The stock market rally which started last week continued this week for most of the world’s markets. India (up 3.2%) was the biggest gainer for the week on the back of strong FII funds inflows. US (down 0.3%) turned out to be the biggest loser as fears of a double dip recession made US investors risk averse.
In Europe, Germany and France were up by 1.4% each while UK was up by 1.2%. Among the Asian markets Japan (down 0.2%) closed the week in the red. However, China, Hong Kong and Singapore were up by 1.5%, 0.9% and 0.7% respectively. Brazil closed the week in the red down 0.1%. Please note that for the global markets we have compared closing prices of 9th September, 2010 with closing prices of 3rd September 2010.
Source: Yahoo Finance
Moving on to the performance of sectoral indices in India - Buying interest was witnessed across the board during the week with stocks from the metal space leading the rally. BSE-Metal was the top gainer of the week up 5.1% while BSE-Banking index followed close behind with a gain of 4.1%. Among the other top performers BSE-IT index was up 3.7% while the BSE-Smallcap index was up 3.4%. Sensex closed the week with a gain of 3.2%.
Defensive stocks were the minimal gainers of the week with BSE-FMCG and BSE-Pharma up by 0.3% and 0.9% respectively. Among the top laggards of the week, BSE-Consumer Durable and BS-Auto indices were up by 1.4% each while BSE-Power index was up by 1.6%.
Moving on to key corporate developments during the week -IT companies have stated that they are not very concerned about the ban imposed by the US state of Ohio on outsourcing of government projects. This is because only a few Indian IT companies are working on US government projects. In fact most derive a large portion of their US revenues from private clients. The major clients include companies in the banking & financial services space (BFSI). However, IT companies are concerned about the general rise in protectionism in the US. To counter this, they have started hiring more local people. We believe that these protectionist measures will not have a long term impact on the companies' business, as these are driven more by political considerations.
Moving onto auto. Auto companies are busy expanding capacity as they expect strong demand growth going forward. India’s largest car manufacturer, Maruti Suzuki plans to invest around Rs 19 bn for setting up a third plant at its facility in Manesar making it Maruti's largest investment in a single plant in the country. Once operational, this plant is expected to boost the capacity of the automaker to 1.7 m units. As of now, the company has three facilities at Gurgaon and one at Manesar. The three plants at Gurgaon can jointly churn out 850,000 vehicles. At Manesar, the plant can produce 350,000 units a year. Maruti has already earmarked an investment of Rs 17 bn for developing the second plant at Manesar which is scheduled to commence operation by the beginning of 2012. The second plant at Manaesar will produce 250,000 vehicles, bringing the capacity of the company to 1.45 m units per annum. It may be noted that the company has been facing supply constraints in delivering some models with automobile sales reporting record growth in 1HCY10. Demand has been unexpectedly high for the multi-seater 'Eeco' and also for 'Swift'.
In news from telecom sector, RCom and GTL Infrastructure have called off their merger which would have created India's largest telecom tower company. The merger was annulled after the two companies could not come to a definitive agreement on the deal within the exclusivity period that ended on August 31. The deal was believed to be beneficial to RCom as it would have helped the company reduce its debt to Rs 150 bn from Rs 330 bn at present. With this RCom has to now make a choice between scouting for new sources of funds or risk its future expansion, especially in the 3G and broadband spaces.
RCom is paying the price of its aggressive growth strategy at the cost of profitability. The company had gamble on its balance sheet, by piling on debt with the assumption that fast growth in the future would take care help it deleverage its balance sheet in the future. But it has never recovered since then, and its shareholders have lost a lot of money. This just goes to show how investing in aggressive companies with the lure of fast growth, can led investors a bad hand.
Moving on to FMCG sector, Britannia plans to invest Rs 450 m in its second Orissa unit. This plant will have a capacity to produce about 30,000 tonnes of biscuits per annum (477,728 tonnes of biscuits were sold in FY10). The work on this plant is expected to start soon with the company acquiring 10-12 acres of land in the next few weeks. This plant will mainly supply biscuits to the Orissa market. At present, Britannia has a 12,000 tonne per annum biscuit producing plant in Orissa. The company plans to set up a similar unit in Bihar as well. The new facilities will help strengthen the company's presence in Eastern India and contribute to the overall business expansion across India. Presently, it has manufacturing facilities in Uttaranchal, Delhi, Chennai and Kolkata.
In news from pharma sector, Sun Pharmaceutical today won a significant victory in its three-year-old battle to acquire Taro Pharmaceuticals. The Supreme Court of Israel has ruled in favor of Sun Pharma’s favour supporting the company’s bid to acquire the outstanding shares of the Israeli drug maker. Sun can now go ahead with its tender offer (similar to open offer) to acquire ordinary shares, including those held by Taro promoters. It may be noted that Sun is the largest shareholder in Taro with 36 % stake. It, however, has 23 % voting rights on management decisions. The Barrie Levitt family owns 12 % stake, but with much higher voting rights of 41 %. Sun Pharma can now put pressure on the promoters to tender their shares, based on the provisions of an option agreement that was part of the merger plan. Together with the promoter shares, Sun will gain 48 % stake in Taro with 64 % voting rights.
However, the share holders of Sun are apprehensive about the deal. This is because of the lack of audited financials of Taro for the three years ended 2009. The deal on the other hand appears significantly value accretive for Sun. This is because the stake is believed to have been acquired at 1 x sales. This is way lower than the average 3.6 x for generic pharma acquisitions. In the past, Sun had managed to turn around its Caraco acquisition. It needs to be seen how well it integrates Taro's business going ahead.
In news from the economy, discarding fears of a slowdown, industrial growth accelerated to 13.8 % in July from 7.2 % in the corresponding month last year, on the back of a 63 % jump in capital goods production. Among the main industry segments, manufacturing activity expanded by 15 % from 7.4 % a year ago. Mining sector grew by 9.7 % from 8.7 % while electricity generation growth slowed down to 3.7 % when compared to previous 4.2 % growth. Capital goods and consumer durable goods production expanded by 22.1 % in July, the same rate witnessed a year ago. Industrial growth for the first four months of this fiscal stood at 11.4% from 4.7% a year ago.
With Indian markets moving way ahead of their BRIC peers in terms of valuations, investors need to keep an eye on long term value and exercise caution in their investing approach.