A lackluster week for global markets
RoundUp

It was a lackluster week for the global stock markets as economic growth concerns weighed heavy on investor sentiments. Although major Asian stock markets did not fare much better, the losses were relatively lower than that in the US and European markets. China led the losers in Asia with 2.9% fall over the week. The sustained Eurozone debt fears and disappointing earnings reports worried investors. As for the US, the markets were down by 1.8%, largely due to concerns regarding corporate earnings

In the European markets, Germany (down 2.9%) and France (down 3.2%) led the pack of losers.

Source: Yahoo Finance
Note: Prices as on 25 Oct/26 Oct, 2012


Coming to the performance of sectoral indices, barring capital goods (up 1.4%) and banking (up 1.0%) sectors, all other sectors witnessed losses over the week, with realty (down 3.7%) and metal (down 3.9%) leading the pack of losers.

Source: BSE

Earnings season for quarter ended September 2012 continued this week with companies like Gas Authority of India Ltd (GAIL), National Aluminium Company (Nalco) and Mahindra & Mahindra Ltd (M&M) declaring their results for the quarter ended September 30, 2012.

In the energy sector, Gas Authority of India Ltd (GAIL) has announced its results for the second quarter of financial year 2013 (2QFY13). The net sales during the quarter were up by 17% on a year on year (YoY) basis. During the quarter, Petroleum and Natural Gas Regulatory Board (PNGRB) has derecognized revenue worth Rs 1.2 bn. The operating profits for the quarter declined by 15.7% YoY. The subsidy payout in the quarter stood at Rs 7.8 bn, up 39% YoY. The net profits of the company witnessed a decline of 10% YoY. The other income for the quarter grew over 100% YoY .As per the management, the company is likely to commission Dabhol LNG terminal by January 2013. It is still evaluating a share purchase in Reliance Gas Transportation.

In the mining sector, National Aluminium Company (Nalco) has announced its results for the quarter ended September 2012. The net sales and the bottomline of the company have declined by 0.3% YoY and 96.6% YoY respectively during the quarter. Topline of the company remained flat due to lower aluminium London Metal exchange (LME) prices. The company has incurred a loss at the operating level during the quarter owing to higher expenditure. EBITDA margins declined by 9.6% YoY. Net profit margins declined by 8.3% YoY. For the half year ended September 2012, the company has reported a decline of 0.6% YoY in net sales and 55.9% YoY in net profits respectively.

In the auto space, Mahindra &Mahindra Ltd (M&M) Ltd has announced its results for the second quarter of financial year 2013 (2QFY13). The net sales for the quarter have witnessed a growth of 33% on a year on year basis (YoY). The revenue from the automotive sales jumped 58 % in the quarter. The domestic tractor sales were down by 13.8% YoY due to slowdown in the economic growth and poor monsoons. However, this was offset by an increase in the car sales. The operating margin for the quarter stood at 11.4%, down from 12% in 2QFY12. M&M's margins were hit during the quarter due to decline in the tractor sales. The company reported a 22% year on year growth in the net profits .The growth in net profits was boosted by an increase in other income and higher dividends from subsidiary companies like Mahindra Finance and Mahindra Holding.

Movers and shakers during the week
Company18-Oct-1226-Oct-12Change52-wk High/Low
Top gainers during the week (BSE-A Group)
Indiabulls Financial Services22825712.9%251/117
Yes Bank3894136.2%405/231
Oriental Bank2933095.5%316/190
Mahindra & Mahindra8378815.3%872/622
Piramal Enterprises4704955.2%539/340
Top losers during the week (BSE-A Group)
IRB infrastructure149120-19.5%210/100
Lanco Infratech1412-16.6%25/9
CESC Ltd331281-15.0%340/186
Exide Industries163139-14.8%164/99
GMR Infra2320-13.3%34/18
Source: Equitymaster

Let us now discuss some more corporate developments. Oil and Natural Gas Corporation Ltd (ONGC) is planning to hire Reliance Industries' (RIL's) unutilized production facilities on the east to bring to production its gas discoveries in Krishna Godavari (KG) basin. ONGC already has made nine discoveries in its KG block KG-DWN-98/2, next to RIL's KG D6 block. It now intends to combine its discoveries with those in the neighboring block to begin gas production from 2016-17. As per the management, ONGC is in discussions with RIL regarding sharing of RIL's infrastructure such as underutilized gas processing and transportation facilities. As per ONGC's management, RIL management is open to such proposal. The latter has indicated that KG-D6 production is unlikely to touch 80 million standard cubic metres per day (mmsmcd) due to unexpected geological complexities. ONGC will firm up its plans once it has a clear indication of what capacities RIL can offer. It will come up with a formal field development plan (FDP) once it gets an approval from the government regarding the commercial viability of the discoveries.

