Market Outlook
And View on Crompton Greaves
There are a couple of announcements that may augur for the markets next week. The Government (cabinet committee on economic affairs) has decided to clear the $ 7.2 billion-deal between Reliance Industries (RIL) and BP. Under this deal, Reliance Industries has agreed to sell 30 per cent participating interest in 21 oil and gas blocks to BP. Another announcement relates to allowing foreign direct investment (FDI) in multi-brand retail. A government committee has given its consent; however, it is yet to be cleared by the union cabinet. It is quiet likely that markets will read these measures as a policy reform.
First Quarter results
Private sector banks have been recording good quarterly results. HDFC Bank, Axis Bank, ING Vysya Bank, Kotak Mahindra Bank and Yest Bank have posted good bottom line growth in a range of 25 to 35 per cent. HDFC Bank has maintained its net interest margin, while Axis Bank’s net interest margin has been declining for the third quarter in a row. Allahabad Bank posted good results while Union Bank’s net profit is down 23 per cent due to rise in loan provisions.
Among IT companies, TCS and MindTree have posted good results, while Wipro is lagging behind. It is clear from the results that TCS has stolen a march over Infosys and Wipro in recent quarters. Exide Industries net profit was down one per cent due to weak auto sales. DRL has reported a 25 per cent rise in net profit for first quarter. For DRL, the US market saved the day despite setbacks in Europe and domestic market. Biocon’s net profit was down about 10 per cent to Rs 70 crore. Hero Honda and Bajaj Auto have posted good results.
Crompton Greaves-all good things come to an end
Crompton Greaves (CG) has shocked the markets with a disappointing performance. On a consolidated basis, the company reported a drop of 59 per cent in net profit due to higher raw material costs, depreciation and wage cost. The stock was down 14 per cent the day the results were announced and it lost another 15 per cent the next day. For the week, the stock lost about 25 per cent. The market is nervous about the fact that the company bought an aircraft in 2010-11 for Rs 270 crore and its ex-CEO S.M.Trehan sold his entire stake of about 1.8 lakh shares in the company at the end of June 2011.
A look at CG’s annual report for 2010-11 indicates that the addition to fixed assets under the sub-head ‘aircrafts’ was Rs 272.55 crore. Surprisingly, the company did not mention about this purchase anywhere else in the 180-page report. The company could have been more transparent on this issue. Till the quarterly results, the company was considered as a good bet on transparency. The expectation about the company was very high. High expectations lead to bigger disappointments. No wonder the stock lost 25 per cent in just two days and closed the week at Rs 182 per share.
See the roller coaster ride of CG’s market cap in the last four years. In November 2007, its m-cap reached the then peak of Rs 15,500 crore. It fell to Rs 4,200 crore in November 2008 and later it reached its lifetime high of Rs 21,500 crore in November 2010. Due to weakness in capital goods stocks, the stock’s m-cap fell by 30 per cent in the last eight months before the June 2011 quarter results. On the morning of 19 July 2011, before results announcement, CG’s m-cap was Rs 15,400 crore; but in just two trading sessions it fell to a low of Rs 11,200 crore before closing at Rs 11,700 crore on 22 July 2011. In the last eight months, the stock lost 50% of its value. Oh, what a ride!
The company boasts of seven independent directors in the 10-member board. The independent directors are industry veterans and they include:
Meher Pudumjee - Chairperson, Thermax (a company known for good
corporate governance)
Omkar Goswami - Economist and columnist of good repute
Scott Bayman - Formerly with GE
SP Talwar - Highly reputed banker and independent director
Despite such luminaries on the board, the company has lost, without doubt, some of its sheen from the corporate governance angle. Interestingly, HDFC mutual fund has lapped up 65 lakh shares of the company during the mayhem. It may be noted that HDFC mutual fund has been holding CG shares for more than four years in a number of its schemes, though the number of shares fluctuates from time to time. The stock performance of CG last week is a very big lesson for investors. In life, all good things come to end. Recently, we have seen the US disbanding its ‘space shuttle’ programme. Likewise, investors’ romance with CG appears to have come to an end.
Data corruption
Nobody would disagree with the view that corruption has spread to every nook and corner of Indian society. But, data corruption is a new phenomenon for India. Reserve Bank of India complains about lack of quality data while making policy decisions. It is particularly uncomfortable with index of industrial production (IIP) date given out by government agencies. Now, rating agency CRISIL says the GDP from the Central Statistical Organisation (CSO) is questionable. CRISIL indicates that India’s GDP for 2010-11 may be revised to 8.9 per cent from the earlier estimate of 8.5 per cent. A few years ago back, KV Kamath said that official estimates of national income did not really capture the economic activity to fuller extent. Even Prime Minister Manmohan Singh is famous for telling that “India’s data are unreliable.” Who will save India’s data?
China is more worried than the US
Germany and France have moved closer to solving the Greece’s debt problem. This has given a boost to equities around the world. The US is still struggling to find a way out of the self-created mess. The top priority for present Obama is increasing the debt level of $14.3 trillion and avoiding a debt default. If the US defaults, its AAA rating will come down and it will create a havoc across the financial world. Everyone is hoping a solution will be found.
China is feeling the heat resulting from US problems because it (China) has invested $1.2 trillion of its foreign exchange reserves in the US Treasurys. If any drastic fall happens to the US dollar following the US debt problems, China will be the biggest loser as it has invested its export surpluses in the US government debt. The fortunes of the US and China are interlinked like the Siamese twins.
The outlook
As mentioned at the outset, stock market will react positively to the news of the clearance of RIL-BP deal and the decision on FDI retail. More quarterly results from frontline companies will be announced next week. While the quarterly results so far are a mix of positive and negative surprises, Reserve Bank of India’s interest rate decision on July 26th will be watched carefully. Reliance Industries will announce its first quarter results on July 25th after market hours. On the global front, the US decision on raising the $ 14.3 trillion debt level will set the tone for markets.
Snippets
Bharti Airtel has decided to increase its pre-paid rates by 20 per cent.
L&T Finance Holdings, an arm of L&T, is coming out with an IPO which will open on July 27th. The pricing of the issue seems to be attractive.
Gold prices touched a high of $1,611 an ounce during the week.
India’s finance minister thunders that the government would meet the disinvestment target of Rs 40,000 crore for 2011-12.
The United Nations has declared famine in some parts of Somalia.
Sushil Kumar Modi, deputy chief minister and finance minister, Bihar, has been appointed as head of the Empowered Committee of Finance Minister on Goods and Services Tax (GST).
Senior Supreme Court Lawyer Rohinton F Nariman is appointed as new Solicitor General of India following the resignation of Gopal Subramanium.
Quote of the week
“The oft quoted joke is that thank god, the government was sleeping when we were building the IT Industry!” laughs Rajendra Pawar, co-founder of NIIT. But he does not agree with this view and gives lot of credit to N Vittal, then secretary in the Department of Electronics. India continues to have such wise people in government who have been helping in building a strong nation. (Source: BL)
Disclaimer: The author’s views are personal. The author has a vested interest in the stock markets. Before taking investment/trading decisions, consult your personal certified financial planner/adviser.
