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Economic concerns spook global mkts 
(Sat, 3 Jul RoundUp) 
 
The past week turned out to be a terrible one for stock markets across the globe. Most Asian markets fell on a weekly basis, with China leading the losers. Sentiments were negative on concerns over the US jobs data. However, the unemployment rate fell to 9.5% from 9.7%, instead of an anticipated rise to 9.8%. Nevertheless, the slow pace of hiring raised concerns over a prolonged downturn in the US economy. China's benchmark index posted the highest decline among world indices after the New York based Conference Board downgraded an estimate for China's growth. The country's manufacturing growth also expanded at a slower than expected pace. The Japanese markets declined by about 4.5% this week on the back of its currency strengthening for the fourth consecutive week, thereby raising concerns over the impact on its exports. European markets also declined on the back of poor economic data from China and the US. Worries about Spain's credit rating being downgraded by rating agency Moody's further spooked investors.

The Indian markets ended on a flat note this week as well. A substantial portion of the gains that the markets witnessed during the start of the week, were shed during the latter half. The key reasons for the same were the slowdown of the Chinese economy and uncertainty over the impact of fuel price rises. Investors preferred to stay away from riskier assets classes like stocks amid worries about the pace of the global recovery. Concerns over the rise in interest rates and inflation also played their part in the decline. Annual food inflation however, dropped sharply to 12.9%, in the third week of June from 16.9% in the previous week due to a high base effect.

Source: Yahoo Finance

Moving on to the sectoral indices in India – Stocks from the IT, pharma, and banking space saw the most pressure this week as the BSE-IT, BSE-Health Care, and BSE-Bankex indices reported weekly losses of about 1% each. Stocks from the consumer durables, oil & gas and power spaces were amongst the top gainers this week. The BSE-Consumer Durables Index was the best performer with gains of around 3%. The BSE-Oil & Gas Index and the BSE-Power Index reported modest gains of around 1% each.

Source: BSE

Moving on to key corporate developments during the week. Banks had an interesting week, with base rates coming out for most banks. The base rate will be the minimum rate at which banks can lend to their customers. The concept of base rate came into picture as the RBI thought that Indian banks do not set their lending rates in a scientific and transparent manner. This move will hopefully restrict the sector from predatory pricing tactics. SBI set the stage by announcing its base rate at 7.5% per annum. Taking cues from the country's biggest lender, smaller Indian banks, mostly in the PSU space also set their base lending rate between 7% to 8%. IDBI Bank, Bank of Baroda and Allahabad Bank, all fixed their base rate at 8%.

Private sector banks and foreign banks set their rates lower in order to attract more corporate borrowings. ICICI Bank and Axis Bank set their rates at 7.5%, while HDFC Bank went one step lower with a 7.25% rate. This move is likely to give HDFC Bank more headroom to lend at lower rates compared to SBI. Foreign lenders however opted to set base rates almost 0.5-1% lower than their domestic counterparts. The two largest foreign lenders in the country Citibank and Standard Chartered Bank set their base rates at 7.25% per cent (the same level as HDFC Bank). The 3rd largest foreign bank HSBC announced its base rate at 7.0% while Deutsche Bank went even lower to 6.75%. These foreign banks rely much more on fee income as compared to traditional interest spread for their profits. They also operate on a leaner cost structure, with a lower asset base. Thus, they were able to offer lower rates.

In other news, telecom major Reliance Communications (RCom) announced during the week that it will combine its telecom towers business with GTL Infrastructure. This deal will create a transmission network valued at Rs 500 bn. RCom's tower business is as of now held by its 95% owned subsidiary Reliance Infratel. The combined entity of Reliance Infratel and GTL will create the world's largest independent telecom infrastructure firm. It will operate over 80,000 towers, with 125,000 tenancies from 10 telecom firms. It will have an enterprise value of over US$ 11 bn. RCom will receive a mix of cash and stock under the terms of the transaction. Exact terms of the deal have not been disclosed so far. RCom will be able to significantly reduce debt as well as leverage ratios after receiving the cash from GTL. Its debt before the deal stood at about Rs 330 bn, including the cost to finance its recent 3G spectrum licenses.

