The past week was a positive one for stocks across the world. Market sentiments improved on the back of easing of concerns over the Euro crisis. In addition, there was also positive news on the improvement in US consumer sentiment as well as a rise in the manufacturing index in the US. Barring China (which was closed for most of the week), all the key global markets ended higher in the range of 1% to 4%. Leading the pack was France with gains of about 4%. Japan, India and Germany followed suit with gains of about 3% each. Ending the week higher by about 1% each, Brazil and Singapore were amongst the lowest gainers.
The Indian markets had a strong 8-day run until Friday. In addition to positive global cues, buying activity was buoyed by the possibility of India growing at a strong double-digit growth in the coming few years. During the week, Finance Minister, Pranabh Mukherjee stated that the revival in the economy coupled with good monsoons could break the barrier of a double-digit growth in FY12.
Source: Yahoo Finance
Moving on to the sectoral indices in India - Buying activity was seen in stocks across sectors. Those from the IT and engineering space led the pack of gainers as the BSE-IT and BSE-Capital Goods indices ended higher by about 5% each. Realty stocks made a comeback after being the top loser last week. The BSE-Realty Index ended higher by about 4%. Stocks from the healthcare and consumer durables spaces were amongst the top underperformers with the BSE-Healthcare and BSE-Consumer Durables indices ending higher by about 0.2% and 1% respectively.
Moving on to key corporate developments during the week - Auto major Tata Motors announced that it is taking up several initiatives to revive its beleaguered brands Jaguar and Land Rover (JLR). These include introduction of new models, engines and a strategy to move into the electric vehicle and hybrid segments. The company also plans to incorporate the technology to reduce emissions to meet the new emission norms. The company has the cost management strategy in place for its two brands and has plans for expansion of product development operations in India. Tata Motors has in fact ear marked Rs 100-120 bn over the next 2-3 years for capex and research & development for JLR. The long-term strategy is to transform the JLR business into a simple and low cost operation, with the ability to sustain itself with its own cash flow. This would reduce the pressure on Tata Motors to raise debt.
It should be noted that JLR posted a net profit of Rs 205 m in FY10 as compared to a net loss in the previous year. We believe that it is important to take steps to improve the profitability of JLR as it would help improve the bottom line of Tata Motors as about half of the company's consolidated revenue is generated from JLR.
Moving to healthcare, Dr. Reddy's Laboratories (DRL) suffered a setback during the week. A US court blocked the company's sale of its generic version of Sanofi-Aventis' anti-allergic drug - Allegra D24. Allegra is one of Sanofi-Aventis' largest selling drugs. In fact, Sanofi-Aventis saw peak sales of US$ 1.5 bn from this drug. DRL had received approval from US Food and Drug Administration (FDA) for this drug a few months back and was planning to launch it at-risk in the first quarter of 2011. According to law, if a generic drug is launched at-risk and if the generic company loses the patent litigation then the generic company will have to pay damages to the innovator. DRL plans to appeal against the court's decision. However, if bared from launching the drug, it could be a big negative for DRL as sales from this drug were estimated at US$ 150 m in 3 years time.
Moving to IT, Infosys is facing acute shortage of manpower. It seems that with the job market picking up, more and more
employees of the company are quitting. To stem the flow, the company had a second round of compensation hikes recently. The company is facing challenges on the recruitment side as well. In fact, the company has seen job applications fall from 1.4 m candidates in FY06 to 0.4 m candidates in FY10. This acute shortage has prompted the company to open a 'green channel' inviting its ex-employees to return to the fold. In such a scenario, Infosys is likely to face margin pressure in the face of higher employee costs to recruit, train and retain its employees.
A leading business daily reported that Reliance Industries (RIL) is targeting to grow its retail venture by 10-times over the next five years. At present, the revenues from this business segment stand at about Rs 45 bn. As such, the revenue target for five years is Rs 450 bn. At present, the retail venture operates about 1,150 stores in 86 cities across 14 states. Not so long ago, the company expressed its intentions of expanding this business again. Earlier, the company had mentioned that it was planning to invest a whopping Rs 250 bn sum in the retail space. However, it had deferred its plans on the back of the slowdown. It also shut over 50 loss-making stores and held up expansion during the slowdown. It is also believed that the company shuffled the top management of this business segment by bringing in expats.
In news from the power sector, Tata Power's 1,600 mw project in Raigad, Maharashtra has been cleared for launch. It took the company 5 years of opposition and negotiations to conclude the official formalities. This was due to the opposition from farmers. The company has also received the approval of its compensation package to the owners of 1,200 acres of land, from the state government's high-powered committee. This land will be transferred to Maharashtra Industrial Development Corporation, which will then transfer the land on lease to Tata Power. As per the company, the plant is expected to be operational by 2014.
In Economic news, exports grew by 35.1% to US$ 16.1 bn in May. This was the seventh straight month of growth. However, this growth has come off a low base. Nevertheless, going forward, exporters are likely to be hurt due to the sharp decline in Euro. Since the beginning of the year, Euro has depreciated by about 18% against the Rupee making European goods more competitive to Indian goods.
Even so, exporters are watching the development in Europe closely. The fear right now is that the Greece crisis may spread to other countries. Last fiscal, Europe accounted for 23% of India's exports. This quarter is expected to close with exports of US$ 48 bn compared to US$ 37.9 bn in the same period last year. Imports too surged growth by 19.8% in May. This is an indication of the increase in domestic economic activity. This has in fact led to a trade gap of US$ 11.3 bn during May.