The week gone by was a mixed one for global markets with the RBI’s status quo on interest rates and better economic indicators coming out of the US. However, concerns about Euro zone persisted as rating agency Moody’s downgraded Ireland’s debt. China was the top gainer for the week, up 1.9%, while Hong Kong was the top loser, down 1.9%. In Europe, UK was the top gainer, up 1%, while in the Americas US was up 0.7%. Among Asian countries, India and Japan closed the week in the green up 1.8% and 0.9% respectively, while Singapore closed 1% lower.
As for the performance of the key global markets, gains were seen in Europe and certain Asian markets. France and UK were the top performers, ending higher by 2.8% and 1.2% respectively. Germany and Singapore followed suit, with weekly gains of 0.8% and 0.4% respectively. The US markets ended on a slightly positive note, while China remained flat. Apart from India, Brazil performed poorly this week with its benchmark index declining by 2%. Asian markets ended on a mixed note this week. While on one side indices rose on the back of better than expected reports relating to economic growth and employment figures, on the other, investors seem to be concerned over Chinese policy makers raising interest rates to contain inflation.
Source: Yahoo Finance
Moving on to the performance of sectoral indices in India - stocks from FMCG, banking and auto sectors closed the week on a positive note. Stocks from the IT space were the top gainer with the BSE-IT index up 5%. BSE-Metals Index and BSE-Smallcap index were among the top performers of the week. BSE-FMCG (down 0.5%), BSE-Bankex (down 0.3%) and BSE-Auto (down 0.3%) indices were the top losers. BSE-Pharma and BSE-Realty indices up 0.9% and 1.1% respectively also lagged the sectoral indices.
Moving on to key corporate developments during the week - The Hero Group confirmed on Friday that it will buy out the 26% stake of its JV partner Hero Group in Hero Honda at a discount to the market price. However, it will disclose details of the transaction after the formal share transfer takes place.
The split between the Hero Group and Honda Motors is expected to kick start a price war in the motorcycle market with companies expected to offer discounts and freebies. Honda Motorcycle & Scooter India is expected to now enter all the two wheeler segments while other companies will try to make the most of a weakening of Hero Honda’s brand image. With this, the competition to capture the market and maintain market share will intensify. It is believed that the biggest challenge for Hero Honda now will be to keep its dealer network of 4,500 touch points intact. The concern is that the split in the partnership may affect the confidence of their dealers, who have enjoyed the market dominance for a long time.
Furthermore, Indian companies are having a hard time, with their dealers being poached by Japanese competitors. However, the domestic players have an advantage in pricing. This is due to the fact that they have developed indigenous technology with frugal engineering. Hence Japanese companies will be squeezed to compete on pricing. Due to this, industry experts are waiting and watching to see which company derives the most out of this split.
In other auto news, Tata Motors announced a special financing scheme for the Nano. As per this scheme, the loan for the car will be provided by Tata Motor Finance. This loan will be up to 90% of the value of the car. It may be recalled that sales for the Nano fell to 509 units for November from 5,500 in September. This loan scheme has been launched to reverse this sharp fall in volumes. Besides the loan financing scheme, Tata Motors has announced various schemes and incentives to boost sales. This include increasing the manufacturer’s warranty to four years or 60,000 km, whichever is earlier and installing devices, free of cost, in the car to prevent it from catching fire.
In news from the power sector, Tata Power is expected to commission its first 800 Mw unit of the India’s first ultra power project by September 2011. This project is being set up in Mundra, Gujarat. As per the company, Coastal Gujarat Power Ltd, the special purpose vehicle implementing the 4,000-Mw (5x800-Mw) project, has already completed 65% of the work. After the commissioning of the first unit in September, Tata Power plans to commission the remaining four units at an interval of every four months. Out of the total project cost of Rs 170 bn, Tata Power has invested Rs 58 bn as debt and Rs 29 bn as equity till September 2010. The project is funded on a 75:25 debt to equity ratio by a consortium of banks, including State Bank of India, International Finance Corporation, Asian Development Bank, KEIC and K-Exim. Once operational, this power project is expected to impact close to 16 m domestic consumers besides supplying cost competitive power to industry and agriculture. Power from this project will be supplied to the states of Gujarat, Rajasthan, and Maharashtra in western India and to Haryana and Punjab in northern India, areas which are suffering from severe shortages of electricity.
In news from banking, share of domestic lenders in the global banking space is expected to double to 2.8% by 2015. This is on the back of an 18-20% annual growth, according to a report by McKinsey & Company. As per the report, the massive growth will see the underlying assets of the domestic banks to touch US$ 3 tn and deposits to touch US$ 2.3 tn. The report further adds that there will be faster consolidation among banks and that atleast five to six Indian banks will be in the global 100 league over the next decade. The financial sector is basically the backbone of the Indian economy. For India to sustain 8-9% growth, a strong banking and financial services sector is crucial. It may be noted that over the past decade, the revenues of domestic banks have grown more than fourfold, from US$ 11.8 bn in 2001 to US$ 46.9 bn in 2010. In the same period, the profits have soared nearly nine fold to US$ 12.06 bn from US$ 1.41 bn.
Coming to the healthcare sector, after the acquisition of Taro Pharmaceuticals, Sun Pharma is looking at another buyout. The acquisition target is believed to be in the US and the company has ear marked US$ 300 m for this takeover. Sun Pharma has been growing inorganically with 16 acquisitions since the company started in 1994. Presently, the company has a war chest of US$ 700 m to fund its inorganic growth. As of now, the US contributes to more than 50% of Sun Pharma's total sales. While the contribution from India stands at around 30%, 14% comes from other markets like Europe, Russia and South America.
In news from the economy, food inflation rose to 9.5% for the week ended December 4. However, the benchmark inflation index (WPI) showed some signs of cooling. Taking into account the tight liquidity scenario, the RBI in the monetary policy review last week, left interest rates unchanged after six increases since March 2010. The RBI has been the most aggressive major central bank in Asia this year, lifting key lending and borrowing rates by 1.5% and 2% respectively, as surging prices spurred by rising food costs threatened to hurt GDP growth rates. The move to allow banks to maintain SLR at 24% instead of 25% will also ease the liquidity scenario in the banking sector.
Inflation and higher interest rates coupled with firmness in commodity prices are expected to dampen the profitability of India Inc. in the upcoming result season.