Pharma major Dr Reddy's Laboratories Limited (DRL) is set to buy OctoPlus NV, for an offer price of Rs 1.9 bn in cash. OctoPlus is a service based specialty pharmaceutical company. DRL currently holds an irrevocable commitment from shareholders representing over 50% of OctoPlus' issued and outstanding shares. Further, the Executive Board and the Supervisory Board of OctoPlus have unanimously recommended the offer to the remaining shareholders. This deal will help to expand DRL's the expertise and scientific capabilities .DRL will provide OctoPlus with fee for service and milestone payments as consideration for services it will render for a maximum of £ 2 m over the next six months.

Coming to economic news, Planning Commission member Mr. Abhijit Sen has estimated a farm output growth of 0.5% to 1% this year. This is despite the fall in kharif output. The farm output has been affected due to sharp decline in yield of coarse cereals and pulses apart from a general slump in other crop groups As per Mr. Sen, the decline in kharif output for the year could be to the extent of 2% to 3%. However, he expects these losses to be offset in the rabi season. Mr. Sen mentioned that inflation is likely to remain high over the next 2 months due to increase in fuel prices.

The month of November will be crucial in light of upcoming US elections and its implications for the fiscal cliff. Back home, all eyes are set on corporate results and the Reserve Bank of India (RBI) upcoming monetary policy meet on October 30.

Sensex ends flat for the week
Closing

Selling pressure in FMCG, pharma and banking heavyweights led the benchmark indices in Indian stock markets to feature amongst the top losers in Asia today. The Sensex ended flat week on week. Sectoral indices across the board, except auto, closed lower today. While the BSE-Sensex closed lower by around 133 points, losses on the NSE-Nifty came in at around 41 points. The BSE Mid Cap and BSE Small Cap indices ended lower by around 1% each.

Asian indices closed a mixed bag today with Europe too trading in the negative currently. The rupee was placed at Rs 53.66 to the dollar at the time of writing.

ICICI Bank declared the results for the second quarter and first half of financial year 2012-2013 (1HFY13). The bank has reported 32% YoY growth in net interest income and 36% YoY growth in net profits for the first quarter. The bank's net interest income grows by 33% in 1HFY13 on the back of 18% YoY in advances while net interest margin (NIM) improved to 3.0% from 2.6% in 1HFY12. The cost to income ratio reduced to 41% from 45% in 1HFY12. Also the capital adequacy ratio was healthy at 18.3% at the end of September 2012. ICICI's net NPAs moved up marginally from 0.7% of advances in 1QFY13 to 0.8% in 2QFY13 (0.9% in 1HFY12). The bank's bottomline grew by 33% YoY in 1HFY13 largely due to higher interest margins and cost efficiency. This is despite increase in provisioning which enhanced coverage ratio to 79% in September 2012. Restructured assets were 1.5% of loan book in 1HFY12.

Meanwhile, power major National Thermal Power Corporation (NTPC) also declared the results for the second quarter and first half of financial year 2012-2013 (1HFY13). The company reported 30% YoY growth in profits for 2QFY13. For 1HFY13, NTPC group has comissioned 2,820 MW on commercial operations, which is the highest-ever by NTPC in a period of six months. Projects with capacity of 16,638 MW are under various stages of construction. NTPC's coal imports had risen 13% to 12 million tonnes in FY12. But the sharp rise in global coal prices and rupee depreciation led to escalation in costs. During the current fiscal, the company plans to import 16 million tonnes. With coal prices cooling off and rupee appreciating, the costs benefit has aided the company's profits. By 2017, NTPC plans to bring down import dependence to 13 million tonnes. It plans to raise productivity in captive mines to 37 million tonnes per annum by 2017.

Auto stocks buck the trend
01:30 pm

The Indian equity markets continued to trade in the red during the post noon trading session. Barring stocks from the auto space, selling activity is being witnessed across the board with stocks from the consumer durables, healthcare and oil and gas spaces leading the pack of underperformers.

The Sensex today is down by about 120 points, while the NSE-Nifty today is down by 35 points. BSE Mid Cap index and the BSE Small Cap index are down by about 0.6% each. The rupee is trading at 53.76 to the US dollar.

