CRR cut fails to enthuse markets
RoundUp

The week gone by was a favorable one for global markets. Barring Singapore (down by 0.5%), all the markets registered gains over the week with Hong Kong (up 2.6%) and China (up 2.5%) leading the pack of gainers. The gains were largely on account of a pickup in Chinese factory activity.

The US dollar witnessed 7 week high level ahead of US job data. The US markets (Dow Jones) gained 1.0% over the week, boosted by better than expected ADP private sector employment report and ISM manufacturing reading.

As compared to the global markets, the Indian stock markets performed relatively poor with just 0.7% gains. The lackluster performance was mainly due to stubborn stance adopted by Reserve Bank of India (RBI) to keep the rates unchanged. Though the cash reserve ratio (CRR) was reduced by 25 basis points repo rate was untouched. What further affected the sentiments was its forecast of still higher inflation and lower GDP growth.

The European stock markets also ended the week in green despite weak manufacturing data from Germany, France, Spain and Italy reflecting

Eurozone's troubles. Among the key European markets, Germany and France were up by 2.4% and 2.2% respectively.

Source: Yahoo Finance


Coming to the performance of sectoral indices, it was a mixed week with Consumer durables (up 5.1%) and auto sector (up 3.9%) leading the pack of gainers. However, FMCG (down 0.7%) and Capital goods (down 1.9%) sectors registered maximum losses during the week.

Source: BSE


Earnings season for quarter ended September 2012 continued this week with companies like Power Grid Corporation of India Ltd (PGCIL), Container Corporation of India Ltd (Concor) and Wipro declaring their results for the quarter ended September 30, 2012.

In the power sector, Power Grid Corporation of India Ltd (PGCIL) has announced its results for the second quarter of financial year 2013 (2QFY13). The company reported a 36.3% year on year (YoY) of revenue growth during the quarter. The growth in the topline was driven by 38% YoY increase in transmission income (95.9% of the company's total revenue). Operating profits during the quarter grew by 42.8% YoY as operating margins improved from 82.6% in 2QFY12 to 86.5% in 2QFY13. Other income declined by 19.2% YoY while depreciation charges increased by 38.3% YoY. The company reported a prior period income of Rs 140 m during the quarter. The net profits for the quarter grew by 58.9% YoY over the corresponding period of the previous financial year.

In the logistics space, state-run logistics firm Container Corporation of India Ltd (CCIL) has announced financial results for second quarter ended September 30, 2012. During the quarter, the company's standalone revenue grew by 6.1% on a year-on-year (YoY) basis. The operating profits for the quarter declined by 2% YoY mainly on account of higher rail freight expenses. As such, operating margins from 26.4% in 2QFY12 to 24.4% in 2QFY13.The net profit growth for the quarter came at 32.5% YoY. However, this was on account of a low base last year due to one-time tax adjustment in 2QFY12. Excluding this one-time item, the growth in the net profits came at 4.6% YoY during the quarter.

In software space, Wipro has announced its results for the quarter ended September 2012 recently. The gross revenues for the quarter grew by 1.5% on a quarter on quarter (QoQ) basis while profits increased by 1.9% QoQ. The IT Services business' revenues (78.7% of total revenue in rupee terms) grew by 10.3% QoQ during the quarter in Rupee terms. In US dollar terms, the segment's revenue was higher by 1.7%. At the operating level, profits were higher on the back of a 1.1% QoQ margins expansion (operating margins stood at 19.9% during the quarter). Wipro has announced the demerger of its non-IT businesses - which include the consumer care & lighting (incl. furniture business), infrastructure engineering (hydraulics & water business), and medical diagnostic product & services business - into a separate company to be named Wipro Enterprises Limited.

Movers and shakers during the week
Company25-Oct-122-Nov-12Change52-wk High/Low
Top gainers during the week (BSE-A Group)
Bajaj Auto Ltd1,765 1,899 7.6%1837/1410
Union Bank208 223 7.6%270/150
Wipro340 365 7.4%448/326
Maruti Suzuki1,367 1,467 7.3%1440/906
Rei Agro Ltd10 11 7.1%24/8
Top losers during the week (BSE-A Group)
CESC Ltd332 288 -13.3%340/186
Reliance Capital431 392 -9.1%471/226
Bharat Forge296 270 -8.9%336/231
Sterling Biotech6 5 -8.0%78/5
Indian Bank183 169 -7.9%265/152
Source: Equitymaster


Let us now discuss some more corporate developments during the week. Healthcare major Piramal Healthcare has tied up with Japanese firm Fujifilm Diosynth Biotechnologies for a contract manufacturing deal. The deal would be aimed at developing antibody drug conjugates (ADC) and is expected to cover over 150 bio-pharmaceuticals and more than 300 batches of ADC which would cover over 30 different new chemical entities. It must be noted that ADC is a field in bio-pharma that focuses on targeted therapy, specifically in the treatment of cancer. While in traditional chemotherapy even good cells get killed in the process, in targeted therapy, specific cancer-causing cells are targeted.

