Earnings disappointment plagues markets

Sat, 16 Jul RoundUp

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It was a lackluster week for the world stock markets. All the major world indices ended the week in the red. France was the biggest loser (down 4.8%) during the week followed by Hong Kong (down 3.7%) and Brazil (down 3.3%). In Asia, China was the best performer and closed the week on a flat note. Japan was down 1.6% while Singapore lost 2.1% during the week.

The US stock markets were down by 1.4% during the week. S&P's warning that it might downgrade the US debt rating within next three months dented investor sentiments. Further, worries about the US and Europe debt trouble continued to haunt the markets. However, blockbuster earnings from search engine major, Google Inc, brought in some respite with Dow Jones closing on a flattish note in the last trading session.

After advancing for three consecutive weeks, Indian stock markets finally snapped its winning streak and were down by 1.6% during the week. Lack of positive cues from the global markets, unsatisfactory IIP data, deficient rainfall figures and disappointing start to the earnings season showered concerns on the markets. Further, bomb blasts in the city of Mumbai also rattled investor sentiments.

Source: Yahoo Finance

Moving on to the performance of sectoral indices in India, stocks from the IT space were the biggest losers of the week (down 5.5%) as disappointing quarterly results from Infosys swelled slowdown concerns which engulfed the entire IT pack. BSE-Metal index too closed the week in the red (down 2.4%). Metal stocks were down on concerns about the rising cost of coking coal. BSE-Realty and BSE-Cap Goods were also down by 1.9% and 1.4% respectively. However, BSE-Healthcare index was up 1.3% during the week followed BSE-Oil & Gas index which was up 1.1% during the week.

Source: BSE

Moving on to the key economic news during the week, the Government has expressed concerns regarding power sector investment for current plan (2007-2012) which is facing a 40% funding gap. The investment was planned at Rs 10 trillion. As per the Power Minister, Power Finance Corporation (PFC) is playing a critical role in addressing the issue of fund requirements of the sector. The company has cumulatively sanctioned loans worth Rs 3.4 trillion and has disbursed loans worth Rs 1.7 trillion to the power sector in a span of 25 years. Currently, it has a loan asset size of about Rs 1 trillion. In the last five years, the installed capacity in the sector has grown up by 43%. For 2010-11, the country has a synchronized capacity of 15,975 MW. According to the Power Minister, the Government had also initiated development of large transmission systems through private sector participation on the lines of Ultra Mega Power Projects (UMPP). Thus, there is a strong need to set up a dedicated power lending agency like PFC so that the funding gap can be plugged.

The earnings season for 1QFY12 kick started with quite a few frontline companies announcing their results during the week. Let us take a look at some of them.

IT bellwether Infosys announced its 1QFY12 results during the week. Sales grew by 3.2% QoQ during 1QFY12. However, operating margins witnessed a decline of 2.9% QoQ to 26.1% during the quarter as compared to 29% recorded in the previous quarter. This was on account of higher cost of sales (as a percentage of sales). The company added 26 new clients during the quarter taking the total number of active clients to 628. Further, the management also tweaked its guidance for the full year ending March 2012 slightly. The management now expects sales to grow by 15.5%-17.5% YoY and EPS to grow by 7.3%-8.9% YoY. The EPS guidance is slightly higher than the 5.5%-7.3% range guided at the beginning of the current fiscal year.

The company expects that it will hire about 12,000 people in the second quarter. The company currently has over 133,000 employees, and has reiterated its annual target of hiring 45,000 people in FY12. It is looking at a revival in spending on information technology (IT) to fuel its growth. It may be noted that Infosys has maintained its hiring guidance despite the ongoing slowdown in Europe and the US.

Bajaj Auto, the country's second largest two wheeler company also reported its first quarter FY12 results during the week. The profit after tax for the quarter came at of Rs 7.1 bn, up 20.5% YoY. The company reported revenues at Rs 47.8 bn, up 22% YoY. The sales for the quarter were highest ever quarterly sales. The operating margins for the company stood at 19.1% versus 20% last year. The margins were impacted due to high commodity prices. It may be noted that the auto major sold 1.1 m units in the first quarter, up 18% year on year. These included two wheeler and three wheeler commercial vehicles.

Another software major TCS reported results for the first quarter of the year. The revenues grew by 6% QoQ helped by 7.5% growth in volumes. Other income clocked a growth of 21% QoQ over the previous quarter (ending March 2011). The IT company has been able to contain the depreciation costs which have fallen by almost 2.5% QoQ. The interest charges have been high and grew by nearly 57% QoQ. As a result of higher expenditure and interest charges, net profit declined by 7.9% QoQ. Attrition rate increased marginally to 14.8% as compared to 14.4% seen during the previous quarter (ending March 2011).

Dr Reddy's Laboratories (DRL) has received final approval from US Food and Drugs Administration (FDA) to sell Fondaparinux Sodium injection. The latter is used for the treatment and prevention of deep vein thrombosis (DVT). As per the management, it is a complex generic molecule and difficult to manufacture at a large scale. Hence, the company foresees a limited competition for the drug in the near future. It plans to leverage this opportunity. It plans to execute a phased launch in select wholesale and retail outlets, and subsequently enhance share over time in the coming quarters. DRL will manufacture the injection under license using a patented process developed by Australia's Alchemia. Dr Reddy's Fondaparinux Sodium injection is a generic version of GlaxoSmithKline's Arixtra. Arixtra sales grew 16% year-on-year to US$ 340 m for the 12 months ending May 2011.

Movers and shakers during the week

Company	8-Jul-11	15-Jul-11	Change	52-wk High/Low
Top gainers during the week (BSE-A Group)
Alstom Projects	532	574	8.0%	875/510
Rural Elect	208	224	7.7%	410/180
IRB Infrastructures	174	187	7.5%	313/148
Sun Tv Ltd	315	338	7.2%	557/273
Glenmark Pharma	312	332	6.2%	390/261
Top losers during the week (BSE-A Group)
Educomp Solutions	466	385	-17.3%	695/385
Infosys Ltd	3,000	2,731	-9.0%	3494/2680
Hindalco	194	177	-9.0%	252/149
Crompton Greaves	265	243	-8.3%	349/228
Sterling Biotech	92	85	-7.9%	126/83

Source: Equitymaster
In news regarding the economy, the Central Statistical Organisation (CSO) announced the IIP (Index of Industrial Production) number for the month of May 2011. The industrial output grew 5.6% in May which is the lowest in last 9 months. In addition, the numbers for the month of February and April have been revised at 6.7% and 5.8% respectively from the earlier announced figures of 6.5% and 6.3%. Policy bottlenecks, delays in environmental clearances and land acquisition problems have hampered industrial growth. Sectors like mining and intermediate goods were the worst impacted.

With inflation still being above the comfort zone, there is a highly unlikely chance of interest rates softening in the near future. This would mean that it would take some time before the capex cycle gains momentum as higher interest rates deters capital outlay. Right now, RBI is facing a tough task of managing inflation and growth and it would be interesting to see how RBI would balance the two in its next monetary policy review.