Indian stock markets embrace SLR cut

Sat, 4 Aug RoundUp

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The world stock markets, except Japan, ended the week on a positive note. The US stock markets were relatively flat having registered gains of 0.1% during the week. This was the fourth consecutive weekly rally for the markets. Better than expected jobs data erased the losses registered earlier in the week. However, inaction by Mr Draghi, the European Central Bank's president, to curtail the Euro zone crisis disappointed investors.

The optimism in the global markets rubbed off on India as well. The Indian stock markets ended the week on a positive note with gains of 2.1%. Markets welcomed the Statutory Liquidity Ratio (SLR) cut by the Reserve Bank of India (RBI) during the week. While the key rates were left unchanged SLR was cut to 23%. SLR cut will inject approximately Rs 620 bn of liquidity into the system. However, worries with respect to delayed monsoon and high inflation continued to plague the markets.

Amongst the other markets, Brazil was up 1.2% while Singapore was up 1.8% during the week. UK was the highest gainer having registered gains of 2.8% while Germany was up 2.7% at the end of the week.

Source: Yahoo Finance

Barring Metals, all sectoral indices registered healthy gains during the week. Capital Goods, Realty and Power stocks led the pack of gainers.

Source: BSE

Now let us have a look at key economic developments during the week.

RBI announced its monetary policy during the week. While the key rates were left unchanged RBI cut the SLR by 1% to 23%.The SLR is the percentage of total deposits that banks need to invest in the government bonds. The reduction will help in the flow of credit through the system. The 1% cut, based on the total deposits in the country will help inject around Rs 620 bn of liquidity into the system.

Scanty rainfall is adding to the troubles of the power distribution sector that is already grappling with a number of problems. Growing demand from the agriculture sector is forcing the power utilities to buy costlier power from the spot market. As per the power distribution companies, if power tariffs continue to rise at the current rate, the business of power distribution will become a loss making venture. It may be noted here that farmers' energy demands rise during a deficient monsoon as they have to depend on water lifting devices to irrigate their lands. Demand for power has risen by over 25% so far this year owing to shortage of rainfall.

Now let us take a look at key corporate events that unfolded during the week. Leading public sector bank, State Bank of India (SBI) has slashed its interest rates on home loans by as much as 60 basis points (0.6%). The rate cut will make housing loans from SBI cheaper than those of other banks. Besides, the bank has brought the interest rate on auto loans down by 50 basis points (0.5%). However, the bank has not yet said anything regarding a cut in the base rate which means that the existing borrowers will not be able to avail the benefits of the rate cuts. The move is expected to increase SBI's share in the retail loan segment and could be followed by the other banks. The decision to cut rates was taken at a meeting of its asset-liability committee (Alco) and follows Reserve Bank of India's decision to slash the statutory liquidity ratio (SLR) by 100 basis points to 23% at its first quarter review of the monetary policy.

Idea Cellular added maximum number of users for the quarter ended March 2012 followed by Uninor and Bharti Airtel. Idea added 6.34 m new users while Uninor and Airtel added 6.13 m and 5.58 m. According to January-March quarterly data released by sectoral regulator Telecom Regulatory Authority of India (TRAI), the total telephone subscriber base in the country grew by 2.68% to reach 951.34 m at the end of March 2012. The total wireless (GSM and CDMA) subscriber base grew 2.83% during the quarter to reach 919.17 m at the end of March 2012. Internet subscriber base grew 2.1% during the quarter to reach 22.86 m at the end of March 2012 from 22.39 m at the end of December 2011.

During the week, retailing major Titan reported sales growth of 9.2% YoY for 1QFY13. Slowdown was particularly visible in the high growth jewellery segment that grew by only 7.8% YoY during the quarter. The company's watch segment grew by 14.4% YoY and others including eye wear by 15.7% YoY. The operating expenses were up by 9% YoY during the quarter. Slower growth in topline resulted in operating profits increasing in similar manner by 10.4% YoY. Operating margins were stable at 9.5%. A disappointing growth in topline resulted in lower profits for Titan. Even a lower rise in taxes could not help the company much which reported net profit growth of 8.8% YoY during the quarter. Net profit margins however remained stable at 7% levels.

Petronet LNG too announced its results for the first quarter of financial year 2012-13 (1QFY13) during the week. The company has reported a 52% year on year (YoY) increase in the revenues. This was despite a decline in volumes of gas but was aided by the better realizations on gas sold. The company processed 127 trillion British thermal units (TBTU) of gas in the quarter as against a volume of 133 TBtus in 1QFY12. The volumes declined due to maintenance shutdown at some fertilizer plants in the month of May. However, the net profits for the quarter were up 5% YoY on account of better margins and operational efficiency. The company's Dahej terminal operated at more than 100% of the nameplate capacity. As per the management, the work on company's Kochi terminal is running as per schedule and is expected to be completed by end of 2012.

Movers and shakers during the week

Company	27-Jul-12	3-Aug-12	Change	52-wk High/Low
Top gainers during the week (BSE-A Group)
United Spirits	721	862	19.7%	1017/450
Jet Airways	323	374	15.9%	451/167
KSK Energy	57	66	15.9%	109/33
Essar Oil	48	55	14.6%	114/45
Castrol	536	604	12.8%	607/385
Top losers during the week (BSE-A Group)
Sterling Biotech	7	7	-7.6%	89/5
GE Shipping	266	256	-3.7%	285/183
Marico Ltd	195	189	-3.5%	200/134
Bharti Airtel	307	296	-3.4%	431/280
Welspun Corp	104	101	-3.0%	157/65

Source: Equitymaster
Moving on to some other news, Montek Singh Ahluwalia, planning commission's deputy chairman is of the view that deficient rainfall is likely to pull down India's economic growth to about 6% this fiscal. It may be noted that recently RBI had lowered the growth target, for FY13, to 6.5% amidst poor monsoons and slower industrial activity. If the monsoons do not revive in the next two months the inflation situation is likely to worsen further which can act as a deterrent to future rate cuts.

With earnings season on the verge of an end, all eyes would be on how monsoons shape up over the next couple of weeks. While a deficiency is already priced in by the market, if the situation turns worse things could get difficult from here on.