Global markets up after a pause

Reversing the trend from last week, all global indices closed the week in the green, with the exception of China. The buoyancy in the world markets can be attributed to some strong earnings reports declared by companies in the latest week. China was the only loser of the week (down 0.5%) while Singapore was the biggest gainer up 1.3%. Amongst other Asian markets, the Indian stock market was up by 1.1% while Japan was up by 1%. Hong Kong closed the week up 0.5%.

In Europe, Germany was the biggest gainer (up 1%) followed closely by France (up 0.8%). UK was up by 0.4%. In the Americas US was up by 0.9% while Brazil was up by 0.6%.

Source: Yahoo Finance

Moving on to the performance of sectoral indices in India, oil & gas and auto stocks were the best performers with BSE-Oil & Gas and BSE-Auto indices closing the week up 2.8% and 2.4% respectively. Capital Goods stocks disappointed with the BSE-Capital Goods index down 2.4%. Among other top performers, BSE-Metals and BSE-Consumer Durable indices were up by 2% and 1.6% respectively. BSE-Power and BSE-Realty were other indices which closed in the red down 1.7% and 1.2% respectively. BSE-IT index also closed in the red due to the bad result of Infosys being reflected on the entire sector.

Source: BSE

Moving on to key corporate developments during the week - a handful of companies announced their results for the quarter ended March 2011. From the financial space, HDFC Bank released its FY11 result. The bank's interest income grew by an impressive 23% YoY for the year on the back of 27% YoY growth in advances. This growth was well in access of industry growth and was aided by more than 30% YoY growth in loans to retail customers and large corporate. Net interest margins (NIMs) remained flat at 4.2% due to a higher proportion of low cost deposits. For the year, CASA made up 51% of deposits. On the other hand, other income grew by 9% YoY. Net NPA to advances fell marginally to 0.2% in FY11 from 0.3% in FY10. Provision coverage ratio increased to 82.5% at the end of FY11 vs. 75% in FY10. While capital adequacy ratio (CAR) stood at 16.2%, Tier 1 CAR stood at 12.2%. During the year, HDFC increased its branch network by 261 branches and declared a dividend of Rs 16.5 per share.

Another bank which declared its results over the week was Yes Bank. The bank's net interest income grew by 58% YoY on the back of 55% growth in advance. Net interest income grows 58% YoY in FY11 on the back of 55% YoY growth in advances. The highlight of the year was that with a growth of almost 3 times the industry growth, the bank is close to the market share of some of its larger peers in SME lending. Other income grew by a mute 8% YoY as a result of lower treasury gains. However, as a result of pressure on interest costs, NIMs fell marginally to 2.9% from 3% in FY10. Net profits grew by 52% YoY during the fiscal. This was a result of write back of provisioning and higher operating leverage. CAR for the year stood at 16.5% while gross NPA stood at 0.2%. The bank declared a dividend of Rs 2.5 per share. At the end of the year the total employee strength of the bank stood at 3,900, a net increase of 900 employees over FY10.

In news from media space, Zee Entertainment declared its 4QFY11 results. The company witnessed a strong growth in the quarter driven by robust growth in the advertisement segment. Advertisement revenues increased by 36.4% YoY during the quarter. This came on the back of higher channel shares across network, a buoyant macro environment and a continued preference of advertisers towards television. Top line growth was also supported by subscription revenue which grew by an impressive 23.7% YoY. However, the other sales and services business disappointed as revenues from this segment fell by 83.6% YoY. This was due to the discontinuation of education business of ETC. Operating profit for the quarter increased by 23.5% YoY while operating profit margins remained flat at 28.4%. While programming expenses increased by 43% YoY, selling and administrative expenses declined by 15% YoY. This ensured that operating margins remained at the same level for the year. Net income increased by 43.3% YoY. This was on the back of strong operating profit growth and lower interest costs and fall in effective tax rates.

IT major TCS also declared its 4QFY11 results. The company's sales grew by 5.1% QoQ basis. This was due to 2.9% growth in volumes. Volumes were driven by robust demand across markets. These included Continental Europe and Asia-Pacific markets. Sales from Continental Europe grew by 11.9% QoQ while sales from Asia-Pacific grew by 9.7% QoQ. North America and Middle East and Africa (MEA) regions also contributed to top line with North America growing by 4.9% QoQ and MEA growing by 5.1% QoQ. Latin America also contributed to the growth of the top line with sales from this region growing by 8.5%. However, India disappointed with a sales growth of 0.5% QoQ. Operating margins grew by 0.5% to 30.5%. This was the result of lower cost of sales (as a percentage of sales). Net profit of the company grew by 10.7% QoQ during the quarter. This was due to higher operating income and lower effective tax rate. TCS added 39 new clients during the quarter taking the total number of its clients to 969. The company declared a dividend of Rs 8 per share during the quarter taking the total dividend paid during the year to Rs 14 per share.

