Red marks across the globe

Sat, 13 Nov RoundUp

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Stock markets across the world had a lacklustre past week with most of the major indices closing in the red. This was a result of the sovereign debt issue plaguing Europe and the continuing concerns regarding the ‘currency wars'. The biggest loser of the week was China (down 4.6%) while Japan was the biggest gainer (up 1%). In the Americas, Brazil was down by 3.1% while US was down by 2.2%. In Asia, other than Japan, only Singapore (up 0.4%) closed the week in the green. India (down 4%) and Hong Kong (down 2.6%) closed in the red.

Source: Yahoo Finance

Moving on to the performance of sectoral indices in India, the week ended with all indices in the red. Stocks from the realty space were the biggest losers with BSE-Realty index down by 6.5%. It was followed closely by BSE-Bankex and BSE-PSU index. The BSE-Sensex and BSE-Oil & Gas index made up the five worst performers of the week. Consumer durable stocks were the best performers with BSE-Consumer Durable index ending the week marginally down by 0.2%. BSE-Smallcap and BSE-FMCG indices were also amongst the top performers of the week down by 1.1% and 1.5% respectively. BSE-Pharma (down 1.8%) and BSE-Auto (down 2%) made up the top five best performing indices of the week.

Source: BSE

Moving on to key corporate developments during the week, a handful of companies announced their results for the quarter ended September 2010. India's largest bank, SBI declared its results during the week. The bank's interest income grew by 11% YoY during the quarter aided by a 20% YoY growth in advances. For 1HFY11, the bank's interest income grew by 9% YoY. Net interest margins of SBI improved by 0.9% to stand at 3.3% for 1HFY11. This was a result of strong growth in CASA deposits. The bank's cost to income ratio fell by 6% to stand at 46% for 1HFY11. This was on the back of write-back of employee provisioning. Net profits grew by 12% YoY as a result of provisioning for bad loans. SBI's gross NPAs increased by 0.4% to 3.4% of advances during 1HFY11.

During the week it was also reported that SBI is looking to acquire a bank in Indonesia. The bank has already shortlisted two to three banks and has set aside US$ 100 m for the purchase. It may be noted that SBI had acquired a bank in Indonesia in 2006 and is now planning a second acquisition as local laws do not permit setting up new branches in the country. The bank is also planning to set up a subsidiary in Australia and branches in Netherlands, Italy and Botswana.

Another bank which announced its result during the week was Bank of Baroda. It reported a 47% YoY increase in net interest income during the quarter. Interest expense on the other hand grew by 14% YoY. As a result, net profit grew by 61% YoY during the quarter. The profit growth could have been higher but for a sharp increase of 60% YoY for provisions and contingencies. During 1HFY11, the bank's net interest income increased by 50% YoY. This performance comes on the back of 30% YoY growth in advances. Net profits however increased by 42.3%. This was due to an increase of 464% YoY in provision towards bad loans. NIMs for the bank increased by 0.4% to stand at 3% while NPAs moved up by 0.1% to 0.4% for 1HFY11. The capital adequacy ratio stood at 13.2% at the end of 1HFY11. Cost to income ratio fell from 48% in 1HFY10 to 39% in 1HFY11.

Moving on to the healthcare space, Novartis announced its 2QFY11 results. The company's revenue grew by 16% YoY on the back of its OTC and pharmaceutical business. OTC business grew by a robust 28% YoY while the pharmaceutical business which contributes 71% to the total sales grew by a strong 14% YoY. Generics business also turned in a decent performance, growing by 14% YoY. However the animal healthcare business turned in a disappointing performance with a 4% YoY growth. Novartis's operating margins fell by 1.1% during the quarter to stand at 22.8%. This fall was on account of higher raw material, staff costs and advertisement expenditure (all as a percentage of sales). Net profits grew faster than operating profits turning in a growth of 22% YoY. This performance was aided by a shape increase in other income and lower effective tax rate. .

Ranbaxy also announced its quarterly results. Sales of the company for 3QCY10 grew by a mute 2.6% YoY. This performance was due to currency appreciation and decline in sales in Europe, Africa and Asia Pacific. When adjusted for currency, sales of the company increased by 14% YoY. This is on the back of a record sales growth of 70% YoY in the US market. Growth in US was driven by sales of Valacyclovir which continued to enjoy a healthy market share of about 36%, even after loss of exclusivity. It was supported by a robust performance by most other business segments. Operating margins fell by 4.1% to stand at 7.2% for 3QCY11. This was due to increase in raw material and staff costs (both as a percentage of sales). Bottom line grew by 168% YoY aided by forex gains and extraordinary income partly offset by fall in operating income and increase in depreciation charges. When adjusting for forex gains and extraordinary income, the bottom line fell by 29% YoY during the quarter.

In other news, India's industrial output growth slowed for the second straight month. This has raised concerns that industrial activity could be faltering. This has also raised odds of RBI holding off further interest rate hikes. Output of mines and factories rose 4.4% YoY for the month of September compared with 6.92% YoY growth in August. This was also far below the 15.2% YoY rise for the month of July, sparking fears that industrial growth may be slowing down as the base effect from last year gets adjusted. However, experts feel that this is a result of weakness in capital goods. Industrial momentum beyond industrial goods is slowing down but is leveling out to more sustainable levels. It may be recalled that industrial output grew at a double-digit pace for eight straight months through May, but then turned volatile due to large swings in capital goods output.

Movers and shakers during the week

Company	5-Nov-10	12-Nov-10	Change	52-wk High/Low
Top gainers during the week (BSE-A Group)
RELIANCE POWER	166	182	9.4%	191/137
CADILA HEALTHCARE	725	770	6.2%	782/374
FINANCIAL TECH	1,040	1,098	5.6%	1,722/1,000
JET AIRWAYS	816	861	5.5%	926/403
RCF	118	123	4.8%	128/70
Top losers during the week (BSE-A Group)
GUJ.NRE COKE	65	57	-12.4%	89/55
IDFC	217	191	-12.3%	218/142
SBI	3,455	3,030	-12.3%	3,515 /1,890
ESSAR OIL	160	141	-12.0%	162/117
EVEREST KANTO CYLINDER	140	123	-11.9%	162/108

Source: Equitymaster
In international news, some Fed officials are of the view that Quantitative Easing or QE-2 could create asset bubbles and result in further job losses. Dallas Fed President, Richard Fisher suggested this week that a bubble is already forming in Private Equity (PE). This is due to cheap debt fueling high priced deals in an echo of the pre subprime crisis leverage buyout days. PE firms do not typically acquire companies with a plan to expand the workforce, but instead with an eye to tighten operations, drive productivity, re-jiggle balance sheets and provide an attractive payback, usually in shorter time than under normal corporate horizons. PE firms raise fund typically from investors like pension and endowment funds and typically buy underperforming companies using a large amount of debt, fixing up these companies and selling them at a profit. Some buyout firms, which raised billions of dollars in better times, are under pressure to invest their money before the investment period comes to an end. Furthermore, there is an incentive to buy and sell assets this year, as a tax hike is anticipated. This according to Fisher is leading to speculation and deals being executed at a premium. Kansas City Fed President Thomas Hoenig has also called on the US central bank to increase and not decrease borrowing costs as further Fed easing may fuel bubbles

After an initial euphoria for QE-2, concerns on economic recovery are back. Investor should remain cautious of potential assets bubbles as cheap money floods the world markets.