It was an enthralling week for the global stock markets. Sustained buying amidst positive global cues lifted the overall market sentiments. The US stock markets closed the week on a positive note (up 4.9%) on the back of better than expected retail sales data for the month of September and positive earnings surprise from Google Inc. Retail sales increased 1.1% in September, the largest gain recorded in the last seven months. Being a key barometer of consumer spending, strong sales figures excited the street.
Indian stock markets were up 5.2% during the week. Expectations of strong corporate earnings for the September quarter also instilled momentum in the markets with the Sensex posting the highest weekly gain in the last six weeks. Amongst the other world markets, Brazil was the biggest gainer (up by 7.4%) with Germany registering a gain of 5.1% during the week. However, UK and Japan posted modest gains of 3.1% and 1.7% respectively.
Source: Yahoo Finance
All the sectoral indices closed in the green during the week. IT pack was the biggest gainer (up 8.7%) during the week. Strong results and better earnings guidance from IT bellwether Infosys added momentum to the other IT stocks. Even the banking sector was up 6.9% thereby erasing losses recorded in the previous week. However, PSU and FMCG stocks were relatively flat.
Now, let's take a look at key economic developments. The telecom ministry unveiled the new draft telecom policy during the week. One of the major highlights of the new telecom policy is the abolition of roaming charges. This could be bad news for telecom companies like Bharti Airtel and Idea as their margins could be hit severely. Currently GSM operators like Airtel get around 8% of their revenue from roaming charges. According to Ernst and Young (E&Y) a global consultancy firm, the net revenue loss from scrapping of roaming charges on telecom operators could be around USD $400 m.
Auto sales numbers for September 2011 were also announced during the week and were a mixed bag. Growth of passenger car sales was quite dismal, while two-wheelers and commercial vehicles (CVs) saw healthy growth. As per the Society of Indian Automobile Manufacturers (SIAM), domestic passenger car sales declined by 1.8% to 165,925 units during the month. On the other hand, total two-wheeler sales grew by 24.3% to 1,233,283 units, while sales of commercial vehicles grew by 18% to 70,634 units during the month. Growth of domestic passenger cars has been subdued on account of rise in interest rates and rising fuel prices (especially petrol), which has dampened demand. Plus, labour issues at Marutis plant in Manesar have also had an impact on production. However, because of the healthy growth in both two-wheelers and CVs, the impact on total sales of vehicles across categories was cushioned as sales volumes were up by 19.4% YoY during September.
Now let's take a look at key corporate events during the week. IT bellwether, Infosys reported results for the second quarter ended September 30, 2011 (2QFY12). The company's bottomline for the quarter was up 11% YoY. It reported a 17.7% YoY rise in the total income. On a consolidated basis, the total income and bottomline registered an increase of 17.6% YoY and 9.7% YoY respectively. The margins were boosted on account of an increase in outsourcing orders and a weak rupee during the quarter. As per the management, the uncertainty in the global environment will remain a cause of concern for the IT industry and suggested that the company's strategic initiatives and organizational structure will enable it to build long-term partnerships with clients and help drive their business objectives. As per the company management, the operating margins are expected to rise by 1.6% in the third quarter on account of a weak rupee. The company expects its dollar revenue growth for the year to range between 17.1%-19.1% for the fiscal year versus an earlier estimate of 18%-20%. It expects an annual growth of 24.2%-26.8% for the revenues in the third quarter. Similarly, the earnings guidance for FY12 has been revised to a rise by 21% YoY. The company's board has proposed an interim dividend of Rs 15 per equity share.
Oil and Natural Gas Corporation (ONGC) has expressed concerns over its bottomline declining by over 47% to less than Rs 100 bn if government increases the company's share to compensate for the under recoveries of state run oil and marketing companies (on selling fuel products at government controlled prices). Traditionally, the upstream companies led by ONGC bear one third of the losses. However, this year, their share would not be based on the actual under recoveries but on the projected notional under-recoveries that existed before the June fuel price increase and duty cuts. At US$ 110 per barrel of crude price, the projected notional under-recoveries prior to June price hike are estimated at Rs 1,711 bn while at today's prices, they stand at Rs 1,211 bn. The company's burden as per prior estimates comes to Rs 474 bn versus a burden of Rs 335 bn as per current estimates. This will imply a realization of US$ 41.27 per barrel for the company versus a realization of US$ 55 per barrel as expected by the company, thus dragging bottomline below Rs 100 bn. This will have an adverse impact on its Rs 300 bn planned capital expenditure and its plan to provide financial support of Rs 75 bn to its overseas subsidiary.
India's leading public sector lender, State bank Of India (SBI) is planning to raise Rs 50 bn through a rights issue of shares by December 2011. The aim of this initiative is to prop up the bank's Tier-I capital to above 8% for the financial year 2011-12. The move has come in response to the downgrade of SBI's standalone rating by Moody's Investors Service. The rating agency had cited concern over capital and rapid deterioration in asset quality. As on 30th June, 2011, SBI had Tier-I capital of 7.6%. Though the regulator mandates Tier-I capital higher than 6%, the Indian government insists public sector banks maintain minimum Tier-I capital of 8%.
The government has unveiled a new policy which will give greater flexibility to Public Sector Undertakings (PSUs) in acquiring raw material assets in overseas markets. The new policy has proposed to enhance the investment limit for asset purchases to Rs 30 bn from Rs 10 bn for Navratna companies. Any additional amount beyond this limit will require government's approval. A committee would also be formed to make quick decisions whenever the buyout amount exceeds the set limit. We believe that increasing the investment limit would ease acquisition hurdles being faced at the bureaucratic level by these companies.
Lastly, the inflation data for the month of September was released recently. The headline inflation eased marginally to 9.72% in September from 9.78% in August. It may be noted that this is the tenth consecutive month where inflation has remained above the 9% mark. With inflation remaining above the comfort zone there is a general consensus that RBI may hike interest rates in its next monetary policy review scheduled on 25th October 2011. However, notwithstanding short term hiccups, we believe that there are some very solid stocks available at reasonable long term valuations even at the current levels.