While the biggest gainer of the week has been the BSE-Oil & Gas index, the crisis in the Middle East has added to the debt burden of oil marketing companies. This has been due to higher crude oil prices. In fact the under recovery of state owned Oil Marketing Companies (OMCs) is expected to cross Rs 2,000 bn this fiscal if crude prices remain at the current levels. Under recovery arises as OMCs have to sell diesel, kerosene and cooking gas at subsidized rates. As a result when oil prices climb up the differential between the cost and selling price increases resulting in under recoveries. It may be noted that the under-recoveries of OMC were to the tune of Rs 780 bn in 2010-11. While the matter is being taken up with the Finance Minister, it is clear that if the government does not de-regulate prices, either OMCs will continue to face higher debt burdens or the government's subsidy bill will keep ballooning.

Movers and shakers during the week
Company13-Apr-1121-Apr-11Change52-wk High/Low
Top gainers during the week (BSE-A Group)
JAIPRAKASH ASSO.91 102 12.3%163/73
SINTEX IND.163 179 10.0%237/134
INDIABULLS FIN. SER.163 179 9.7%241/130
JUBILANT LIFE SCIENCES182 198 9.0%413/149
Top losers during the week (BSE-A Group)
INFOSYS3,224 2,901 -10.0%3,494/2,565
POWER FIN CORP248 229 -7.7%383/221
UNITECH45 41 -7.0%98/33
GMR INFRA42 39 -6.9%69/31
BHEL2,200 2,050 -6.8%2,695/1,911
Source: Equitymaster

In other news from the Indian economy, the Planning Commission is targeting an economic growth of 9% for the 12th five year plan. This is a revision from the earlier 10% target set by the Prime Minister, Dr Manmohan Singh. The reason for this revision is the continuing global uncertainties, rising energy prices and high inflation. While other economists feel that 9% is also high it can be achieved if the government addresses the infrastructure deficit in the next 5 years. However, the 9% growth assumes the global economic conditions will stabilize.

Food inflation reversed the 3 week declining tread and shot up to 8.74% from 8.28% for the week ending April 9. As per official data, this increase was on the back of expensive fruits, protein-based items and onions. This unexpected increase has again put pressure on the government prompting Dr Manmohan Singh to call for enhanced production of a diversified basket of agriculture products. We however, maintain that food inflation is a result of infrastructure bottlenecks. During the week under review, fruits became dearer by 25.2% YoY while egg, meat and fish were up by 14.9% YoY. Non food articles were up by 27.6% YoY and fuel and power increased by 13.1% YoY.

In news from the world economy, high oil prices are hurting demand from the world's top oil consumers i.e. China and the United States. Warning bells have been sounded that a sustained price of US$ 100 or more for the rest of 2011 would result in demand destruction last seen in 2008 when oil prices had risen to their highest levels. So far we have not seen the effect of the high prices as there is a six month lag for the world economy to fully show the impact of high oil prices. While OPEC meets next in June to discuss supply policy, it has taken no coordinated action to boost supply to moderate prices.

Global cues boost markets yet again

Benchmark indices in the Indian stock market remained range bound during the final couple of hours of trade. However, thanks to gains recorded earlier in the day, they managed to close the day strongly in the positive. BSE-Sensex edged higher by around 130 points whereas NSE-Nifty finished higher by around 30 points (up 0.6%). Amongst the smaller indices, both BSE Midcap as well as BSE Small cap index ended nearly flat. More than two stocks gained for every one that declined on the Sensex today.

While most of the other Asian indices also closed in the positive today, Europe too is witnessing positive trend currently. Rupee was trading Rs 44.3 to the dollar at the time of writing.

Markets rose higher seemingly yet again on the back of global cues. Bloomberg reported that US companies, especially tech stocks are doing well and that's helping to instill confidence. It should be noted that earnings trend at big companies like Apple and IBM have become useful pointers these days to know whether businesses are doing discretionary spending or not. And things are certainly looking good on this front and this is helping have a good rub off effect on stocks across the globe.