Stocks of FMCG companies are trading weak with United Spirits, ITC and REI Agro leading the pack of underperformers. As per a leading financial daily, Godrej Consumer Products(GCPL) has commenced the third and final phase of expansion in Africa. According to the company, it is growing in excess of 25-30% in Africa and the completion of the third phase in a year is expected to contribute additional revenues of Rs 3.8 bn to group turnover. GCPL has acquired companies in Asia, Africa, South America and Europe to expand presence in the overseas market. The company currently derives around 40% of its revenues from outside India. In Africa, the company has acquired the pan African hair care business of the Darling group and Tura in Nigeria. Through the Darling group, the company has operations in six countries in Africa namely South Africa, Mozambique, Nigeria, Uganda, Kenya and Tanzania. In FY12, Africa contributed 23% to GCPL's international business revenues.

Bajaj Electricals announced its results for the quarter ended September 2012 recently. The company reported a revenue growth of 5% YoY during the quarter. Growth was led by the company's consumer durables and lighting businesses which grew by 23% YoY and 12% YoY respectively. The company's engineering and products (E&P) business witnessed a revenues decline of about 11% YoY during 2QFY13. Further, the company's operating profits declined by 55% YoY as operating margins declined to 3.3% from 7.7% earlier. The performance of the E&P division seems to have been the main culprit for the decline in margins as the segment suffered losses at the earnings before interest and tax (EBIT) level. As for the profits, the same grew by 8% YoY on the back of an extraordinary income. On excluding the same, profits are lower by 80% YoY. As for the 1HFY13 performance, Bajaj Electricals' profits grew by 8% YoY while revenues were higher by 12% YoY.

Oil and Gas stocks drag markets lower
11:30 am

Indian equity markets continues to trade weak over the last two hours of trade on back of heavy selling pressure witnessed across industry heavyweights. Auto and realty stocks witnessed maximum buying interest while oil and gas and consumer durable stocks witnessed maximum selling pressure.

The Sensex today is down by 120 points, while the NSE-Nifty today is down by 35 points. BSE Mid Cap index and the BSE Small Cap index are down by 0.15% and 0.29%. The rupee is trading at 53.55 to the US dollar.

Aluminium stocks are trading in the red led by Nalco and Hindalco. Nalco has announced its results for the quarter ended September 2012. The company has reported a decline of 0.3% YoY in net sales and 96.6% YoY in net profits respectively during the quarter. Topline of the company remained flat due to lower aluminium LME prices. The company has incurred a loss at the operating level during the quarter owing to higher expenditure. EBITDA margins declined by 9.6% YoY. Net profit margins declined by 8.3% YoY. For the half year ended September 2012, the company has reported a decline of 0.6% YoY in net sales and 55.9% YoY in net profits respectively.

Auto stocks are trading in the green led by Mahindra and Mahindra and Tube Investments. According to a leading financial daily, Bajaj Auto has increased its market share from 25% to 27% during the first six months of the current financial year. This is despite the fact that the motorcycle market has dipped by 1% during the same period. In the first eight days of Dussera festival, Bajaj Auto's retail sales had witnessed a 6% growth compared to the last season's sales. This was due to the slew of new launches such as Discover 4G, Pulsar 200 and Discover 125 ST. Over the past decade, there has been a major shift in customer preference in the three bike segments - 100 cc, 125 cc and sports bikes of 150 cc +. From accounting for 4% of the entire market eight years ago, the sports bikes' market share has gone up to 17% aided by the launch of Bajaj's Pulsar brand.

Indian share markets open weak
09:30 am

The major Asian stock markets have opened the day on a weak note with stock markets in China (down 1.7%) , Japan (down 1.0%) and South Korea (down 1.5%) leading the losses in the region. However, markets in Indonesia (up 0.1%) and Singapore (up 0.4%) are trading firm. The Indian share market indices have opened the day in the red. Barring auto and consumer durables, all sectoral indices have opened in the negative led by stocks in the pharma and energy sector.

The Sensex today is down by around 75 points (0.4%), while the NSE-Nifty is down by around 23 points (0.4%). Mid cap stocks have opened on a flat note while small cap stocks have opened in the green with BSE Small Cap index up by around 0.1%. The rupee is trading at Rs 53.56 to the US dollar.

