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Euro crisis spooks Indian mkts
Sat, 22 May RoundUp

Similar to last week, stock markets worldwide continued to nosedive on the worries over the Greek debt crisis this week. In addition to this, the unexpected rise in US jobless claims added to the concerns. Pressure was seen in stocks across geographies with the top losers being Japan (down 7%) and Singapore (down 5%). These were followed by Brazil, China and the US, which saw declines in the range of 4-5%. Amongst the key world markets, Hong Kong was amongst the best performers, falling by 'just' 3%.

Down by 3.2%, India's benchmark Index BSE-Sensex was also amongst the lowest losers this week. Pressure on Indian stocks was largely due to an approximate Rs 40 bn selloff (net) by the foreign investors. However, on the back of strong results posted by some of the index heavyweights, the pressure on the stocks was curbed to a certain extent.

Source: Yahoo Finance

Moving on to the sectoral indices in India, the week was negative for the overall markets. Realty stocks were beaten down. The BSE-Realty index was down by 9%. Pressure was also seen in commodity stocks with the BSE-Metal Index down by about 7%. Amongst the lowest losers were stocks from the BSE-FMCG and BSE-Consumer Durables indices. Ending higher by 1%, the BSE-Capital Goods Index was the sole gainer this week. Smallcaps were under pressure this week as the BSE-Smallcap Index ended lower by 5%. The BSE-Midcap Index ended lower by 4%.

Source: BSE

Moving on to key corporate developments during the week, a handful of large companies announced their quarterly and full year results this week. We have highlighted some of the key ones below.

The stock of engineering major L&T was amongst the top gainers this week (amongst stocks forming part of the BSE-A group). Gains in the stock were largely due to the strong results posted by the company during the quarter and year ended March 2010. During the quarter, L&T's standalone revenues grew by 28% YoY, largely led by a 28% YoY growth in sales from the engineering and construction (E&C) segment. At the operating level, the company's margins expanded by 0.9% YoY to 13.8%. This was on the back of lower sub-contracting charges as well as administrative expenses (as percentage of sales). Excluding extraordinary items, net profits grew by 17% YoY during 4QFY10, a slower growth when compared to the topline. The reason for the same was higher interest and tax charges. During the quarter, the company had an extraordinary gain of Rs 1,007 m, which included a gain from the sale of the petroleum dispensing pumps & systems business. For the full year FY10, the company reported 9% YoY growth in sales while its net profits were up 26%.

ITC also reported its numbers during the week. The company had a good quarter as revenues and profits increased by 29% YoY and 27% YoY respectively. As for the full year, revenues and profits were higher by 16% YoY and 24% YoY. Sales for the full year were boosted by its FMCG (includes cigarettes) and paper and paperboard businesses. During FY10, the company's operating profits grew by 25% YoY, a faster pace as compared to sales. This was on the back of a 2.3% YoY expansion in margins. Profits for the year grew at a faster pace on the back of a strong operating performance, but were partly offset by higher interest costs and higher tax expense.

Moving from corporate news to other news, the stock of ABB was in strong demand this week as it ended higher by 23%. This was on the back of its parent company announcing an open offer for the shares of its Indian subsidiary ABB Ltd. The open offer is for 48.5 m equity shares at a price of Rs 900, representing a 22.9% of voting rights in ABB Ltd. This deal is worth US$ 965 m and will raise the stake of the parent company from 52% to 75%. Even after this buy back, the parent company will have US$ 5 bn in cash, leading to speculation that it may take its stake even higher and eventually delist the Indian subsidiary. The open offer will commence on 8th July and end on 27th July 2010. While the offer price is expensive at three times sales of ABB Ltd, the premium could be a reflection of the growth potential of the company.

The stock of ICICI Bank was in the news this week on the back of its plans of acquiring stake in Bank of Rajasthan (BoR). Under the agreement, ICICI Bank will offer 25 shares for every 118 shares of BoR held by the latter's promoters. It may be noted that ICICI Bank is nearly 25 times the size (in terms of assets) of BoR. However, the latter has one-fourth the numbers of branches as that of ICICI Bank, which has about 2,000 branches across the country. BoR on the other hand has good presence in the northern region of the country. From this, it is quite evident that ICICI is aiming at expanding its retail franchise especially in the northern region. However, this may not have a significant impact on ICICI Bank's books (considering BoR size as compared to itself). Nonetheless, we are not thrilled about the valuations at which ICICI Bank is acquiring BoR. The move could have a small impact on ICICI's NPA levels in the medium term as well. It may be noted that BoR is not really known for its financial stability. The bank had reported a loss at the bottomline level during the 9mFY10 period.

Movers and shakers during the week
Company 14-May-10 21-May-10 Change 52-wk High/Low
Top gainers during the week (BSE-A Group)
ABB 674 827 22.8% 880 / 598
Federal Bank 281 313 11.6% 324 / 216
IOC 309 330 7.0% 395 / 232
GAIL 428 453 5.8% 459 / 280
L&T 1,530 1,608 5.1% 1,800 / 1,234
Top losers during the week (BSE-A Group)
Gujarat NRE Coke 73 57 -21.7% 89 / 34
Educomp Solutions 604 485 -19.8% 1,017 / 495
Aban Offshore 831 681 -18.1% 1,680 / 658
HDIL 253 214 -15.3% 411 / 186
Tata Motors 816 710 -12.9% 882 / 265
Source: Equitymaster

Food inflation for the week ended May 8 came in marginally higher at 16.5%. During the previous week, it stood at 16.4% levels. The uncertainty over the monsoon this year, coupled with the difficulty in maintaining the supply of perishables (due to the summers) are cited as the key reasons for the figure to rise. It is believed that situation would continue to remain like this at least for the next 2-3 months. It is only after the monsoons have progressed satisfactorily, will some clarity emerge. India's Finance Minister has set an ambitious target, expecting inflation to fall below 5% by the end of the fiscal as against the 9.6% rate that ruled in the month of April.

The past week was a significant one for the telecom industry as the 3G spectrum auction finally ended. While no company opted for the pan-India license, the total amount that the companies will have to shell out will be about Rs 680 bn. This indirectly means that the government will get richer by this amount. In the process, it would help the government reduce the fiscal deficit level to below 5% from about 5.5% at present. This would help relieve some amount of pressure from the government's shoulders.

However, now with the auctions behind, the focus is on whether the government will be able to reduce the deficit further. Considering that the global markets are subdued, commodity prices have been at low levels. As such, crude prices have been stable at currently levels. While a decline in prices would be a positive for the government, any rise in prices could create problems in the form of higher fuel subsidies. In addition, if the Europe debt crisis starts spreading, it would indirectly create pressure on the Indian markets. Such a negative market sentiment could create problems for the government considering that it has planned to garner nearly Rs 400 bn from PSU disinvestments this year.

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