IT behemoth TCS announced its full year results today. Its net sales grew by 5.1% QoQ in 4QFY11, largely driven by 2.9% growth in volumes. For the year ended March 2011, sales grew by 24.3% YoY on account of strong volume growth of 29.7%. Operating margins improved by 0.5% QoQ to 30.5% during the quarter as compared to the 30% seen during the previous quarter. This was mainly due to slightly lower cost of sales (as a percentage of sales). For the year ended March 2011, operating margins expanded by 0.9% YoY. As far as net profits are concerned, the same grew by 10.7% QoQ during the quarter. This was mainly driven by lower tax expense during the quarter. For the full year FY11 (year ended March 2011), net profits increased by 29.5% YoY. This was mainly driven by the growth in revenues and other income. The company also proposed an interim dividend, which took up the total dividend for the year to Rs 14 per share (yield of 1.2%). The stock however closed the day 3% lower.

Tyre major Apollo Tyres was in the thick of action today, closing the day with gains in the region of 5%. The positive sentiment was perhaps on account of news in a leading daily that the company is looking to step up after-market sales of its branded tyres in Europe to 60,000-65,000 levels per month. It should be noted that the company is currently selling approximately 50,000 'Apollo Tyres' a month in Germany, the Netherlands, the UK and Italy. This does not include sales of 'Vredestein' branded tyres manufactured by its European outfit Apollo Vredestein BV (AVBV). Apollo tyre was the first major made-in-India brand to be launched in Europe last year. Efforts are also on by the company to enlist itself as an OE supplier to automakers in Europe. Quite a few European car makers like VW, Audi and Skoda already use Apollo tyres in India.

Markets continue in green
01:30 pm

The benchmark indices in the Indian stock market continued to trade in the green in the last two hours of trade. Stocks from Realty, Metal and Software space are trading firm, while those from Capital Goods and Power space are trading weak.

The BSE-Sensex is up by 153 points while NSE-Nifty is trading 36 points above the dotted line. BSE Midcap and BSE Small cap indices are trading up by 0.3% and 0.2% respectively. The rupee is trading at 44.28 to the US dollar.

Power stocks are trading mixed with Jaiprakash Power and Reliance Power leading the pack of gainers. The stocks of GVK Power and Coal India are trading in the red. As per a leading financial daily, Power Grid Corp. has signed an agreement to develop transmission network with Kenya Electric Transmission Company Ltd. (KETRACO) in Nairobi. KETRACO is a 100% state-owned corporation that designs, constructs, operates and maintains high voltage electricity transmission infrastructure. The details of the agreement are yet to be worked out. The company has also signed an agreement to provide 10 weeks training to KETRACO engineers under the first phase. This will be followed by a two months hands-on training and a specialized training based on evaluation reports of the first two phases. These agreements are expected to lead to substantial future consultancy business assignments for Power Grid on a nomination basis. The stock of Power Grid Corp is trading flat.

Software stocks are trading mixed as well with NIIT Ltd, TCS and HCL Infosystems leading the pack of gainers. However, Moser Baer (India) and HCL Tech are trading weak. As per a leading financial daily, NIIT Ltd, an Indian IT (Information Technology)-based educational sector company, has sold its unit Neo Multimedia Ltd to Earth Infrastructures Ltd for US$ 7.3 m (Rs 32.3 Cr). Neo Multimedia was previously known as NIIT Multimedia Ltd. It was a non-operating unit of NIIT Ltd. NIIT has closed the deal today and transferred 100% of this unit to Earth Infrastructures and its nominees. The directors of NIIT Ltd have resigned from Neo Multimedia Ltd. The stock of NIIT Ltd witnessed a steep rise in the morning session of trade. It is now up by 5.1%.

Metal, IT stocks keep markets firm
11:30 am

Indian stock markets continue to trade firm on buying interest in heavy weights over the last two hours of trade. Stocks from the metal and IT space are the biggest gainers while stocks from the pharma and power space have gained the least.

The BSE-Sensex is up by 210 points while NSE-Nifty is trading 55 points above the dotted line. BSE Midcap index is trading up by 0.6% while BSE Small cap index is trading 0.7% above yesterday's closing. The rupee is trading at 44.28 to the US dollar.

FMCG stocks are trading mixed with Pidilite Industries and Marico trading firm while Gillette India and P&G Hygiene are trading weak. As per a leading financial daily, Godrej Consumer Products Limited (GCPL) plans to employ a strategy of exchange of technology rather than brands transfer across product categories in Indonesia, Argentina and Africa. For this reason, bringing acquired brands to India is unlikely. This is because while the brands are number one in their respective markets, they have low brand equity in India. Hence, bringing in a new brand would be the same as building a brand from scratch.

However, in categories which have no overlaps, GCPL would consider the possibility of introducing international brands. For example, GCPL has exited the air care and hair care categories as a result of Sara Lee's brands like Ambi Pur, Kiwi and Brylcream being sold to P&G and Unilever. The company's spokesperson has stated that GCPL is considering re-entering these categories and would consider brand transfer in these categories. Globally, GCPL's ambition is to become the number two player in household insecticide business. It would be competing with big MNCs such as SC Johnson and Reckitt Benckiser in this business.

