It was a mixed week for the world equity markets. While most of them closed on a flattish note Japan was the highest gainer during the week. However, markets in US, Hong Kong, China and Brazil closed on a negative note. The US stock markets were down 1% during the week. Declining home sales and rise in jobless claims overweighed markets. Even the factory output contracted affecting the risk appetite of investors in US.
The Indian equity markets ended the week on a flattish note. The Sensex regained 17,000 levels during the week but could not sustain the momentum. Reserve Bank of India (RBI) stance of maintaining status quo with respect to policy rates surprised India Inc. Keeping the rates intact was a big disappointment for the markets. Also, Fitch downgraded India during the week amidst slowdown in economic growth. This also had a sentimental impact on the markets. Further, it may be noted that Rupee hit a record low of 57 to the US dollar during the week due to weakness in domestic shares and dollar buying.
Amongst the other world markets, UK and Singapore were up by 0.6% each during the week. However, Hong Kong and China were down by 1.2% and 2% respectively.
The sectoral indices ended the week on a mixed note with stocks from Capital Goods, Pharma and Power leading the pack of gainers. However, stocks from Information Technology (IT), Metals and Banking lost ground during the week. While the banking stocks were relatively flat with a negative bias, metal and IT stocks lost 0.5% and 1.8% respectively during the week.
Let us now take a look at key economic news during the week. The RBI announced its monetary policy during the week. Contrary to market expectations RBI left the repo rate unchanged at 8%. Even the Cash Reserve Ratio (CRR) was untouched and remained at 4.75%. This was a big disappointment for the markets as a rate cut was widely expected. However, RBI cited that inflationary pressures are not supportive for rate cut at this juncture. Apart from this, Fitch also downgraded the outlook on Indian economy amidst slowing growth.
Now let us take a look at key corporate events during the week. As per a leading financial daily, the Competition Commission of India (CCI) has found 11 cement companies guilty of cartelization. The companies that have been found guilty include - ACC , Ambuja Cement, Ultra Tech Cements, Grasim Cement (now merged with Ultra Tech Cement), JK Cements, India Cements, Madras Cements, Century Cements, Binani Cements, Lafarge India and Jaypee Cements. The companies have been asked to pay penalty at 50% of the profits that they booked during 2009-10 and 2010-11 within the next three months. At Rs 63 bn, the penalty is almost double of what the companies were expected to pay earlier (8% of the average turnover in the last three years). Amongst the companies taking major hits, JaiPrakash Group, ACC, Ambuja Cements and Ultra Tech Cements will be paying penalties of Rs 13.2 bn, Rs 11.5 bn, Rs 11.6 bn and Rs 11.8 bn respectively. The penalty could be higher as CCI is allowed to charge higher of 10% of turnover for each year under consideration or three times the net profit of each year. The companies have denied indulging in cartelization and are expected to challenge the order and seek legal remedies. The Cement Manufacturers Association (CMA) has also been slapped with a penalty of Rs 7.3 m by CCI and has been asked not to engage in collecting wholesale and retail prices and circulating information on cement dispatch and production to its members. As per the industry sources, as a result of this development, the cement companies will lose their pricing power and a cement price correction is expected.
Power generation equipment for projects above 1,000 MW may attract import duty at the rate of 19%. If the proposal is approved, it will give domestic equipment manufacturers such as Bharat Heavy Electricals Limited (BHEL), Larsen and Toubro (L&T) and ABB a major boost. At present, power generation equipment for projects below 1,000 MW bears a duty of 5% while there is almost nil duty on equipment for projects above 1,000 MW. Domestic equipment manufacturers allege that there is no level playing field. Foreign machines are cheaper by up to 14%. This is hurting the local players' investment and capacity expansion plans. In the absence of the import duty, it is believed that domestic power equipment manufacturers like BHEL may find some of their capacity lying idle during the Twelfth Plan period. However, power producers fear that this may lead to stiff rise in tariffs. While the requirement for power is high, margins are thin. Hence, any price increase will have to be borne by the end-user.
On account of slowdown in the business, Bangalore-based IT firm Infosys has delayed the joining dates of engineers hired from campuses. The joining dates of about 28,000 engineering graduates who were offered jobs from campus placements in August-September 2011 range anywhere from September 2012 to July 2013. Even the existing 1.5 lakh staff has had to bear the brunt of the slowdown with freezing of salaries and cuts in variable pay. The company has been struggling to match the growth rate of its peers. In the quarter ended March 2012, the company's topline dropped by 2% from the preceding quarter. For the full financial year, the company expects to register a growth of 8-10% year-on-year. This is much lower than the 11-14% growth forecast by industry body Nasscom (National Association of Software and Services Companies).
Due to the huge difference in the prices of diesel and petrol, the demand for diesel in the country has shot up. So much so, that demand outstrips supply. As a result, most of the PSU oil refiners have been forced to buy diesel from Reliance Industries Ltd (RIL) and Essar Oil. As per a leading daily, the PSU oil firms, Hindustan Petroleum Corporation Ltd, Indian Oil Corporation and Bharat Petroleum Corporation Ltd are buying nearly 15 m tones of diesel per year from the two private refiners. The private refiners are able to charge diesel at international prices from the PSU refiners leading to huge windfall gains for the former. The government has tried to prevent and control the dieselization in the country through higher taxes on diesel driven vehicles. However, till such time as the price differential between the two fuels exists, this higher demand for diesel is expected to continue.
Moving on to some more economic news it may be noted that the Rupee breached the psychological 57 mark to the US dollar during the week. Weakness in domestic shares due to RBI's status quo stance and dollar buying by oil and gold importers put downward pressure on the rupee. It would be interesting to see whether RBI intervenes to prevent any further fall or leaves rupee to the mercy of the market. If untouched rupee might fall further as investors have turned risk averse towards Indian equities amidst slowing growth and widening current & fiscal deficit.
The crude oil fell to under US$90 a barrel during the week due to weak demand amidst slowdown in the world economy. Falling crude oil prices have brought in some relief for India as that would reduce the import bill amidst significant rupee depreciation witnessed in the recent few days. Inflation will also remain under check amidst falling crude prices. Thus, where the crude heads from here on and how the monsoons shape up will be a key trigger for the stock markets in the coming week.