It was a mixed week for the world stock markets. While the developed world with the exception of Japan closed in the green, emerging markets ended the week in the negative territory. The US stock markets were up 1.4% during the week. Signs of stabilization in Europe with Italy's senate approving austerity measures buoyed markets. Further, measures from Greece to form a national unity government also provided some relief to the investors.
It was a truncated week for the Indian stock markets. Weak Index of Industrial Production (IIP) data and continued selling pressure in the banking space amidst Moody's downgrade overweighed markets. Weak corporate earnings by index heavyweights also dented investor sentiments. Amongst the other world markets, Germany was up 1.5% while France was up 0.8% during the week. However, Hong Kong and Japan were down by 3.6% and 3.3% respectively during the week.
Source: Yahoo Finance
Amongst, the sectoral indices banking and realty lost considerable ground and were down by 5.4% and 6.0% respectively. Banking stocks were under pressure due to ratings downgrade by Moody's. Both realty and metal stocks were down on concerns over earnings disappointment from select heavyweights. However, FMCG
and IT stocks were relatively flat during the week.
Now, let us have a look at the key economic developments during the week. Index of Industrial Production (IIP) data for the month of September was announced recently. The numbers were disappointing with IIP slipping to a two year low of 1.9% in the month of September. Poor performance from manufacturing and mining sectors dragged the IIP numbers. As the current set of data was not encouraging the overall IIP growth for the current fiscal has been lowered to 6%, from an earlier projection of 7%.
India's steel industry could face some headwinds in the medium term as overcapacity concerns loom large. It may be noted that about 25 million tonnes (MT) of new capacity is likely to be commissioned in the next 18-24 months outstripping the growth in demand. The new capacity coming up accounts for around 30% of the country's current production capacity. This scenario would most likely put pressure on the margins of steel companies in India. Further, the Indian economy has slowed down a bit in the current fiscal and tepid demand from sectors such as construction, automobiles and capital goods is likely to impact steel companies as well. It must be noted that India is the world's fourth largest steel producer, having produced about 68 MT of crude steel during 2010. Crude steel production in the country has gone up at a compounded annual growth rate of about 9.8% between 2000 and 2010. While demand was strong before the global financial crisis, it slowed down in 2008 as the crisis took its toll. In the last two years, the growth rate has remained between 6-8%.
Now, let us take a look at key corporate events during the week. State Bank of India (SBI) declared its results for the second quarter of the financial year 2011-12 (2QFY12) recently. The bank has reported 31% YoY growth in interest income and 12% YoY growth in net profits for the quarter. Net interest income grew by 28% YoY in 2QFY12, on the back of a 17% YoY growth in advances. The bank's other income dropped by 14% YoY in 2QFY12 on the back of lower fee income and profit on sale of investments. However the NIMs (net interest margins) moved up from 3.3% in 1HFY11 to 3.7% in 1HFY12, as the bank was able to improve its yields. Net NPAs (Non Performing Assets) which increased from 1.7% in 1HFY11 to 2.04% in 1HFY12 are a major concern for the bank. Also the bank's capital adequacy ratio stood at 11.4% (Tier-1 ratio at 7.47%) at the end of 2QFY12 as per Basel II, indicating the need for an urgent capital infusion
Tata Steel announced results for the quarter ended September 2011 during the week. On a consolidated basis, the company has reported an increase of 15.5% YoY in net sales and 89% YoY decline in net profits. Tata Steel Group, like most others, has been hit by rising input costs and slow demand in its overseas operations. However, its domestic operations are relatively insulated from input cost hikes since it has access to captive raw materials like iron ore and coal. Operating profit was down by 17% YoY. Total costs rose 20% YoY, while raw material expenses climbed 15% YoY in the quarter. The depreciation of the Indian currency against the dollar affected Tata Steel's exposure to foreign currency convertible bonds by Rs 1.5 bn. The company had a net debt of USD $9.2 bn at the end of September.
Oil and Natural Gas Corporation Limited (ONGC) also announced its results for the second quarter of financial year 2011-12 (2QFY12) recently. The company's sales and net profits registered a growth of 24% Year-on-Year (YoY) and 60% YoY respectively. Operating profits were up 27.8% YoY during the quarter while margins at operating levels stood at 63.1%. The company registered highest ever net realizations at US$ 83.7 per barrel versus US$ 62.75 per barrel in the corresponding quarter last year. However, the management has expressed concerns of higher under recovery discount going forward which may have an adverse impact on net realizations.
In news from the banking sector, global rating agency, Moody's has revised its outlook on Indian banks from stable to negative. Slowing economic growth (will slowdown disbursement in loans), increase in repo rate and deregulation of saving rates (will increase the cost of funds for banks) are the primary reasons for the downward revision in rating. However, risk of increasing bad loans due to the current slowdown especially in the power & infrastructure sector is cited as the biggest concern for the ratings downgrade. Nonetheless, considering that the Indian banks have a stable deposit base and high government ownership, the sector is partially shielded from any unwarranted liquidity shocks. Further, with interest rate cycle already reaching its peak we believe that the margin concerns are also short lived.
Lastly, food inflation figures for the week ended 29 October 2011 were announced recently. Food inflation has declined marginally to 11.8% during the week from 12.2% in the previous week. Increase in prices of vegetables, pulses, milk and fruits are primary culprits for rising inflation. However, it may be noted that fuel & power inflation remained unchanged from the previous week.