Moving on to the IT sector, software stocks closed lower this week. The BSE-IT index was the biggest loser amongst the sectoral indices this week. IT companies may have begun to report better sales and profits than what they did in 2009. But, as reported in a leading business daily, advisory firm Gartner and Forrester have stated that the European sovereign debt crisis will cause companies and governments in the region to curtail IT spending for 2010. Further, Gartner has scaled down its 2010 growth outlook for the global IT industry to 3.9%. Its earlier estimate was for a 5.3% growth. It now expects worldwide IT spending to total US$ 3.4 trillion in 2010 from US$ 3.2 trillion in the 2009. This is primarily due to the devaluation of the euro versus the US dollar since the beginning of the year.

Indian IT companies such as TCS and HCL Technologies will however feel a greater pinch if spending is curtailed in the UK. This is the biggest market for some Indian players in Europe. On the positive side, given European nations are deep in debt, cost cutting looks like the most obvious option. In that sense, many vendors in Europe would then outsource of most of their operations to Indian IT players.

Now, moving on to news from the auto space. During the week, Hero Honda reported a 17% YoY jump in its sales in June at 426,454 units. The company sold 365,734 units in June 2009. It is interesting to note that this is the 18th time in a row that it has sold over 300,000 units in a month. The growth is visible across all segments including its scooter, Pleasure, which now contributes over 25,000 units per month to overall volumes. For 1QFY11, the company's volumes sales rose 10% YoY to 1.2 m units from 1.1 m units in 1QFY10.

Real estate company, DLF reported signing deals to lease out 10 m sq ft of its commercial real-estate space. At present DLF, along with DLF Assets Ltd (DAL), its subsidiary has 19 m sq ft of assets available for lease. Out of this DAL has a portfolio of 13 m sq ft. DAL has managed to lease out 6.5 m sq ft till date and has plans to lease 1 m sq ft every quarter.

The average leasing rate for DLF's commercial portfolio is about Rs 41 per sq ft. The company management has indicated that it will have rental income of Rs 16 bn at the end of FY11. This is pretty much on the cards, as DLF has witnessed increased traction in the pre-leasing activity in the recent past. And some of its markets such as Gurgaon and Noida have witnessed an increase in rentals.

Movers and shakers during the week
Company 25-Jun-10 2-Jul-10 Change 52-wk High/Low
Top gainers during the week (BSE-A Group)
HPCL 401 475 18.6% 484 / 298
MRPL 73 83 13.0% 94 / 66
Aban Offshore 753 834 10.8% 1,680 / 642
BPCL 621 666 7.2% 678 / 440
IFCI 53 57 6.8% 61 / 39
Top losers during the week (BSE-A Group)
Ultratech Cement 933 867 -7.1% 1,172 / 676
Rei Agro Ltd. 33 31 -7.0% 55 / 26
Mmtc Ltd. 32,276 30,101 -6.7% 40,000 / 26,490
Sesa Goa Ltd. 367 347 -5.5% 494 / 180
Cairn India 312 296 -5.0% 321 / 208
Source: Equitymaster

After a brilliant run last week, we saw some oil marketing companies see superior gains this week as well. The recent fuel price hike finds support even at the highest level. A recent statement of Prime Minister Manmohan Singh makes that amply clear. He stated that the fuel price hikes were ‘much needed reforms'. In fact, de-regulation of diesel prices is also on the cards. We agree with the government's view that fuel subsidies are unsustainable. What now remains to be seen is how the government will deal with the political opposition. Hence, we remain circumspect about the durability of these reforms. Nonetheless, even if all this turns out to be mere tokenism; at least it raises hopes that the government will reform more sectors in the future.

In a surprise move on Friday, the RBI raised its key policy rates. It has raised the repo and reverse repo rates (for lending to and borrowing from banks) by 0.25% each. These rates will now stand at 5.5% and 4% respectively, and with immediate effect. This hike comes just ahead of the July review of the monetary policy for 2010-11. RBI's act comes on the back of its views that the economic recovery is now showing signs of picking pace. It also cited examples of improving manufacturing growth and rising exports. The central bank has also hinted at the credit pickup in the banking sector. Moreover, the good monsoons that the country is receiving currently also raise chances of a robust GDP growth during FY11. The central bank has also raised its concerns on the inflation end. All these factors have forced it to raise interest rates ahead of the review schedule.

The US markets ended at new 2010 lows last week. China seems to have lost favour amongst global investors due to the economy's excessive dependence on exports. A slower output growth in the juggernaut economy also does not seem to be going well with investors. Commodities like gold and crude too saw some correction during the previous week. These developments may lead to temporary blips in the Indian markets in the near term. However, Indian investors would be better off being greedy when others are fearful. Of course, only by focusing on selecting stocks with resilient business models at attractive valuations.

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