It was yet another disappointing week for the global stock markets. All the markets closed the week in the red. The US stock markets were down 4% during the week (fourth consecutive week in the red) on fears of another recession and rising concerns over the European debt crisis. High risk aversion and the prevailing confidence crisis amidst global uncertainties have taken a huge toll on the markets. European markets also suffered heavily during the week due to lingering debt worries. In Europe, Germany was the biggest loser (down 8.6%) as slowdown in GDP growth worried investors and triggered a massive fall.
Indian stock markets too faced the brunt of heavy selling with the BSE Sensex closing lower by 4.1% during the week. It may be noted that this is only the second time since the Lehman crisis that the markets have fallen for four weeks in a row. Weak global cues and fears of slowdown due to rising interest rates overweighed investor sentiments. Amongst the other world markets, France was down by 6.1% during the week followed by UK (down 5.2%). However, Hong Kong showed some resilience and was down by only 1.1%.
Source: Yahoo Finance
Moving on to the performance of sectoral indices, except for FMCG, all other sectoral indices were heavily battered. Stocks from the banking and realty space were the worst hit. Banking stocks were down on fears that rising interest rates may impact margins and raise delinquencies. Realty stocks were also down during the week due to negative sentiments prevailing in the sector. IT stocks were down amidst global slowdown fears. Lastly, Healthcare and Oil & Gas stocks declined 3.5% and 3.1% respectively during the week.
Now, let's take a look at key sector developments during the week. It may be noted that the country's ambitious power generation programme could take a hit on account of coal shortage. As per the parliamentary panel, the availability of coal for power plants that were designed to run on domestic coal would be at a mere 417.5 MT in the current fiscal, as against the requirement of 480 MT. Out of this, Coal India will be now be supplying 319 MT versus an earlier estimate of 360 MT. As per the Standing Committee on Energy, this is expected to impact new capacity addition plans to the tune of 15,000 MW in the current fiscal. For FY12, the capacity addition target has been set at 17,600 MW. This includes 2,000 MW of nuclear power generation. But such targets are at risk on account of fuel availability constraints and environmental hurdles.
Given the slowdown in automobile sales in the domestic market, auto companies such as Tata Motors and Maruti Suzuki have recently cut down on production. Maruti has cut down production of most of its models by 5% for the month of August 2011. Maruti's car production for July 2011 had declined by 21% YoY to 72,587 units on account of non-production of Swift. Consequently, its domestic sales had dipped by 31% YoY to 52,483 units. During the same period, Tata Motors' car production had plunged by 27% YoY from 27,362 units in July 2010 to 19,985 units in July 2011. The company's domestic car sales had declined by 43% YoY to 13,997 units. Domestic passenger car sales had registered their first decline in July 2011 after 30 months of continuous growth. High interest rates and fuel prices were the main reasons for the decline. It may be noted that car manufacturers are however, betting on new launches to restore the demand.
Now, moving on to the key corporate events that concluded during the week, it may be noted that Engineering giant Larsen & Toubro (L&T) is gearing up to drive its growth through international markets. The company currently derives 91% of its Rs 1.36 trillion order book from the domestic market. However, given the constraints in the country and the problems such as corruption, the company is looking forward to increasing the share of exports by at least 10% points. It expects order inflow to pace up from West Asia for hydrocarbon, power transmission and distribution and infrastructure projects. L&T has reaffirmed its guidance of 25% for revenue growth and 15-20% for order inflow during the financial year 2011-12.
India's largest power transmission utility company Power Grid Corporation is on the lookout for opportunities for execution of engineering, procurement and construction (EPC) contracts in Africa. It would be the first time that the company will take up an EPC project. The company is likely to set up the project in Nigeria where it already provides consultancy to Power Holding Company of Nigeria for update of telecommunication and substation automation systems specifications. It is also exploring opportunities in Niger and Kenya. However the company has not allocated any investment for the EPC segment. It will be based on project to project basis. Power Grid has already received a letter from Exim Bank about their willingness to invest on behalf of the company.
Hindalco Industries may see a rise in production costs in its upcoming aluminum project in Mahan in Madhya Pradesh. This is because the Mahan coal block from where the company is supposed to draw coal for its captive power plant has run into environment problems. The Mahan coal block is under no go area and the matter has been referred to the group of ministers by the ministry of environment and forest. The company is building a 359 kilo ton per annum (ktpa) aluminium smelter and 750 MW power plant for captive purposes. It is essential for the company to receive green clearance otherwise the cost of the project will increase substantially. This is because alumina and power comprise close to 70% of production cost of aluminium. Without captive source there is no way that Hindalco could produce low cost aluminium.
Sintex Industries is aiming to double its revenues to US$ 2 bn by FY14. For this, the company plans to invest around Rs 11 bn on its upcoming capacity expansion projects across India. During this period, the company will invest Rs 2.5 bn on facilities for custom moulding, Rs 2.2 bn on prefab, Rs 3-3.5 bn on monolithic, Rs 1.5 bn on captive power and Rs 500 m on textiles. The company has shifted its focus from textiles and water tanks and is concentrating more on building products like monolithics and pre-fabricated structures. Further, the company is also looking to target new markets for pre-fabs in the tribal areas of the country.
In some more news from the economy, it may be noted that the planning commission is expected to lower its inflation target for the 12th plan to 4.5%, compared to 6% for the current plan. While lower inflation is critical for growth it would be interesting to see whether the planning commission is able to meet its target. Right now, India is reeling under the pressure of rising inflation and steps taken by RBI (raising rates) have not had the desired effect. Thus, we believe that the target of 4.5% can be a challenging task for the government.
Separately, amidst heavy selling pressure and weak global cues, India's disinvestment plans have taken a backseat. It may be noted that government had plans to garner Rs 400 bn through stake sale in PSUs during the current financial year. However, till date, the government has raised only Rs 11.4 bn through FPO sale in PFC. And considering the current market conditions, it does not appear that the government would be able to meet its disinvestment target for this fiscal.