Markets plunge on weak IIP data

Sat, 12 May RoundUp

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It was a disappointing week for world stock markets. Except for Germany all the markets closed the week in the red. The US stock markets were down 1.7% during the week. This was the second straight weekly loss for the US indices. A surprise trading loss of US$ 2bn by JP Morgan prompted a selloff in the financial stocks. Further, rising political uncertainty in Greece that might cost the country a crucial bail out led to further turbulence in the markets. However, better economic data ensured that the fall was restrained to a certain extent. Claims for the new unemployment benefits fell for the second week fuelling some positivity.

The Indian stock markets were down 3.2% for the week. This was the fourth straight weekly loss as indices lost ground due to contraction in the industrial production data. It may be noted that the industrial output contracted by 3.5% in March. Clarification on General Anti Avoidance Rule and Reserve Bank Of India (RBI) directive to exporters to convert 50% of their forex holdings into rupee did not help much in improving the market sentiments.

Amongst, the other world markets, Hong Kong was the biggest loser (down by 5.3%) followed by Japan (down by 4.6%). The markets in France and UK were relatively flat registering a fall of 1% and 1.4% respectively.

Source: Yahoo Finance

All the sectoral indices closed the week in the red. Power and Information Technology stocks were at the receiving end having lost 4.7% and 4.4% during the week. Even the metals and realty pack was down 4.3% and 4.1% during the week. The only solace was consumer durables pack which ended the week on a relatively flattish note.

Source: BSE

Let us now take a look at key developments during the week. The Index of Industrial Production (IIP) data was announced during the week. IIP contracted by 3.5% in March 2012 as compared to the corresponding year-ago level. The index had clocked a growth of 4% in the preceding month. The reduction has come on account of lower production in mining and manufacturing whose indices fell by 1.3% and 4.7%, respectively in March 2012. The production index for capital goods slumped by 21.3%. However, electricity grew by 2.7% during the month. The economy is clearly showing signs of slowdown as reflected in the cumulative growth in IIP for 2011-12 that grew by a mere 2.8% vis-a-vis a growth of 8.2% last year.

The National Highway Authority of India (NHAI) has a target for awarding projects of 8,800 km during the current financial year FY13. While the target is massive, there was a worry amongst the investors as competition in the road construction segment has intensified substantially in the last few years with many small players bidding for projects across segments. However, a new development would help ease the competitive scenario within the sector. As per a leading business daily, the NHAI plans to award road projects of 3,000 km or one-third of the full year target in the form of two lane cash contract projects. This could come in as good news for big and smaller players alike as smaller players could target such projects, while the bigger player would focus on the four and six lane projects. As per the NHAI, these two-lane projects would be awarded on EPC (engineering procurement and construction) or cash contract basis rather than on BOT (build-operate-transfer) or BOOT (build, own, operate and transfer) basis because most of the two-lane roads lack heavy traffic. In short, owning such assets would not be viable for smaller players. For smaller players, this would be a breath of fresh air in a time when they are facing problems varying from stiff competition, margin pressure, high interest cost and stretched balance sheets. It is estimated that the total value of such contracts would stand at about Rs 150 bn.

Now let us take a look at a few corporate events during the week. Grasim Industries announced its results for the quarter and financial year ended March 2012 during the week. During the quarter (4QFY12), the company's standalone net sales stood at about Rs 13.9 bn, witnessing a marginal decline of 2.6% year-on-year (YoY). Operating profits declined by 53.3% YoY to almost Rs 2.2 bn, as all cost heads witnessed upward pressure. There was some relief on account of 27.5% YoY rise in other income which stood at Rs 1.5 bn during 4QFY12. Interest expenses and depreciation charges declined by 44.7% YoY and 12.6% YoY, respectively. At the bottom-line level, net profit dropped by 38.4% YoY to Rs 2.4 bn during the quarter. During the full financial year (FY12), while sales grew by 7.3% YoY, net profits remained almost flat.

India's largest engine supplier for three-wheelers, Greaves Cotton, plans to diversify. The company plans to manufacture diesel engines for both the passenger cars as well as for light, medium and heavy trucks. The company's Managing Director has stated that they have approached several passenger car manufacturers for this and plan to enter the space in a big way in the next three to four years' time. Currently, the demand for diesel powered passenger cars is hovering at its all time high. This is largely on account of the huge differential in the prices of petrol and diesel. Several international companies like Suzuki, Hyundai as well as Honda are all getting into the compact diesel engine segment.

Asian Paints has announced results for the quarter ending March 2012 (4QFY12). The company reported 39.5% year on year (YoY) increase in its consolidated net profit during the quarter. The consolidated revenues for the quarter also registered a growth of 29.3% YoY. For full year (FY12), the topline and bottomline registered a growth of 24.7% YoY and 17.3% YoY respectively. The company's board of directors has recommended a final dividend of Rs 30.5 per equity share for FY12.

Movers and shakers during the week

Company	4-May-12	11-May-12	Change	52-wk High/Low
Top gainers during the week (BSE-A Group)
BPCL	656	701	6.9%	705/465
GTL Infrastructures	8	8	6.9%	35/7
Petronet LNG	131	139	5.8%	183/128
Cadila Healthcare	730	766	4.9%	968/632
Piramal Healthcare	421	440	4.6%	489/340
Top losers during the week (BSE-A Group)
IRB Infra	148	105	-28.9%	210/120
GMR Infra	27	21	-21.0%	38/18
GVK Power & Infra	15	12	-20.7%	23/10
Unitech	26	21	-19.6%	37/18
United Spirits	760	614	-19.2%	1109/492

Source: Equitymaster
We will now discuss the other important corporate/economic events that took place over the week. The proposal to increase the foreign direct investment (FDI) in insurance sector has been again put on a hold, possibly until 2014. It may be noted that the current FDI limit in the insurance sector is 26% and insurers are lobbying the government to increase the same to 49%. The proposed insurance reform is crucial as according to Insurance Regulatory and Development Authority (IRDA) the sector needs a capital infusion of US$12 bn over the next 5 years. And unless the sector is opened up, garnering capital will turn out to be a difficult task.

Overall, it was a tumultuous week for the Indian stock markets. Weak IIP data and basket selling by investors saw the markets crash to a four month low. However, investors should keep in mind that such situations offer opportunities to invest into fundamentally sound companies at reasonable valuations.