Selling rules world markets

Sat, 17 Apr RoundUp

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The past week was largely negative for the Asian and the European markets with only the Singapore markets (up 1.2%) closing the week meaningfully higher. European markets continue to suffer due to the Greek debt crisis. US markets lost almost all of their gains on Friday with news of SEC charging Goldman Sachs with fraud. The US markets closed the week with a marginal gain of 0.2%.

For the week, only two global markets closed in the green. Singapore market, which was the top performer and the US market. Amongst the European markets, France was the biggest loser with a fall of 1.6%. India closed the week with a fall of 1.9%, while China, Japan and Hong Kong closed the week with a fall of 0.5%, 0.9% and 1.5% respectively. The biggest loser during the week was Brazil with a fall of 2.8%.

Source: Yahoo Finance

Moving on to the sectoral indices in India - the market was weak during the week, led by persistent selling across the board. IT stocks were the best performers with BSE-IT index gaining 3.2% during the week. BSE-Consumer Durable, BSE-Realty and BSE-FMCG indices also closed the week higher by 2.3%, 1.5% and 0.3% respectively. However, the remaining indices closed the week in the red with capital goods as the top loser. The BSE-Capital Goods index fell by 3.3% during the week. Stocks in Auto, Banking and Oil & Gas sectors also witnessed heavy selling with the BSE-Auto, BSE-Banking and BSE-Oil & Gas indices falling by 2.9%, 3.1% and 3.3% respectively.

Source: BSE

Moving on to key corporate developments during the week - India's largest two-wheeler company, Hero Honda released its yearly volumes during the week. The company turned in a robust 23% growth during FY10. While the company has indicated that sales growth will be strong during FY11 as well, we are not convinced. The reason is that the company's factories are already running at full capacity. As of now, Hero Honda has not lined up any expansion plans. However, it is in talks with various state governments to set up new factories. While the company is expected to finalize the location of the new units in a few months, delays would hamper sales for the company at least for FY11. However, the company losing its market share would depend on how much free capacity its competitors have.

With demand for natural gas set to increase, GAIL plans to invest about Rs 150 bn over the next three years to expand its pipeline network. These pipelines are being set up in Uttar Pradesh, Uttarakhand, Punjab and Haryana regions from where demand for gas is expected. Furthermore, the company is laying about 5,000 km of pipeline to connect the gas sources on the western coast to the gas consuming areas in the north of the country. GAIL is also laying pipeline to connect Bangalore, Mangalore and Kochi to its cross-country pipeline network. GAIL has a good track record of implementing projects. Given this, we feel that the company is in a sweet spot to benefit from the growing demand of gas.

One of the top gainers for the week is Godrej Consumer Products. The company is on an acquisition spree to increase its market reach and is targeting fast growing regions. Recently, the company acquired Tura in Nigeria and Megasari in Indonesia. According to news reports, the company is also looking to acquire Embelleze, a hair care company in Brazil. To manage its business better, Godrej is planning to consolidate its acquisitions in Africa, which are Rapidol and Kinky. While Rapidol owns hair color brands, Kinky offers hair extensions and wigs. To begin with, the sales and distribution network of the two companies will be merged followed by a corporate merger. The consolidated entity will have a new name under Godrej's one Africa strategy. This will help the company exploit scale and expand its brands over Africa.

IT major Infosys announced its FY10 results during the week. The company's sales and profits grew by 5% YoY beating the company's own guidance. The company also declared a final dividend of Rs 15 per share. The management of the company was upbeat about its performance and believes that the company has emerged stronger from the downturn. However, the company's management has indicated that it expects the company's sales to grow by 9%-11% YoY in FY11 while the profits will decline by 2% YoY. This is given on the basis of unfavorable fluctuation in currency, increase in employee-cost and investment in business.

According to news reports, Mahindra & Mahindra has agreed to take over the 49% stake of its partner Renault in the joint venture Mahindra Renault Pvt. This comes on the back of Renault's decision to expand operations in the country on its own. This makes M&M responsible for managing the Logan in the Indian markets. The car will continue to use the brand Logan until the end of CY10 and the company will change the name of the car thereafter. Renault will continue to support the Logan under a license agreement and will supply key components for the car, including the engine and transmission. It may be noted that Logan at 4.237 meters length attracts an excise tax of 22% compared to 10% for cars under 4 meters in length. This price differential meant that the car was priced out from the market. M&M plans to reengineer some aspects of the car including its length. This would ensure a more competitive price for the car in the market

Movers and shakers during the week

Company	9-Apr-10	16-Apr-10	Change	52-wk High/Low
Top gainers during the week (BSE-A Group)
Indiabulls Fin. Ser.	127	140	10.3%	224 / 95
Godrej Consumer	283	312	10.3%	336 / 130
Titan Industries	1,905	2,050	7.6%	2,062 / 725
Balrampur Chini	89	95	7.3%	167 / 66
Castrol	365	389	6.6%	392 / 156
Top losers during the week (BSE-A Group)
Max (I) Ltd	219	185	-15.7%	254 / 120
Aditya Birla Nuvo	956	835	-12.7%	1,054 / 450
United Spirits	1,351	1,233	-8.7%	1,514 / 656
Essar Oil	151	139	-8.2%	194 / 118
Punj Lloyd	183	168	-8.0%	299 / 108

Source: Equitymaster
In a report from the World Bank, it has been indicated that India can emerge as the world's second largest economy in the year 2039. This implies a GDP growth rate of 8-9% and would make the country's GDP bigger than that of the US. In fact, this also means that India's average per capita income would jump 22 times to US$ 22,000 during this period. While there is no doubt regarding India's long term growth prospective, we are a bit skeptical. This is because a sustainable growth rate of 8-9% is a tall order for the next 30 years as there are many challenges to overcome including infrastructure growth.

Moving on to international news - SEC sued Goldman Sachs for fraud, tied to collateral debt, which led to the financial crisis. An investment instrument called Abacus 2007-AC1 was sold to investors who eventually lost more that US$ 1 bn. A prominent hedge fund manager bet against the instrument and profited. Turns out, he helped create the instrument in the first place. This led to the Dow Jones falling by 1.13% on Friday.

China released its economic data during the week. The GDP grew by grew 11.9% YoY during the first quarter this year. This is the fastest growth seen in three years and far higher than estimates. While most of this growth was led by government stimulus, consumer spending is also a factor for the growth. The government in turn announced measures to cool the real estate market on concerns of an asset bubble. The concern here is that the Chinese economy is overheating. The high levels of economic growth China has been experiencing typically result in inflationary pressures, raising prices and ultimately slowing expansion.