Relief rally fizzles out

Sat, 10 Dec RoundUp

   Previous Close   

After witnessing a sharp bounce back in the last week, the world markets were not able to hold on to the gains and corrected in this week's trade. The US stock markets were up 1.4% during the week. Hopes that better fiscal integration measures by the European countries will help resolve the debt crisis fuelled market sentiments. Trade deficit numbers reported by the US were also encouraging while the consumer confidence index surprised positively, propelling further buying interest.

However, the Indian stock market were down 3.8% during the week after the government lowered the full year Gross Domestic Product (GDP) growth target and disclosed that meeting the fiscal target would also prove to be a challenge. Apart from this, decision to put Foreign Direct Investment (FDI) in multi-brand retail on a hold also made investors jittery.

Amongst the other markets, Brazil was up 0.6% while France was flat with gains of 0.2%. However, Singapore and China lost considerable ground and ended the week on a negative note.

Source: Yahoo Finance

Amongst the sectoral indices, except for IT all were in the red. Capital Goods was the biggest loser (down 5.4%) amidst expectations that it would lead to a decline in industrial output in October. (Data for industrial output is scheduled to be reported on Dec 12). Apart from this, Realty and Oil and Gas sectors were also down by 4.8% and 4.6% respectively. Broad based selling across markets led to a decline in majority of the sectors.

Source: BSE

Now let us have a look at the key economic developments during the week. Firms from the infrastructure sector have been bogged down by a slowdown in orders and rising interest costs. That is why many of them are looking to scale down targets, cut costs, as well as evaluate options to divest holdings in projects and real estate assets. Many of them are also looking to de-leverage their balance sheets given that on an average debt levels of infrastructure companies have gone up 10% in the last two quarters. Working capital situation has also deteriorated in the past 6 months. High interest rates have only added more fuel to the fire. Orders from the central and state government authorities in areas like urban infrastructure, water and the like have been hit by slow decision making by the government. In the power sector, orders have fallen due to uncertainty over availability and pricing of fuel and higher borrowing costs. Thus, overall the sector continues to struggle due to delay in policy reforms and higher interest rate environment.

About 14,000 MW of capacity addition in the pipeline for power companies based on Indonesian coal is likely to hit a roadblock. This is because Indonesia has made it mandatory for coal exports to be benchmarked to international prices. Players such as Tata Power, Reliance Power, JSW Energy and the like had aggressively bid in the competitive bidding process for power projects, based on agreements they had made for fuel stock from Indonesia. However, these companies had worked the financials of their projects factoring in the coal price they had entered into in Indonesia for long-term supply. This in some cases was about US$ 26 to US$ 30 a tonne, which are almost half the benchmark prices. The problem is that many Indian power players have to depend upon imported coal as Coal India despite the huge opportunity in this sector is not able to address their requirements. Hence, some solution will have to be worked out with the Indian government, if power projects in India are not to be stalled.

Now let's take a look at key corporate events during the week. Hindalco Industries is planning to make an additional investment of USD $5 bn to more than double its aluminum production capacity by 2016. However, the pace of the expansion would largely depend on early clearances for captive coal blocks, as smelter projects are not viable without captive power. The company's new 360,000 tonne project would start production in the next three to five weeks. The company is still awaiting forest clearances for the captive coal block intended to meet this project's requirement and will be buying coal till such time as the captive coal becomes available.

Coal India (CIL), which supplies coal for 80% of the power produced in the country, has cut its production target to 440 m tonnes for FY12 from the earlier estimate of 452 m tonnes in its annual plan. The PSU has lowered its production target due heavy rainfall, strike and delays in the grant of forestry and environmental clearances to coal projects. During the terminal year of the 12th Five-Year Plan (2012-17) company was planning to mine between 556 and 615 m tonnes of coal. CIL had asked the government to scale down its production target for the 2011-12 financial year to 448 m tonnes (MT), fearing it will not be able to make up for the slippage in output in the first half of the fiscal.

The coal miner was not able to achieve its April-September target by about 20 m tonnes, recording an output of 176 m tonnes against the target of 196 million tonnes, as inclement weather, including heavy rains affected production in almost all its collieries.CIL had in fact lowered its production target to 440 m tonnes from 460 m tonnes in FY11 as well.

