Liquidity drives the rally in markets

Sat, 18 May RoundUp

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Barring Hong Kong (down 1.0%), the major global indices have closed the week on a positive note. The US stock markets gained 1.6% over the week. This was mainly on account of strong corporate earnings data and positive data on labor market and retail sales. As such, consumer sentiment is at its highest in nearly six years. The future economic activity data for US has also been positive and has risen to near five year high in the month of April.

The major European stock markets ended the week in the green boosted by positive signals from US economy. Among the major European markets, the markets in Germany and France were up 1.4% and 1.2% respectively over the week. The stock markets in UK also gained 1.5% over the week.

Among the major Asian markets, the stock markets in Japan led the gains (up 3.6% over the week). This was boosted by a better than expected GDP data for the quarter that suggests that recent stimulus intervention programme might be paying off. The stock markets in China were up 1.6% over the week on speculations that Government will be going for economic reforms.

The Indian equity markets ended the week on a positive note with BSE-Sensex gaining 0.9%.The Indian stock markets were driven by foreign liquidity. As wholesale inflation data suggested easing, the gains were further boosted by hopes of a rate cut.

Source: Yahoo Finance

The sectoral indices ended the week on a mixed note with stocks in realty and capital goods leading the gains. However, the stocks in the FMCG and consumer durables sector witnessed maximum losses.

Source: BSE

Now let us discuss some of the economic developments of the week gone by. The wholesale price index (WPI) based inflation in April plunged to sub-5% level and stood at 4.89% (lowest since last seen in 2009) as against 5.96% in the previous month. Categorywise, inflation in food items declined to 6.08% in April from 8.73% in the previous month. It is important to note here that these are provisional numbers and nowadays these figures are witnessing sharp revision. With WPI data suggesting easing, hopes for a policy rate cut by Reserve Bank of India is high. That said, the consumer price inflation is still on the higher side.

Now let us move to some news from the corporate world. With the earning season in full swing, a number of companies have declared their quarterly results over the week.

FMCG firm ITC has announced its results for the quarter ended March 2013. The company has clocked an 18.8% YoY growth in revenues. Segmentwise, non-cigarette FMCG and agri-segments registered the fastest growth of over 20% each. The company has been able to sustain its operating margin at 32.8% due to a controlled rise in other expenses and staff costs as a proportion of sales. On account of price-hikes (as a measure to counter excise duty increase), the cigarette segment recorded a 4.2% YoY rise in EBIT margin. The net profits were up by 19.4% YoY.

Auto firm Bajaj Auto Ltd has announced its financial results for the fourth quarter of the financial year 2013 (4QFY13). The net sales for the quarter grew by 3% on a year on year (YoY) basis. The operating margins during the quarter slipped to 17.6% from 20 .7% in the corresponding quarter last year. The decline in the margins was mainly due to the adverse product-mix and increase in other expenditure. The net profits for the quarter declined by 0.77% YoY. This was due to weak demand and adverse product mix. However, the overall decline was limited to some extent by a higher contribution of other income that grew by 74 % YoY. The management has suggested that it does not see any growth in volumes in the short term.

Indian pharma firm Dr Reddy's Laboratories has announced its financial results for the fourth quarter. The company's revenues grew by 25.6% year-on-year (YoY) during the quarter. The growth was driven by strong sales from North America and emerging markets in the global generics segment. The pharmaceutical services and active ingredients segments also witnessed better performance. The net profits for the quarter increased by 66.6% YoY. For the financial year ended March 2013 (FY13), revenues grew by 20% YoY while net profits increased by 17.6% YoY.

Movers and shakers during the week

Company	10-May-13	17-May-13	Change	52-wk High/Low
Top gainers during the week (BSE-A Group)
GSK Consumer	4,062	5,094	25.4%	5249/2179
ABB Ltd	527	660	25.2%	830/469
Apollo Hospitals	940	1,068	13.6%	1096/605
Crompton Greaves	93	106	13.2%	142/87
Eicher Motor	3,050	3,450	13.1%	3482/1620
Top losers during the week (BSE-A Group)
Oracle Financial Services	2,625	2,419	-7.8%	181/43
HCL Tech	774	720	-7.0%	1397/989
Bajaj Finserv	757	708	-6.5%	1617/830
Cummins India	523	493	-5.7%	191/117
Tata Comm	238	225	-5.7%	137/73

Source: Equitymaster
Among other corporate news, the Competition Appellate Tribunal (COMPAT) has directed cement companies to pay 10% of the Rs 63 bn penalty imposed on them by fair trade regulator Competition Commission of India (CCI) for forming cartel in the sector. The tribunal also clarified that if the cement firms fail to deposit the amount within a 30 day time-frame, their petition would be dismissed. The next date for the final hearing has been fixed in August. CCI had found cement manufacturers in violation of the provisions of the Competition Act, 2002 which deals with anti-competitive agreements, including cartels. The cement companies charged with cartelisation include Lafarge India, India Cement, JP Associates, Binani Cement, Ambuja Cement, Madras Cement and J K Cement.

In some news from the banking industry, Indian banks have been alleged to violate KYC norms (Know Your Customer). Thus the RBI (Reserve Bank of India) and government might hike the penalty to be imposed on such banks who are involved in wrong doing activities. As per the banking secretary Rajiv Takru, the maximum penalty under the law is Rs 10 m or less and there is an active discussion on increasing this limit. The regulator has already sent show-cause notices to the erring banks and is awaiting reply from their side. However, the amount by which RBI will hike the penalty is still not specified.

The Government of India has decided to bring down the prices of essential medicines as per the new norms in pharma industry. The norms also call for increasing the number of drugs under price control and change the method of regulating the prices. The new regime would regulate the prices of 652 medicines. Earlier this number stood at only 74. We may note here that the new pricing regime would replace the 18 year old method of fixing prices on a cost-plus basis. Drugs will now be priced as per market price-linked cap for each drug. The new norms are likely to impact the business of both Indian as well as multinational pharma companies. However, makers of niche drugs may not get affected.

Going forward, the direction of the Indian stock markets will be governed by trend in the corporate earnings and market expectations on the rate cut. However, long term investors should focus on fundamentals and valuations rather than near term earnings trends.