand at Rs 25 bn. For FY11, sales increased by 16% YoY to Rs 537.2 bn while net profits increased by 1% YoY to stand at Rs 88 bn. While announcing the results, the chairman and managing director of the company Mr Arup Roy Choudhury stated that about 50,000 Mw of power was under construction. Moreover, the company plans to set up 15 Greenfield project within the next 5-7 years. A majority of these projects would be coal based. For this reason, NTPC is reviving proposals to buy coal mines in Indonesia, Australia, Mozambique and South Africa. NTPC also announced that it is increasing its planned capex for the year 2011-12. The capex which earlier was Rs 163 bn has now been increased to Rs 264 bn. NTPC is also looking at projects abroad. So far the company has selected Bangladesh, Sri Lanka and Bhutan where it would like to set up project and is in talks with their governments.
In news from the IT sector, Satyam Computers has got some relief in its dispute with the income tax department. The government has informed the Supreme Court that it will set aside its order directing Satyam Computers to pay Rs 6.1 bn as income tax. Moreover, the government will give fresh hearing to the firm’s plea challenging the tax demand. However the court has refused Satyam Computers’ plea to defreeze its bank accounts. Satyam has current Rs 13 bn blocked in the bank account which has been frozen by the court. The counsel for Satyam submitted that the company needs the money as it has to pay US Securities Exchange Commission. However, the Attorney General opposed this plea by pointing out that the company already has cash reserves of Rs 18 bn. However, the Court has assured the firm that after revised process, the company will receive whatever is entitled to it.
In other corporate news, after EIH and Suzlon successfully raised fund via rights issues, more companies are expected to follow suit. Over the last six months more than 30 companies have applied to SEBI for approval of their rights issues, while 40 firms have announced proposal for rights issues. A rights issue is a preferred way of raising funds as there are no restrictions and a company can price the issue attractively. This is beneficial for both promoters and shareholders. Promoters have an a further advantage in a rights issue as they can raise their shareholding in a company by this method as such a route is exempted from the annual limit of 5% applicable under Sebi’s creeping acquisition guide lines. Furthermore, a rights offer is a traditional method of raising funds where all shareholders of an existing company are offered equity or convertibles, at a discount to the market price.
In 2010-11, there was a 15% YoY increase in fund raising through the rights issue route. Around 24 companies raised Rs 96 bn during this period compared to Rs 83.2 bn raised by 29 companies during the previous year. The largest rights issue in that year, according to Prime Database, was from Central Bank of India which raised Rs 25 bn. Suzlon Energy, REI Agro and EIH were a few other examples of the past year's top fund-raising companies. If the bull market continues we expect to see several more companies announcing rights issues in the coming months.