Power Grid Corporation of India (PGCIL) is in the process of finalizing $750 million loan from the Asian Development Bank (ADB) for one of its transmission projects. PGCIL would utilize this loan for establishing a transmission system between the Northern (Haryana) and Western (Chhattisgarh) region. Of the total US$750 m loan from ADB which PGCIL proposed, loan amount of US$ 500 m shall be availed through Government of India guarantee while the loan amounting to US$ 250 m shall not carry any sovereign guarantee. It may be noted that PGCIL owns and operates most of India's interstate and inter-regional electric power transmission systems with inter-regional power transfer capacity of about 20,800 MW and wheels nearly 45% of total power generated across India.

Movers and shakers during the week

Company	2-Dec-11	9-Dec-11	Change	52-wk High/Low
Top gainers during the week (BSE-A Group)
Indiabulls Financial Services	135	148	9.4%	191/120
Sun TV	263	282	7.1%	550/221
Ambuja Cement	149	159	6.9%	164/118
Federal Bank	364	389	6.9%	473/337
HPCL	275	294	6.9%	422/274
Top losers during the week (BSE-A Group)
Sterling Biotech	74	62	-16.7%	107/45
Indiabulls Real Estate	64	53	-16.7%	150/44
Pantaloon	211	182	-13.7%	390/152
Koutons Retail	21	19	-12.5%	59/18
Everest Kanto Cylinder	41	36	-11.1%	105/37

Source: Equitymaster
In news from the economy, it seems that weak rupee is likely to upset the fiscal deficit target of the government. Depreciating rupee is raising the outgo on oil imports as well as the cost to service foreign debt thereby putting pressure on the government's budget. Further, slowing economy also means that the tax revenues are likely to be impacted thereby putting additional pressure on the government to meet rising expenditure. Consequently, we believe that the government's borrowing may increase putting an upward pressure on interest rates.

India's trade deficit widened to US$116.8 bn during the first 8 months of 2011-12. Despite healthy growth in exports (33.2% YoY) rising oil imports proved to be the main culprit. It may be noted that the trade deficit for the full year is further expected to widen to US$155-160 bn. Further, with demand for the Indian merchandise slowing down in global markets government's export target of US$300 bn is also at significant risk. Considering that the export target is under jeopardy we believe that the trade deficit woes could magnify.

After witnessing a sharp bounce back in the last week, the world markets were not able to hold on to the gains and corrected in this week's trade. The US stock markets were up 1.4% during the week. Hopes that better fiscal integration measures by the European countries will help resolve the debt crisis fuelled market sentiments. Trade deficit numbers reported by the US were also encouraging while the consumer confidence index surprised positively, propelling further buying interest.

However, the Indian stock market were down 3.8% during the week after the government lowered the full year Gross Domestic Product (GDP) growth target and disclosed that meeting the fiscal target would also prove to be a challenge. Apart from this, decision to put Foreign Direct Investment (FDI) in multi-brand retail on a hold also made investors jittery.

Amongst the other markets, Brazil was up 0.6% while France was flat with gains of 0.2%. However, Singapore and China lost considerable ground and ended the week on a negative note.

Source: Yahoo Finance

Amongst the sectoral indices, except for IT all were in the red. Capital Goods was the biggest loser (down 5.4%) amidst expectations that it would lead to a decline in industrial output in October. (Data for industrial output is scheduled to be reported on Dec 12). Apart from this, Realty and Oil and Gas sectors were also down by 4.8% and 4.6% respectively. Broad based selling across markets led to a decline in majority of the sectors.

Source: BSE

Now let us have a look at the key economic developments during the week. Firms from the infrastructure sector have been bogged down by a slowdown in orders and rising interest costs. That is why many of them are looking to scale down targets, cut costs, as well as evaluate options to divest holdings in projects and real estate assets. Many of them are also looking to de-leverage their balance sheets given that on an average debt levels of infrastructure companies have gone up 10% in the last two quarters. Working capital situation has also deteriorated in the past 6 months. High interest rates have only added more fuel to the fire. Orders from the central and state government authorities in areas like urban infrastructure, water and the like have been hit by slow decision making by the government. In the power sector, orders have fallen due to uncertainty over availability and pricing of fuel and higher borrowing costs. Thus, overall the sector continues to struggle due to delay in policy reforms and higher interest rate environment.

