India up on false hopes

Sat, 25 Jun RoundUp

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It was a mixed week for the world markets. While the Asian markets closed the week in the green, the markets in Europe and the Americas closed the week in the red. The Asian market cheered the news of a possible breakthrough for the debt crisis in Greece after the country's government won the confidence vote as well as the release of oil from US's strategic reserves. However, the European markets continued to remain cautious which put pressure on the major bourses in the continent. The US markets closed the 7th week out of the last 8 in the red. This followed the statement from Mr. Bernanke that US would not engage in any further rounds of quantitative easing.

Japan was the biggest gainer of the week up 3.5% while France was the biggest loser down 1%. In Asia, China closed the week up 3.1% while Hong Kong was up by 2.2%. Indian stock markets were up by 2.1% after a surge of 513 points on Friday. This was on the back of positive sentiments that inflation would come down as the government would not raise diesel and LPG prices. However, the government's decision to raise the same late Friday night proved the markets wrong. Singapore closed the week up 2%. In Europe, UK and Germany were down 0.3% and 0.6% respectively. In the Americas, Brazil was down by 0.1% while US closed the week down 0.6%.

Source: Yahoo Finance

Moving on to the performance of sectoral indices in India, stocks from the realty space were the biggest losers of the week on concerns on interest rate hike. As a result BSE-Realty index was the biggest loser of the week down 4.9%. One of the biggest concerns of the week was the issue of pledged shares by promoters of companies. As a result mid and smallcap stocks were under pressure during the week. BSE Midcap and BSE Small cap indices closed the week down 3.1% and 2.1% respectively. The biggest gainer of the week was BSE-IT index up 3%. BSE-Banking index and Sensex also figured in the top performers of the week up 2.5% and 2.1% respectively

Source: BSE

Moving on to the key economic developments during the week, National Aluminium Company (NALCO) has reduced basic prices across its product categories by Rs 5,000 per tonne. The company resorted to change in prices because of slower demand during monsoons. In case of 5 inch billets, the prices have been reduced by Rs 4,500 per tonne. The prices were changed with immediate effect. It may be recollected that NALCO reported a growth in sales of 18% YoY during the financial year with aluminium and electricity sector and chemicals growing by 17.9%, 21.4% and 6.4% respectively. Increase in prices will adversely impact the margins for the aluminium segment in the short-term.

In news from the pharma sector, Sun Pharma received US FDA approval for marketing of one of its products. "Imitrex" injection (Sumatriptan Succinate) is the trademark of pharma major GSK Plc. It is used to cure migraine attacks and cluster headache episodes. Annual sales for the injection amount to US$ 190m in the US. It may be noted that this is development is seen as a positive development for Sun Pharma. It will help augment the sales of the company which were under pressure ever since its subsidiary Caraco faced regulatory issues with US FDA (Food & Drug Administration).

Tata Motors is looking at introducing world-class products in the next decade to meet customers' needs. With this, the Tata group Chief Mr Ratan Tata hopes to bring Tata Motors at par with the international players. The Indian auto company has been known to develop products with reliability, finishing and technology but lately it has faced a few challenges. Rising commodity prices along with abnormally high prices of automatic transmissions have raised input cost. Imports have become economically less viable as a result of high customs duty. However, its joint venture with JLR (Jaguar - Land Rover) has been dished out a decent performance. JLR has reported robust sales numbers even though Mr Tata feels that significant synergy still remains to be unlocked.

Tata Steel has stated that it is going to increase production of auto-grade steel by 20% to 1.2 m tones this fiscal. In 2010-11 the company had supplied 1 m tones of auto grade steel. The steelmaker expects to increase auto steel capacity by 15-20% every year for the next few years as it sees demand from auto industry growing. It may be noted that supplies from Tata Steel make up for over 40% of the domestic steel sourcing of the automotive industry in India. On another note, Tata Steel has recent received US$ 1.12 bn from the sale of its stake in Australian mining firm Riversdale. This money has been used to draw down some portion of the company's debt while the rest will be used for future capital expenditure programs.

In news from the consumer goods space, FMCG (Fast moving consumer goods) companies are now getting squeezed by increase in packaging costs. This is in at a time when most companies are already burdened by increase in raw material costs. With prices of kraft paper, aluminium foil, adhesives for corrugated boxes and plastics shooting up by nearly 25% in the last three months, firms such as Hindustan Unilever, Colgate Palmolive India, Dabur, Emami, Marico and Godrej Consumer are having a tough time maintaining their profits. It may be noted that packaging costs make up 7-11% of the total cost of products for most FMCG companies. Unfortunately, high packaging costs would continue to affect these companies till the price of crude eases. This is because most of the packaging materials are linked to crude prices. To manage costs, several companies have reduced their advertisement spending. However, if the pressure continues, FMCG companies may resort to another round of price hike soon.

Movers and shakers during the week

Company	17-Jun-11	24-Jun-11	Change	52-wk High/Low
Top gainers during the week (BSE-A Group)
Bhushan Steel	417	459	9.9%	545/276
Hero Honda	1,735	1,866	7.6%	2075/1379
Ambuja Cement	125	133	6.5%	167/109
Jain Irrigation	148	157	6.3%	264/136
Bharti Airtel	369	391	6.1%	400/263
Top losers during the week (BSE-A Group)
GTL Ltd	407	110	-73.0%	477/113
GTL Infra	32	16	-49.8%	54/16
Lanco Infratech	30	23	-24.7%	75/26
India Cements	83	69	-17.0%	128/70
Koutons Retail	30	26	-14.0%	346/25

Source: Equitymaster
In news from the economy, the government hiked the prices of diesel and cooking gas by Rs 3 per liter and Rs 50 per 14.2 kg cylinder respectively. This has been done to reduce losses of state owned refiners and lower the budget deficit. At the same time, the government has removed the existing 5% customs duty on crude oil. It has also slashed the duty on refined products (including diesel) from 7.5% to 2%. The government has also announced the reduction of excise duty on diesel from Rs 4.6 to Rs 2 per liter. The hike is expected to reduce under recoveries of oil marketing companies by Rs 210 bn during the current fiscal. On the other hand, the government would see a negative impact of Rs 490 bn as a result of the duty cut. After these measures, the loss projected for the state own refiners for the current fiscal is expect to be around Rs 1.2 trillion. This is down from the Rs 1.7 trillion that they are incurring presently.

It may be noted that diesel has a 4.7% weighting in India's benchmark wholesale-price index while gasoline has 1.1%. The increase in diesel prices alone is expected to add 30 basis points (100 basis points equal one percentage point) to inflation. Moreover, the hike will have a cascading effect on the prices of almost all commodities - from fruits and vegetables to industrial products. This is because transportation costs would go up due to the hike. In fact, the total (direct and indirect) impact of the diesel price increase could be around 100 basis points or 1% increase in inflation rate.