PSU Banking stocks are trading mixed with Allahabad Bank and SBI leading the pack of gainers. However, Oriental Bank and Indian Overseas Bank are trading weak. As per a leading financial daily, SBI has discontinued its teaser home loan scheme. The scheme that benefitted over 0.4 m home buyers in India will be withdrawn from May 1. Under the scheme home buyers could avail of loans at lower rates initially. RBI fears defaults from such borrowers once the rates go up after initial period of 3 years.

The State Bank of India has replaced the existing home loan structure by a new lending structure which will raise the interest payment of customers. It may be noted that to discourage banks, RBI had earlier increased the provisioning requirement on teaser loans by five times to 2%. SBI is in talks with RBI for a waiver.

Metal stocks boost index gains
09:30 am

Asian stock markets continued yesterday's winning streak and have opened the day in the green. Benchmark indices in Taiwan (up 1.8%), Korea (up 1.2%) and Hong Kong (up 1.0%) are leading the pack of gainers. However, markets in Indonesia and Malaysia have opened the day in the red. The Indian stock markets have opened the day on a positive note as well. Stocks in the metal and realty space are leading the gains.

The BSE-Sensex is trading higher by around 116 points (0.6%), while the NSE-Nifty is up by around 25 points (0.4%). Midcap and small cap stocks are trading in the positive as well, with the BSE Midcap and BSE Small cap indices up by about 0.4% each. The rupee is trading at 44.29 to the US dollar.

Energy stocks have opened the day on a tepid note. HPCL, BPCL and IOC are all trading in the red. However, ONGC and Oil India are witnessing buying interest. The turmoil in the Middle East has led to the oil prices scaling new heights. These higher prices have added to the debt burden of the oil marketing companies (OMCs). The under recoveries due to the higher oil prices have led to a debt burden of a whopping Rs 2,000 bn. The under recovery arises as the OMCs have to sell the diesel, kerosene and cooking gas at the subsidized rates. As a result, when oil prices trend higher, there is an under-recovery of the prices as there is a huge differential between the cost and the selling price. The debt burden for the OMCs has been on the rise. It has gone up from the level of Rs 490 bn in 2006-07 to its current levels. The matter is being taken up by the finance ministry. However, if the oil prices continue to be where they are currently and the government does not de-regularize the prices, one of the two things would happen. Either the OMCs would continue facing higher debt burdens. Or the government's subsidy bill would keep going up.

Power stocks have opened the day on a positive note. Tata Power, NTPC and JSW Energy are leading the pack of gainers. There has been a burgeoning gap between estimated demand and supply of domestic coal. This has been a major concern for power producers in the face of rising demand for electricity. As a result, the government has now asked power generators to ensure that their upcoming projects use more imported coal. The problem with the equipment at existing plants is that they cannot use more than 15% imported fuel in their coal supply. It causes pollution and also corrosion of boilers. The Central Electricity Authority (CEA) has told central and private power utilities and equipment manufacturers to use boilers and auxiliaries that are designed for blending at least 30% or more imported coal.

BRIC nations submerged in inflation

The BRIC nations- Brazil, Russia, India and China- have witnessed the longest rally in their stock markets since 1997. Investors have amassed humungous wealth during this period. Now the question is- Will the party go on? Well, the party may go on. But, the music may wane a bit; the lights may go out at times; and the glasses may have more water than wine.

Getting back to economics, rising inflation is the biggest threat looming over the BRIC economies.

China and India have witnessed a significant rise in consumer prices led by rising food, fuel and commodity prices. In Brazil, inflation shot up at the fastest pace in the last one month than it had in two years. The story in Russia too is running on a similar plot.

The central banks of all these emerging economies have been breaking their heads in their vain attempt to rein over the inflationary monster. Since October 2010, China has already raised its interest rates four times. The Indian central bank RBI has hiked rates 8 times in the past 12 months. And there are strong reasons to believe that there will be a 9th hike next month. On similar lines, Brazil has hiked its interest rates five times. And Russia too followed the cue and increased rates in February 2011. And it seems as if the central banks have lost control over the inflationary monster.

How is all this going to take a toll on the economy of these nations? On the one hand, companies have already been bearing the brunt of rising input costs. On the other hand, high interest rates pose a threat to their investments and expansion plans. So while high input costs will curb profitability, high interest rates will put a brake on growth.

We are not spelling doom for the BRIC economies. In fact, these economies are going to be driving the global economy in the coming times. However, the concerns that we have pointed out pose short to medium term risk that investors should bear in mind.