In another development, Gas Authority of India Ltd. (GAIL) is planning to buy a stake in Reliance Gas Transportation Infrastructure Ltd (RGTIL). RGTIL, originally a subsidiary of Reliance Industries, operates the East-West pipeline that expands from Andhra Pradesh to Gujarat. It is important to note here that Petroleum & Natural Gas Regulatory Board (PNGRB) had recently cancelled RGTIL's license to build and operate four other pipelines because of inordinate delays. As per GAIL's management, the company will take the decision only after proper due diligence. As per an industry official, GAIL wants a controlling stake in RGTIL which is not acceptable to current promoters. GAIL's management has not yet disclosed the details of negotiations with RGTIL.

Coming back to economic news, the Finance Minister Mr. P Chidambaram disclosed the five year fiscal road map today. The plan for fiscal consolidation aims to promote investments and growth and to keep inflation under control. Moreover it is expected to check the potential rating downgrade for the economy. As per the plan, the government will work towards limiting fiscal deficit to 5.3% of GDP in FY13 (higher than the budgeted deficit of 5.1% of GDP) and will further trim it down to 3% by FY17. It may be noted that the Vijay Kelkar Committee had warned about fiscal deficit shooting up to 6.1% in FY13 in the absence of reform initiatives. As part of the roadmap, the government aims to raise Rs 300 bn from disinvestment and Rs 400 bn from sale of telecom spectrum.

In the coming week, US presidential elections and US job report will be the key events to impact the global markets. Back home, the corporate earnings announcement will continue to drive the Indian stock markets.

Markets up 0.7% for the week
Closing

The closing hours saw the Indian equity market indices come off a bit from their day's highs but still close the day firmly in the positive. Thus, while BSE-Sensex edged higher by around 194 points, gains on the NSE-Nifty came in at around 53 points (up 1%). BSE Mid Cap and BSE Small Cap indices also participated in the rally, gaining around 0.4% each respectively. From the Sensex, only around 4 stocks closed the day in the red, with the rest closing higher.

The rupee was trading at Rs 53.8 to the dollar at the time of writing. Amongst other indices, while Asian ones closed in the red, Europe too was trading mostly in the green.

The gains today singlehandedly took the markets to a positive ending for the week. In fact, had it not been for today's rise, indices would have closed slightly in the red. The auto sector has been in sublime form all of this week and today was no exception. Strong auto numbers despite the overall tepid environment is triggering interest in the sector counters we believe. Capital goods and bank stocks also gave good company to the auto space.

Steel Authority of India (SAIL), India's largest PSU steel maker edged higher by around 2% today. The company, as per reports, is looking to expand its production capacity to 18 m tonnes from existing 14 m tonnes by the end of the current financial year. It should be noted that the firm is in the midst of a massive expansion programme, involving an outlay of close to Rs 720 bn. It is believed to have already spent Rs 390 bn towards the same. The company has set itself a long term target of achieving a capacity of 45 m tonnes by 2020 and in the process, accounting for 30% of the market share of Indian steel industry. SAIL's follow on public issue is going through rough weather currently with valuations being the bone of contention.

Marico announced its September 2012 quarter results today. The company recorded 19% growth in revenues driven by 14% rise in volumes. All the three business units registered healthy growth in turnover for the quarter. The domestic consumer business grew by 19% whereas the International business posted growth of 16%. The Kaya business segment grew by 38% led by same store growth of 10% in India and Middle East.

The company has been able to expand operating margin by 70 basis points to 13% during the quarter on the back of a 6.8% reduction in the cost of goods sold to sales ratio. Brand investments continued to remain high as reflected in the 4.5% jump in the ad-spend to sales ratio. Only the domestic consumer business saw a 50 basis points improvement in its EBIT margin. The skin care business turned in the black clocking EBIT of Rs 57 m. Earnings grew by a relatively subdued 10% due to over 40% escalation in each of the interest charges and tax outgo. The other income earned slumped by 59% during the quarter. The stock took a loss of nearly 5% on the bourses today.

