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Markets fall over earning concerns
Sat, 21 May RoundUp

It was a lackluster week for the majority of the world's stock markets. Except for UK and Singapore, all the global indices ended the week on a negative note. The European stock markets were down on euro zone debt worries. Even the US stock markets were down by 0.7% over the week due to disappointing corporate earnings. Indian stock markets were not an exception either. They were down by almost 1.1% during the week due to weak investor sentiments amidst expectations of further rise in interest rates. Disappointing corporate earnings by index heavyweights like SBI further worsened the fall.

Talking about the other markets, in Europe, Germany was the biggest loser down by about 1.8%, while France closed the week down by 0.7%. However, UK was up by 0.4%. In the Americas, Brazil was down by 1% while US was down by 0.7%. China closed the week down 0.4%.

Source: Yahoo Finance

Moving on to the performance of sectoral indices in India, it was a mixed week for the sectoral indices. The BSE-Capital Goods index was the top gainer of the week (up 4%) followed by consumer durables (up 1%). The rally in capital goods was fuelled by strong earnings report from index heavyweight L&T. On the other hand, BSE-PSU index was the biggest loser (down 4.7%). Rising interest rate concerns continued to weigh on the banking and realty stocks. Both the indices were down by 3.4% and 4.2% respectively. BSE-Oil & Gas index was down after the government increased the subsidy contribution of upstream majors to compensate for the under recoveries incurred on account of selling petroleum products below cost prices by state run oil marketing companies (OMCs)

Source: BSE

Moving on to the key economic developments during the week, in order to combat the effect of rising crude oil prices, the oil marketing companies (OMCs) in India decided to hike petrol prices by Rs 5 per litre. This is the sharpest hike ever made by the companies. To match the under recoveries on oil, the companies needed a price hike to the tune of Rs 9 to 10 per litre. However, they decided to raise prices by half. They plan to have another hike in prices if needed. Despite the deregulation of petrol prices, OMCs had not hiked the prices of petrol due to the 'informal' dictate of the oil ministry. As a result the OMCs had been suffering huge losses on account of under recovery. The price hike on diesel, LPG and kerosene would be decided by the Finance Minister soon. It may be noted that while petrol prices were deregulated last year, prices of diesel, kerosene and LPG (Liquefied Petroleum Gas) are still controlled by the government.

Moving on to the key corporate developments during the week, - a handful of companies announced their results for the quarter ended March 2011.

SBI, the largest bank in the country today announced its fourth quarter and full year results for the financial year 2010-11 (FY11). The bank saw its net interest income grow by 15% YoY in FY11, on the back of 20% YoY growth in advances. Its NIMs (net interest margins) also moved up from 2.7% in FY10 to 3.3% in FY11 on lower cost of deposits. Profits were, however, an altogether different story. The bank's net profit fell by 10% YoY in FY11, and by 99% YoY in 4QFY11 as provisions on advances and higher tax outlay ate into profits.

The bank had to make an extra Rs 5 bn provision on standard assets for its teaser-rate home loan schemes in accordance with the RBI's guidelines. The retail loan segment, of which home loans was a major contributor, was a huge growth driver for the bank over the past year. With the scheme coming to a close, and with the RBI's recent bout of rate hikes, the bank's growth prospects in this segment may be affected. SBI's capital adequacy ratio stood at 11.98% at the end of FY11 as per Basel II, indicating the need for a further capital infusion. However, with its right issue now being postponed, the only plausible course of action would be for the bank to temper its growth aspirations.

Larsen & Toubro (L&T) announced its results for the fourth quarter and year ended March 2011. During the quarter, the company's sales grew by 13% YoY, while net profits registered a 17% YoY growth. For the full year, however, while sales grew by 19% YoY, net profits declined by 9.5% YoY. The company's order book registered a growth of 27% YoY during the quarter and stood at Rs 1,302 bn. This is 3 times its net sales for the year ended March 2011. Although the growth in order book is expected to provide revenue visibility into the future, execution will remain the key. Besides, intense competition and rising input costs will exert some pressure on the operating margins going forward.

Bajaj Auto declared its results for the fourth quarter and year ended March 2011. The company reported a healthy 24% YoY and 39% YoY growth in sales for 4QFY11 and FY11 respectively. Strong sales performance was largely led by volume growth as well as higher realisations. The latter was especially strong due to its focus on high end motorcycles. For the quarter, growth in sales volumes stood at 17% YoY, while for the year volumes grew by 34% YoY.

The motorcycles segment , in particular, did well to log in an impressive volume growth of 35% YoY for the year. Sales volume growth of the commercial segment came in slightly lower at 28% YoY. Operating margins for the year, however, declined by 1.3% mainly on account of rise in raw material costs (as a percentage of sales). Net profits rose by a robust 96% YoY during the year as the company received extraordinary income to the tune of Rs 7.2 bn as against an expense of Rs 1.6 bn last year. Excluding this impact from both the periods, growth in net profits came in at a healthy 40% YoY in FY11 and was led by higher other income and reduction in interest costs and depreciation charges.