About 14,000 MW of capacity addition in the pipeline for power companies based on Indonesian coal is likely to hit a roadblock. This is because Indonesia has made it mandatory for coal exports to be benchmarked to international prices. Players such as Tata Power, Reliance Power, JSW Energy and the like had aggressively bid in the competitive bidding process for power projects, based on agreements they had made for fuel stock from Indonesia. However, these companies had worked the financials of their projects factoring in the coal price they had entered into in Indonesia for long-term supply. This in some cases was about US$ 26 to US$ 30 a tonne, which are almost half the benchmark prices. The problem is that many Indian power players have to depend upon imported coal as Coal India despite the huge opportunity in this sector is not able to address their requirements. Hence, some solution will have to be worked out with the Indian government, if power projects in India are not to be stalled.

Now let's take a look at key corporate events during the week. Hindalco Industries is planning to make an additional investment of USD $5 bn to more than double its aluminum production capacity by 2016. However, the pace of the expansion would largely depend on early clearances for captive coal blocks, as smelter projects are not viable without captive power. The company's new 360,000 tonne project would start production in the next three to five weeks. The company is still awaiting forest clearances for the captive coal block intended to meet this project's requirement and will be buying coal till such time as the captive coal becomes available.

Coal India (CIL), which supplies coal for 80% of the power produced in the country, has cut its production target to 440 m tonnes for FY12 from the earlier estimate of 452 m tonnes in its annual plan. The PSU has lowered its production target due heavy rainfall, strike and delays in the grant of forestry and environmental clearances to coal projects. During the terminal year of the 12th Five-Year Plan (2012-17) company was planning to mine between 556 and 615 m tonnes of coal. CIL had asked the government to scale down its production target for the 2011-12 financial year to 448 m tonnes (MT), fearing it will not be able to make up for the slippage in output in the first half of the fiscal.

The coal miner was not able to achieve its April-September target by about 20 m tonnes, recording an output of 176 m tonnes against the target of 196 million tonnes, as inclement weather, including heavy rains affected production in almost all its collieries.CIL had in fact lowered its production target to 440 m tonnes from 460 m tonnes in FY11 as well.

Power Grid Corporation of India (PGCIL) is in the process of finalizing $750 million loan from the Asian Development Bank (ADB) for one of its transmission projects. PGCIL would utilize this loan for establishing a transmission system between the Northern (Haryana) and Western (Chhattisgarh) region. Of the total US$750 m loan from ADB which PGCIL proposed, loan amount of US$ 500 m shall be availed through Government of India guarantee while the loan amounting to US$ 250 m shall not carry any sovereign guarantee. It may be noted that PGCIL owns and operates most of India's interstate and inter-regional electric power transmission systems with inter-regional power transfer capacity of about 20,800 MW and wheels nearly 45% of total power generated across India.

Movers and shakers during the week

Company	2-Dec-11	9-Dec-11	Change	52-wk High/Low
Top gainers during the week (BSE-A Group)
Indiabulls Financial Services	135	148	9.4%	191/120
Sun TV	263	282	7.1%	550/221
Ambuja Cement	149	159	6.9%	164/118
Federal Bank	364	389	6.9%	473/337
HPCL	275	294	6.9%	422/274
Top losers during the week (BSE-A Group)
Sterling Biotech	74	62	-16.7%	107/45
Indiabulls Real Estate	64	53	-16.7%	150/44
Pantaloon	211	182	-13.7%	390/152
Koutons Retail	21	19	-12.5%	59/18
Everest Kanto Cylinder	41	36	-11.1%	105/37

Source: Equitymaster
In news from the economy, it seems that weak rupee is likely to upset the fiscal deficit target of the government. Depreciating rupee is raising the outgo on oil imports as well as the cost to service foreign debt thereby putting pressure on the government's budget. Further, slowing economy also means that the tax revenues are likely to be impacted thereby putting additional pressure on the government to meet rising expenditure. Consequently, we believe that the government's borrowing may increase putting an upward pressure on interest rates.

India's trade deficit widened to US$116.8 bn during the first 8 months of 2011-12. Despite healthy growth in exports (33.2% YoY) rising oil imports proved to be the main culprit. It may be noted that the trade deficit for the full year is further expected to widen to US$155-160 bn. Further, with demand for the Indian merchandise slowing down in global markets government's export target of US$300 bn is also at significant risk. Considering that the export target is under jeopardy we believe that the trade deficit woes could magnify.