Auto stocks have opened the day on a mixed note with Maharashtra Scooters Ltd and Mahindra & Mahindra (M&M) Ltd leading the gains. However, Hero Motocorp Ltd and Bajaj Auto Ltd witnessed selling pressure.

M&M Ltd has announced its results for the second quarter of financial year 2013 (2QFY13). The revenue growth for the quarter came at 33% on a year on year basis (YoY). The revenue from the automotive sales jumped 58 % in the quarter mainly due to surge in demand for SUVs that helped the company defy the slowdown in India's car market. The operating margin for the quarter stood at 11.4%, down from 12% in 2QFY12.M&M's margins were hit during the quarter due to decline in the tractor sales. However, this was offset by an increase in the car sales. The domestic tractor sales were down by 13.8% YoY due to slowdown in the economic growth and poor monsoons. The company reported a 22% year on year growth in the net profits .The growth in net profits was boosted by an increase in other income and higher dividends from subsidiary companies like Mahindra Finance and Mahindra Holding.

The stocks in the paint sector have opened the day on a mixed note with Akzo Nobel Ltd and Jenson & Nicholson Ltd leading the gains. However, Berger Paints and Asahi Songwon Colors witnessed selling pressure. Asian Paints Ltd has reported results for the second quarter of financial year 2013 (2QFY13). The company's income from operations for the quarter witnessed a growth of 16.8% YoY. It has taken a hit in the volume growth and the revenue growth was mainly on account of price increases carried out in the earlier quarters. The operating margins for the quarter stood at 14.5% versus 17.5% in the previous quarter (1QFY13). While raw material costs for the company increased in line with sales, the growth in staff and other expenses was higher than the sales growth putting margins under pressure. The company has reported a 14.6% year on year growth in the consolidated net profit. Its international business (18% of its consolidated revenues) helped to boost profitability. Historically, the September quarter is a weak quarter for the company due to monsoons. The current quarter is expected to be better as a pickup in demand is likely due to festive season. The company's Board of Directors of has recommended an interim dividend of Rs 9.5 per share for the first six months of FY13.

Will this lead to higher valuations for PSUs?
Pre-Open

It was not too long ago when information technology major Infosys was being hounded and criticized by many on its unutilized cash reserves. While the company continued to expand its war chest, the general concern within the investing community was that of the cash earning lower returns than that of the company's core business, thereby lowering the overall return ratios of the company.

On such situations, investor concerns also include misuse of the cash by the company management. Attempts at diversification or expensive buyouts have often earned minority investors a raw deal. Hence the willingness to rather pocket the cash instead of allowing company management to have it at their disposal.

For a while now, the government has been trying to stoke the growth levels in India. This would be benefiting the government by bringing in higher revenues in the form of taxes. However, with PSUs themselves unwilling to spend excess cash towards projects have dislodged the government's original plans. And the reasons for the PSU chiefs not taking the necessary actions seem to be associated with concerns relating policy inactions, lack of resources, amongst others, leading them to wait before committing funds to project that could have an uncertain future.

Government warnings continue... this time in person

The central government had been warning the PSUs against keeping heavy cash idle on their books for too long. On Tuesday, in its first meeting ever, Prime Minister Manmohan Singh met with the heads of India's 25 cash rich PSUs - asking them to invest or pay out the surplus, which is believed to be amounting to a sum of Rs 2.5 trillion. These companies included industry heavyweights such as Oil and Natural Gas Corporation Ltd. (ONGC), Coal India, Bharat Heavy Electricals (BHEL), National Thermal Power Corporation (NTPC), Steel Authority of India (SAIL) and National Mineral Development Corporation (NMDC).

The government's argument seems simple - either help towards reigniting the economic growth and help in changing the investing sentiments in the country or pay the money to the exchequer in the form of dividends. As per the PM, the country should continue to aim for a growth levels in excess of 8% regardless of what is going on around the world.

Addressing the concerns of the PSUs, Heavy industry minister Praful Patel said that a committee would be formed to look into the concerns of PSUs such as autonomy and regulatory clearances, in addition to the investment of surplus funds. Further, the heads of the PSUs also asked for decisions on foreign acquisitions and takeovers being left entirely to the company's board.

How would investors look at this development?

Given the past experience and how regulations have impacted PSU companies, majority of investors would prefer the option of companies paying out the money in the form of dividends. Having said that, how the scenario would change once (and when) the reforms come into place is any one's guess. While the Congress-led ruling coalition has been on a reform overdrive in recent times, it all boils down to execution of the same.