ITC announced its fourth quarter results (4QFY11) and full year (FY11) financial results. The top line for ITC grew by 15.9% YoY in 4QFY11, bolstered by a strong growth in FMCG (including cigarettes) , hotels, paper and packaging and agriculture businesses. The operating (EBITDA) margins increased by 0.4% as a result of fall in raw material costs and staff costs (as a percentage of sales). Net profit grew by 24.6% YoY during the quarter. This increase was a result of a growth in operating income, higher other income and a sharp fall in interest expense. For the full financial year FY11, ITC's net profits grew by 22.8% YoY while net profit margins expanded by 1.1% to 23.2%. This performance comes on the back of higher operating income, increase in other income, and a fall in interest expense. Lower depreciation charges and a lower effective tax rate also helped add to the full year profits.

NTPC announced its results for the fourth quarter and full year ended March 2011. The company's net sales grew by 19% YoY and 26% YoY during 4QFY11 and FY11 respectively. This was largely a result of improvement in electricity tariffs, as the company volume sales did not have much to cheer about. Volumes grew by a meager 0.8% YoY for the full year. Operating margins declined to 22% from 27% in FY10. This was largely on account of higher fuel costs (as percentage of sales). Despite weaker operating margins, higher other income and lower depreciation charges cushioned the net profit margins. The company recorded its highest ever capacity addition of 2,490 MW for FY11. The Board has recommended an interim dividend of Rs 3 per share.

As per a press release by Glenmark Pharma's wholly owned subsidy Glenmark Pharmaceuticals SA has entered into a license agreement with global pharma major Sanofi for development and commercialization of GBR 500. GBR 500 is a monoclonal antibody to treat Crohn's disease as well as other chronic autoimmune disorders.

As per the agreement, Glenmark will receive an upfront payment of US$ 50 m from Sanofi. This payment includes US$ 25 m on closing of the deal and the remaining US$ 25 m on assessment by Sanofi of certain data to be provided by Glenmark. In addition to the payment, Glenmark could potentially receive payment for success-based development and regulatory and commercial milestones. As per the agreement, Sanofi will have the exclusive marketing rights for North America, Europe, Japan, Mexico, Argentina, Chile and Uruguay. In addition, the company will have co-marketing rights in Brazil, Russia, Australia and New Zealand. Glenmark would receive double-digit royalties on sales of products under this license. For India and rest of the world, Glenmark will have exclusive marketing rights.

Movers and shakers during the week
Company 13-May-11 20-May-11 Change 52-wk High/Low
Top gainers during the week (BSE-A Group)
Mundra Port & SEZ 135 148 9.5% 185/128
L&T 1,510 1,652 9.4% 2212/1485
Pantaloon 240 259 7.7% 531/233
Shriram Transport 638 684 7.1% 900/527
Aditya Birla Nuvo 811 859 5.8% 914/713
Top losers during the week (BSE-A Group)
SBI 2,645 2,322 -12.2% 3515/2165
Jain Irrigation 182 163 -10.3% 264/158
IOC 355 319 -10.1% 459/298
ONGC 305 274 -10.1% 368/263
Punj Llyod 63 57 -10.0% 142/56
Source: Equitymaster

It may be noted that modern retail has doubled its share in the Indian retailing industry within a span of just three years. As per internal estimates of Hindustan Unilever, modern retail now accounts for 10% of total retail sales as compared to 5% in 2007. One of the factors for the growing popularity of these modern day outlets could be that people are now willing to experiment more. FMCG marketers have also built on this opportunity by devising specific strategies for modern retail. To try out new products, usually consumers prefer visiting the nearby malls. They discover products like instant food, juices in tetrapacks, etc at these places. However, eventually they may start buying these from their nearby general stores as well. Thus, it turns out to be beneficial for overall retailing industry in the long run. With rising incomes, people's consuming habits have changed. It is interesting to note here that this change in consumption is seen not only in the metros but also in the tier-2 and tier-3 towns. With retail industry set to get into a new growth trajectory, modern retail will continue to play a key role in the future as well.

In news from the energy space, the Government has formally increased the contribution of upstream sector from 33% to 38.5% for FY11 to compensate for the under recoveries incurred on account of selling petroleum products below cost prices by state run oil marketing companies (OMCs). The government's move aims to help fiscal consolidation. The decision will have an adverse impact on proposed Follow on Public offering (FPO) of ONGC wherein the government plans to sell 5% of its shares. It will be difficult to raise the desired amount of funds post this decision. It can even lead to delay in timing of FPO, which as of now is scheduled in first week of July.

The under recoveries for FY11 are estimated at around Rs 780 bn. Post the decision, ONGC's share will be Rs 249 bn. This is RS 38 bn more than what the company had projected earlier. As per the management, it has an adverse impact on profits to the extent of Rs 20 bn.

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