The past week was largely negative for the world markets. Baring UK and Singapore (both up 0.1%), all markets closed in the red. Weak GDP data from the US, which increased the likelihood of US slipping back into recession resulted in the weak performance the world over. The biggest loser of the week was India (down 2.2%) as US economic concerns resulted in US$ 7.1 bn being pulled out by investors from equity markets the world over.
Among the remaining Asian markets, Japan and Hong Kong were down 2.1% and 1.8% respectively. China was down 1.2%. In Europe, Germany closed the week down 0.9%; while France was 0.5% lower. In the Americas, US was down 0.6% while Brazil was down 1.6%.
Source: Yahoo Finance
Moving on to the performance of sectoral indices in India – baring stocks from consumer durable which saw some buying interest, the markets ended the week in the red with stocks from the realty space seeing the maximum sell off. BSE-Consumer Durables (up 1.4%) was the only index to close the week in the green. BSE-Realty index was the biggest loser (down 8.5%). Amongst the other top losers, BSE-Metals and BSE-Banking indices were down 3.3% and 2.5% respectively. They were flowed closely by BSE-Smallcap and BSE-Midcap, both down 2.4%.
Among the best performers BSE-PSU and BSE-FMCG indices were down 0.1% and 0.6% respectively. BSE-Capital Goods and BSE –Oil & Gas indices were also amongst the top performers down 1.1% each.
Moving on to key corporate developments during the week, BSE-Realty index was the biggest loser for the month amongst Indian indices. The selloff in these stocks is the result of profit booking after steady gains the last few weeks. As per the financial performance of the realty companies it is obvious that they still have not recovered from the losses of the 2008 economic slowdown. However, they are seeing a slow improvement in demand for homes and a marginal pick-up in demand for office space.
On the other hand, the realty companies are themselves to blame for the slow recovery. This is given that these companies have raising property prices before real demand actually came in. As per reports, residential prices in Mumbai and the National Capital Region of Delhi have increased by 20-30% since March to reach new highs. This has made even the RBI wary of banks lending too much to the sector. Furthermore, RBI is refusing to grant licenses to real estate players even if it means going slow on the government's financial inclusion plans. We believe that unless we have a more regulated real estate market, such a cautious approach is warranted.
Coming to the hospitality sector, things are certainly looking up now for the hotels industry and occupancy rates have been improving over the last 3 quarters. In fact, the hotel industry is planning to increase room tariffs 10-15% from September this year. With the winter months the best period for hoteliers it is expected that this would help them recover from the
slowdown that hit the hotel industry two years ago. In may be noted that Indian hotels traditionally increase rates before the crucial winter season every year. But the economic slowdown and terrorist attacks in 2008 had hit hotel business in India hard. This had led to room rates crashing by 25-30% over the last two years. The current average level of room occupancies are in the range of 58-60% which is higher than the same period last year. It is expected to go up to 70% on an average, leading to an upward revision of room rates.
In news from the power sector, NTPC is now looking at taking the tender route to secure assets for its future fuel requirements. The company has been facing a tough time
acquiring strategic coal assets over the past few years. With this latest decision, the company will be inviting offers from foreign miners that would be on a lookout for strategic investors. It is believed that the company will float a global offer through an expression of interest (EoI). This would be a good move as it would allow the company to target those players who would be genuinely interested as well as difficult to locate otherwise. It is believed that NTPC’s coal requirement is likely to double to 30 m tonnes per annum by 2017 and the company plans to increase its generation capacity by 4 times from the current capacity of 32,000 MW by 2032. As such, it would be looking at importing more coal to meet its requirements. However, the same could take a hit on profitability as imported coal costs about 40% more than the domestic coal.
Moving on to the consumer goods sector, FMCG companies are going for price hikes due to increase in raw material prices. HUL has announced an increase in prices of Lux and Lifebuoy soaps by Re 1 while selectively reducing the grammage on some products to retain the retail price. This is the first hike taken by the company in 20 months. Marico also announced price hikes of approximately 3% and 5% on Saffola and Parachute respectively. While the price increases in Saffola is actually a price correction as during the last financial year the price of Saffola was brought down by 10% due to competitive pressure the price of Parachute was increased due to increase in price of copra. However, the company retained the price of smaller or recruiter packs of Parachute. Godrej on the other hand is still considering a price hike or alternatively a grammage reduction in its brands due to the rising cost of palm oil. In may be recalled that two years ago HUL had increased its soap prices in response to input cost pressure. On the other hand Godrej had opted to hold on to its prices. The result was that Godrej managed to gain market share at HUL's expense. For this reason, the next move by Godrej will be watched closely by HUL.
In news from the auto sector, robust demand has prompted the Indian component manufacturers to plan a combined investment of US$ 3.5 bn (Rs 160 bn) over the next decade to meet the revised production target of auto makers. This decision comes as component makers are currently forced to operate at over 100% capacity and automakers are unable to match their production to match rising demand as a result of component supply shortfall. The bad news however is that fresh component capacities are being set up only now and will take atleast a year to be commissioned. Vehicle manufacturers are also making huge investments to set up new capacities of their own and launch new models in the domestic market. Companies such Tata Motors, Maruti Suzuki, Bajaj Auto, Hero Honda, Toyota, Nissan, Renault, M&M have decided to add fresh capacities to meet the demand of 2013-15. The component making industry’s share to total GDP is expected to rise to 3.6 % from the present 2.1 %. It is estimated that domestic turnover could touch US$ 80 bn, while exports may be around US$ 29 bn.
In other news, the six core sectors (Crude oil, petroleum refinery, electricity, cement, steel and coal) registered a growth of 3.9% for the month of July 2010 compared to 3.2% for the same month last year. This was largely on the back of higher crude oil production and petroleum refinery production. Domestic refiners processed 13.7 % YoY more crude oil in July. Refineries operated at a higher capacity during July to take advantage of rising refinery margins. The utilization rate in July was 105.6% up from 96.8% during the same month last year. Crude oil output in July rose 15.8% to 3.23 m tonne (7,64,235 bpd), while natural gas output climbed 19.9 % to 4.51 bn cubic metres. Coal production in July stood at 37.80 million tonnes a growth of 4.5 % YoY. Electricity generation in July was up by 3.8 %. However, slowdown in construction activity brought down cement and steel production. Cement production dipped by 0.2 % in July. Steel production slumped by 0.9 %. The country only produced 4,657 thousand tonnes of steel this July (4697 thousand tonnes in July 2009).