Rate hike concerns plague markets

Sat, 30 Jul RoundUp

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Negative and cautious sentiments prevailed over the world markets during the week. Except for Singapore, all the markets closed the week in the red. The US stock markets were down by 4.2% during the week. Concerns that failure to raise the debt ceiling could lead to a technical default resulted in a steep fall. Further, fiscal woes prevailing in Eurozone and concerns with respect to slowing growth in US also worried investors.

Indian stock market was also down 2.8% during the week. Apprehensions that further rate hike would slowdown growth dented investor sentiments. Weak global cues and possibility of a US debt default also overweighed markets.

Amongst the other world markets, France was the biggest loser (down by 4.4%). Even Japan was down by 3.0% followed by India (down 2.8%) and Brazil (down 2.4%)

Source: Yahoo Finance

Moving on to the performance of sectoral indices in India, stocks from the Realty and Capital goods were the biggest losers during the week. Realty stocks were down on rate hike concerns. Stocks from the Capital goods space were also down 5.2% during the week as rate hike fuelled concerns that the industrial capex cycle would further get delayed. Amongst other indices, metal and power stocks were down by 5.0% and 4.4% respectively during the week. However, Pharma, Consumer durables and FMCG stocks closed the week on a flattish note.

Source: BSE

Now, let's take a look at key economic developments during the week. It may be noted that amidst inflationary pressures, the central bank resorted to another rate hike of 0.5% during the week. Accordingly, the revised repo rate now stands at 8% with reverse repo being pegged at 7%. The Cash reserve ratio has been kept unchanged at 6%. It may be noted that RBI also revised its fiscal-end inflation projection to 7% from an earlier figure of 6%. However, the growth projection for this year is maintained at 8%. Post the hike, all loans including auto, personal and home are expected to get costlier. The move as expected was not taken well by the stock markets and the corporate alike as investment sentiment will be hurt. This was reflected in the 2.8% losses that the Indian Stock Markets posted during the week.

In news from telecom sector, Bharti Airtel increased tariff by 20-25% in some of its circles. It is expected to extend this hike to the entire country soon. The other players in the telecom sector may follow suit thereby resulting in increased tariffs across networks. It may be noted here that earlier Tata Docomo had also raised tariffs to deal with falling profit margins. Raising of call rates by Bharti is an indication that the low tariff regime in the Indian telecom market has probably come to end.

Several companies declared their first quarter results for financial year 2011-2012 let's take a look at some of the results declared last week.

Reliance Industries declared results for the first quarter of financial year 2012 this week. The company's topline grew by 37.2% YoY and net profits by 16.7% YoY. Sales now amount to Rs 836.8 bn. The growth is attributed to both volume and value. Higher prices resulted in 32.7% growth in topline while the rest was because of volume growth. The gross refining margins for the quarter are at US$ 10.3 per barrel as against US$ 7.3 per barrel in the corresponding quarter last year. Gas production from the KG-D6 block declined by 18% to 156.2 bn cubic feet. Oil production fell to 1.41 m a barrel which is down 41%. This resulted in a slower growth in net profits as compared to the growth in sales.

India's largest auto company Maruti Suzuki too declared its results this week. The slowdown in the auto space was clearly evident in its results. The company registered sales of Rs 83.2 bn this quarter which implies a growth of just over 1% YoY. This is mainly on account of the 13 day strike at its Manesar plant during the quarter. Operating margins however remained stable at 9.5% as compared to 9.6% in the same quarter last year. This marginal decline was due to high input costs and volatility in the forex markets. It sold 2.5 lakh units in the first quarter of this financial year. The net profits grew by 18% YoY on account of nearly 80% growth in other income and marginal rise in depreciation charges.

Hindustan Unilever (HUL) also announced its first quarter financial results of 2011-2012 (1QFY12). The company has reported 14.8% YoY increase in sales which were on account of strong growth in volumes. This growth was despite various price hikes undertaken in order to counter inflation and rising input costs. All segments reported double-digit growth during the quarter. Operating margins remained almost flat during the quarter at 11.3%. The impact of rising raw material cost was offset by a cut in advertisement expense. Net profit rose by 25% YoY during the quarter. The steep rise was on account of higher other income as well as extraordinary income earned from property sale and stake dilution in subsidiary company, Hindustan Field Services. Excluding the one-time income, the bottom-line grew by a relatively muted 11% YoY.

In the world of media and entertainment, the print media company DB Corp has plans to invest Rs 1 bn in FY12 for expansion in existing as well as new markets. It may be recollected that the company is on an expansion mode and had ventured into newer territories in Jharkhand and Maharashtra last year. The management feels that merely entering into a new state is not sufficient, there is enough potential to explore various markets in the newly entered states. At present, DB corp is present in 17 states spanning across India. The company wants to spend money on promotional efforts also but as of now, it does not intend to expand its radio business.

Movers and shakers during the week

Company	22-Jul-11	29-Jul-11	Change	52-wk High/Low
Top gainers during the week (BSE-A Group)
IDEA	81	94	16.8%	93/57
EIH LTD	86	96	11.4%	163/77
RELIANCE COMM	92	102	10.7%	188/81
UNITED PHOSPHORUS	151	166	9.9%	216/128
BHARTI AIRTEL	398	437	9.8%	430/307
Top losers during the week (BSE-A Group)
ADANI ENTERPRISES	724	586	-19.0%	773/569
INDIABULLS REAL EST	119	100	-16.3%	215/101
JAI CORP LTD	119	100	-15.7%	304/107
LANCO INFRATECH	21	18	-15.3%	74/18
UNITECH	35	31	-12.9%	98/29

Source: Equitymaster
In news from the economy, India's fiscal deficit numbers for the first quarter were announced recently. And the figures were not that encouraging. In the first quarter, India's fiscal deficit quadrupled to about Rs 1,600 bn compared to same period previous year. Considering the first quarter performance, it would be interesting to see whether government is able to rein in fiscal deficit at 4.6% of GDP, as targeted earlier in the year. With expenditure widening and revenue receipts dwindling, we believe that the target is virtually out of reach. Rising subsidy bill is not helping either. It is creating a huge hole in the pockets of the government. Thus, if the government is really keen on achieving its fiscal targets, it has to find a solution to bring an end to this subsidy era. But considering the vote bank politics involved with subsidies, we believe it's long before India ultimately reaches the path of fiscal prudence.