Indian share markets soar higher
01:30 pm

Backed by strong buying in index heavyweights, Indian share markets continued to rally in the post noon trading session. Barring oil and gas, all the sectoral indices are trading positive with capital goods, auto and IT stocks leading the pack of gainers.

BSE-Sensex is up 211 points and NSE-Nifty is trading up 60 points. BSE Mid Cap and BSE Small Cap indices are trading up by 0.7% and 0.8%, respectively. The rupee is trading at 53.6 to the US dollar.

Most of food stocks are trading in positive led by GlaxoSmithkline Consumer Healthcare (GSKCH) and ITC. GSKCH announced its September 2012 quarter results. The company registered a 15% rise in topline on a 13% increase in sales. The company continued to post incremental margins backed by rationalisation in the cost of goods sold and other expenditure. As a proportion of sales, the cost of goods sold and other expenses fell by 46 basis points and 53 basis points, respectively during the quarter. This cost saving was able to offset the rise in staff costs and advertisement expenses. GSKCH's operating margin improved by 80 basis points during the quarter. Aided by a 34% reduction in depreciation outgo and lower interest charges coupled with 20% higher operating profits, GSKCH clocked a robust 25% rise in earnings for the quarter.

Majority of the large IT stocks are trading strong with Tech Mahindra and Mahindra Satyam being the biggest gainers. Wipro declared its results for the quarter ended September 2012 recently. The company reported a 1.5% QoQ increase in gross revenues, while profits increased by 1.9% QoQ. The IT Services business' revenues (78.7% of total revenue in rupee terms) grew by 10.3% QoQ during the quarter in Rupee terms. In US dollar terms, the segment's revenue were higher by 1.7%. At the operating level, profits were higher on the back of a 1.1% QoQ margins expansion (operating margins stood at 19.9% during the quarter). At the end of the quarter, the company's employee strength (IT services business) stood at 140,569, which is higher by 2,017 (on net basis) during 2QFY13. Wipro's attrition declined to 14.6% as compared to 15.6% for the previous quarter (1QFY13). It may be noted that Wipro announced the demerger of its non-IT businesses - which include the consumer care & lighting (incl. furniture business), infrastructure engineering (hydraulics & water business), and medical diagnostic product & services business - into a separate company to be named Wipro Enterprises Limited. Wipro stock is up 1.8%.

IT stocks lead the rally
11:30 am

Indian equity markets continued to trade strong over the last two hours of trade on the back of heavy buying activity witnessed across industry heavyweights. Capital goods and IT stocks witnessed maximum buying interest.

The Sensex today is up by 151 points, while the NSE-Nifty today is up by 44 points. BSE Mid Cap index and the BSE Small Cap index are up by 0.73% and 0.90% respectively. The rupee is trading at 53.70 to the US dollar.

Energy stocks are trading in the green led by Essar Oil and Hindustan Petroleum Corporation Ltd (HPCL). According to a leading financial daily, Reliance Industries has cut its estimate of gas reserves in the D6 block by about two-thirds to 3.4 trillion cubic feet (tcf). The D6 block in Krishna Godavari (KG) basin, jointly operated by Reliance and BP Plc, was expected to contribute up to a quarter of the gas supply for India. But output from KG fields has declined, leaving India more dependent on expensive liquefied natural gas (LNG) imports. Reliance's latest revision compares with its December 2006 estimate of 10.3 tcf of reserves and brings the figure back closer to the November 2004 estimate of 3.81 tcf. The company also has revised its capital spending plan from US$ 8.8 bn in 2006 and US$ 2.4 bn in 2004. Reliance has seen its growth outlook marred by falling output from the KG gas fields, and the company has been under pressure from the government and regulators to increase production.

Banking stocks are trading strong led by ICICI Bank and HDFC Bank. According to a leading financial daily, Yes Bank is planning to sell about 500 kilogram of gold products in 2012-13 fiscal. The bank has over 175 branches for bullion business. The private sector bank has introduced combi-bar of 50 gram gold which can be broken into one-one gram unit and can be used for gifting. Yes Bank had launched the bullion business in April, 2012. Its gold products are available in 5, 10, 20 and 50 gram denominations. The bank in association with EZspend Prepaid Payment Solutions has launched a multi-purpose prepaid card to cater to the needs of unbanked/underbanked customers as well as to enhance cashless payment mechanism in the country.

