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FII pull out weighs on Indian stock markets
Sat, 28 May RoundUp

It was another disappointing week for the world stock markets. Other than Brazil which managed to close the week in the green (up 2.7%), the remaining world markets ended in the red. The biggest loser of the week was China (down 5.2%) extending its biggest weekly drop in 10 months. The country continues to battle high inflation. This is putting pressure on the central banks to continue raising interest rates. Investors are getting increasingly worried that the tightening is overdone and that higher interest rates would slow economic growth.

In Europe the biggest loser was Germany (down 1.4%) followed by France (down 1%) and UK (down 0.2%). Europe continues to battle the sovereign debt crisis with Fitch downgrading Greece's debt further into junk status. In Asia, Singapore was down by 1% while Japan was down by 0.9%. Hong Kong closed the week down 0.4%. Indian stock markets remained choppy during the week and closed down 0.3%. Foreign funds have been pulling out money from the Indian markets on stubborn price pressures and the central bank's aggressive monetary tightening which threatens to restrict growth and dent corporate profits. US closed the week down 0.6%.

Source: Yahoo Finance

Moving on to the performance of sectoral indices in India, it was a mixed week for the sectoral indices. The BSE-Oil & Gas index was the biggest gainer of the week (up 2.4%). Power stocks were the biggest losers with the BSE-Power index down 2.2% on problems plaguing the power sector expansion. Among the top performers BSE-Consumer durable index was up 1% while BSE-Banking index closed the week up 0.5%. Amongst the top losers BSE-IT index was down 1.9% while BSE-Capital goods index closed the week down 1.8%.

Source: BSE

Moving on to the key corporate developments during the week, - a handful of companies announced their results for the quarter ended March 2011. From the oil & gas sector GAIL released its 4QFY11 results. The company's top line grew by 35.6% YoY. This performance was on the back of strong growth in the natural gas trading business supported by natural gas transmission business and petrochemicals business. Natural gas trading business which constitutes 73% of total revenues grew by 53.4% YoY. Natural Gas transmission business and petrochemicals business grew by 23.4% and 25.3% YoY respectively. However, other business of the company disappointed. While sales of LPG transmission fell by 3.9% YoY, sales of the LPG liquid hydrocarbon business fell by a sharp 41.3%.

Operating income of the company fell by 5.6% YoY while margins came in lower by 6.3% YoY to stand at 14.5%. This was the result of increase in cost of raw materials and purchased goods as well as staff costs during the quarter. Raw material and purchased goods increased by 8% to stand at 75% (as a % of net sales). Staff costs grew by 154% YoY during the quarter. On a segmental basis, natural gas trading segment was the only one to witness an increase in operating profit margins with a growth of 3% YoY. The margins for natural gas transmission and petrochemicals segment were down 10% YoY and 12% YoY to stand at 58.6% and 42.4% respectively. LPG liquid hydrocarbons segment however registered a loss at operating income level. Net profits for the quarter fell by 14.0% YoY. This was on the back of a fall in the other income as well as by an increase in interest costs. Other income fell by 48% YoY while interest costs increased by 71% YoY.

In news from the realty sector, DLF released its 4QFY11 results. The company's top line grew by 34% YoY. This was on the back of 10 m sq ft sold by the company during the quarter. However, this is a fall of 20% YoY over the sq feet sold in 4QFY10. Operating profit of the company fell by 33% YoY while operating margins more than halved to stand at 24.8%. This fall in operating income is a result of a onetime adjustment related to cost reset for input price inflation. Net profits declined 19.2% YoY. This is a result of a sharp increase in interest and depreciation expenses. Interest and depreciation expense rose by 45% YoY and 75% YoY respectively during the quarter. However, fall in effective tax rates helped support the bottom line. Effective tax rates fell from 31.8% to 6.7% due to deferred tax adjustments. The company is battling a high interest cost environment which is slowing demand on one hand and on the other is adding to the company's own interest cost burden. The company is looking at selling its noncore assets to repay a part of its debt. However, unless demand increases, the company will continue to face tough challenges.

Moving on to the engineering sector, BHEL declared its 4QFY11 results. The company's top line grew by 32.2% YoY. This was aided by a robust performance by the company's power segment which grew by 35.8% YoY. Industry segment also put up a solid performance with a sales growth of 18% YoY. Operating income for the company grew faster than sales at 50% YoY while operating margins expanded by 2.8%YoY to stand at 24%. This performance was a result of a fall in staff costs and raw material costs (both as a percentage of sales). On a segmental basis, while the operating margins of power segment remained flat, operating margins of the industry segment grew by 1% YoY to stand at 26.6%. Net profit of the company grew by 47% YoY during the quarter. This is slower than operating income growth and is a result of a fall in other income combined with an increase in interest costs as well as higher effective tax rate. While other income fell by 21% YoY, interest costs grew by 71% YoY. Effective tax rate increased from 34.1% in 4QFY10 to 34.7% in 4QFY11.