Indian share markets open firm
09:30 am

Asian stock markets have opened the day on a mixed note with stock markets in Malaysia (down 0.5%) and China (down 0.3%) leading the losses in the region. However, markets in Hong Kong (up 1.3%), Japan (up 1.1%) and South Korea (up 1%) and are trading firm. The Indian share market indices have opened the day with on a firm note. Stocks in the realty, capital goods and power space are leading the gains.

The Sensex today is up by around 131 points (0.7%), while the NSE-Nifty is up by around 39 points (0.7%). Mid and small cap stocks are also trading in the green with the BSE Mid Cap and BSE Small Cap indices up by around 0.6% and 0.8% respectively. The rupee is trading at Rs 53.69 to the US dollar.

Power stocks have opened the day on a firm note with Reliance Power, Reliance Infrastructure and National Thermal Power Corporation (NTPC) leading the gains. Public sector electric utility firm Power Grid Corporation of India Ltd (PGCIL) has announced financial results for second quarter ended September 30, 2012. During the quarter, the company's total income from operations stood at Rs 30,857.7 m, higher by 36.3% on a year-on-year (YoY) basis. The growth in the topline was driven by 38% YoY increase in transmission income which accounts for 95.9% of the company's total revenue. Operating profits rose by 42.8% YoY to Rs 26,692.6 m as operating margins improved from 82.6% in 2QFY12 to 86.5% in 2QFY13. Other income declined by 19.2% YoY while depreciation charges increased by 38.3% YoY. There was a prior period income of Rs 140 m that was reported during the quarter. At the bottomline level, the company reported net profits of Rs 11,258.9 m, higher by 58.9% YoY over the corresponding period of the previous financial year. It must be noted that PGCIL is India's prime electric power transmission company.

State-run logistics firm Container Corporation of India Ltd (CCIL) has announced financial results for second quarter ended September 30, 2012. During the quarter, the company's standalone revenue stood at Rs 10,548.6 m, higher by 6.1% on a year-on-year (YoY) basis. Operating profits declined by 2% YoY to Rs 2,575.6 m on account of higher rail freight expenses. As such, operating margins declined by 200 basis points (2%) from 26.4% in 2QFY12 to 24.4% in 2QFY13. Tax expenses were lower by 18.9% YoY as the effective tax rate declined by 460 basis points (4.6%) YoY. The net profit growth for the quarter came at 32.5% YoY. However, this was on account of a low base last year due to one-time tax adjustment in 2QFY12. Excluding this one-time item, the growth in the net profits stood at 4.6% YoY. The stock of CCIL has opened in the green.

India's rising Debt to GDP ratio
Pre-Open

The government debt burden has been a challenge that has ravaged both developed and developing economies. The major cause of this problem has been the efforts by respective governments to bridge the fiscal budget deficit experienced by many economies.

The Indian government has perceived the global debt crisis in a light hand, saying that India is strong enough and they are prepared to face any kind of situation that will arrive in global scenario. However the response misses the fact. The fact is that Indian currency and its inflation remained the worst performers among the Asian peers during 2011 and the first half of 2012. Also, unlike China, India doesn't own enough reserves that can be used to ensure growth during the time of crisis.

Indian economy which is already under pressure of weak GDP, poor IIP and elevated inflation rate, is also weighed down by its increasing government debt. The debt to GDP ratio is a key indicator of the fiscal health of the government. India's fiscal capacities have been shrinking since 2008, along with other Asian emerging markets. This is more of a threat, as India's gross public debt to GDP ratio is still among the highest in the region as it increased from 66.2% to 70% between 2007 and first half of 2012. The average government debt levels of the top 10 emerging market economies, including China, Russia and Indonesia, has halved to 25%, from 50% of GDP since 2000. Brazil and India are the two countries with the highest government debt ratios at almost 70% of GDP, which is however, still lower than the developed countries' average.

High debt to GDP ratio tends to dampen the credit worthiness of the Indian economy. Viewing its increasing debt, Fitch and S&P (Standard and Poor) have cut India's outlook to negative from stable. The government has laid out a five-year roadmap to reduce the fiscal deficit. But doubts remain about the credibility of the plan and whether the government will be able to stick to it.