In news from the auto sector, Tata Motors released its FY11 results. The company has performed well on the back of its domestic business as well as on its Jaguar Land Rover (JLR) business. Consolidated sales of Tata Motors grew by 33% YoY during the year. Domestic business grew by 30% YoY while the JLR business grew by 42% YoY. Tata Motors's domestic business was driven by the company's commercial vehicle sales business which grew by 23% YoY in volume terms. Total standalone sales volumes stood at over 836,000 units, while total global volumes stood at over 1,080,000 units for the year. Sales of passenger and utility vehicle (including JLR vehicles) increased by 23% YoY during the year in the domestic market. Sales of the Nano crossed the 100,000 mark on strong exports. The company faced raw material pressure during the year. As a result it had undertaken several price hikes. For the year, realization improved by 5.3% and 4.6% on commercial vehicles and passenger cars respectively during the year.

Operating profits increased by 107% YOY while operating margins grew by 4.9% YoY. This is due to a control on costs as raw material on a consolidated basis fell by 2.3% (as a percentage of sales). Operating margins of JLR which had stood at nil in the previous year stood at 11% in FY11. However, operating margins of the domestic business fell from 9% in FY10 to 8% in FY11 as a result of higher raw material prices. Consolidated net profits of Tata Motors grew by 260% YoY (increased by 220% YoY excluding extraordinary items) during FY11. This was on the back of strong operating performance and lower interest costs. Interest costs fell by 8.7%. However, fall in other income capped net profit growth. Other income fell by 95% YoY.

Coming to the IT sector, Infosys is planning to set up a separate company to focus on IT products, platforms and intellectual property-driven solutions. This is a shift towards a higher value albeit riskier business. While the payoffs from successful products can be huge, they can also fail even after substantial investments. As per a spokesperson of Infosys, it is a natural progression for IT services companies to move to products. This is because to remain competitive, it is essential to become a full service provider. Clients are demanding high-end solutions such as platforms and products from Indian IT services providers. Infosys as a full services provider can drive greater values and efficiencies and can win long term and stickier deals. The company is also contemplating acquiring existing companies that are involved in areas where it is looking to innovate. These areas include fast growing practices such as cloud computing, mobility and sustainability.

This products and platforms effort is part of the 'Infosys 3.0' strategy. The company under this strategy plans to transform itself from a technology solutions company to a business solutions firm. Recently the company structured itself under three service lines. The first is transformation. This includes 'Change-the-business' initiatives like package implementation and consulting. The second service line is business operations. This includes 'run-the-business' initiatives like application development & maintenance, testing and BPO. The third service line is innovation which includes products and platforms.

Movers and shakers during the week
Company 20-May-11 27-May-11 Change 52-wk High/Low
Top gainers during the week (BSE-A Group)
MPHASIS LTD 420 476 13.4% 712/355
EDUCOMP SOLUTIONS 423 471 11.3% 695/401
FEDERAL BANK 400 436 9.1% 501/310
HOUSING DEV. INFRA 149 161 8.5% 300/127
VOLTAS 153 165 7.9% 263/148
Top losers during the week (BSE-A Group)
KOUTONS RETAIL 32 29 -8.9% 346/26
TATA GLOBAL BEV. 97 88 -8.6% 139/86
MAHINDRA FINANCE 721 659 -8.6% 913/402
REI AGRO LTD. 27 25 -6.7% 36/19
BALRAMPUR CHINI 63 59 -6.6% 98/57
Source: Equitymaster

In news from the economy, the government is likely to soon announce downward revisions to its GDP growth forecast for the current fiscal year. It may be noted that the official growth forecast for FY12 stands at 9%. Independent forecasters have already pared the growth forecast to 8% citing multiple head winds. While the revision is not expected to be substantial, a revision so early in the year is cause for concern. In its midyear review of the world economy, the United Nations pared India's growth for 2011 to 8.1% from 8.2%, estimated in January even as it lifted the world GDP forecast to 3.3% from 3.1%. The growth forecast for India had been under a shadow as a result of high inflationary pressure. After the Reserve Bank of India raised interest rates by a sharp 50 basis points (0.5%), ninth increase since March 2010, it had signaled that it was ready to sacrifice growth to curb inflation. With the inflation expected to climb further after the petrol price increase, there is fear that as the year progresses we would see further downward revisions to growth rates.

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