The US Debt Downgrade and Its Impact
Rama Krishna Vadlamudi, Hyderabad August 15, 2011
Since the beginning of August 2011, financial markets around the world have been very volatile due to surfeit of fears and uncertainties. The biggest event that has impacted the markets is the Standard & Poor’s downgrade of the United States’ Government debt from AAA to AA+ on August 5th. However, the other two rating agencies, Fitch and Moody’s have retained the AAA rating for the US on August 2nd. In reaction to the S&P’s downgrade, equity markets and commodity markets have fallen heavily with increased volatility. However, gold price has surged by around five per cent as it is considered as a safe haven asset amidst debasement of paper currencies by several countries.
After the demise of the Soviet Union in 1991, the US had become the most powerful nation in the world. It has lost the superpower status politically after some serious blunders in Iran, Iraq, the Middle East and Afghanistan. Now, with mounting debt problems and credit rating downgrade, the US has been losing its predominance in the world economy also. One thing is sure: the US economy is on a decline and the repercussions will be felt across the world.
Here is an analysis of the issues behind the downgrade and its impact on markets:
Why has S&P downgraded the US credit rating?
After closing of market hours on 5 August 2011, S&P had downgraded the US long term sovereign rating from AAA to AA+. The reason cited by the credit rating agency for the downgrade is that the debt deal brokered by US lawmakers is not sufficient and expressed its doubts about the ability of US lawmakers to bring down the US debt level. S&P is concerned that US political parties are not working in tandem when it comes to fixing the US economy and bringing about fiscal consolidation. It’s first time in 70 years that any rating agency has downgraded US’ AAA-rating. The downgrade has not come as a total surprise. In April this year, Standard & Poor’s had first cautioned that there was a possibility of US downgrade if the US lawmakers did not agree for a deal over raising the statutory US debt level and bringing down the debt over long term.
What is the difference between AAA and AA+ rating?
According to the standard definition of S&P:
AAA : Extremely strong capacity to meet financial commitments. (Highest Rating)
AA+ : Very strong capacity to meet financial commitments (just below AAA)
As can be seen from above, AAA is the highest rating and AA+ is just below AAA. And still AA+ rating is considered as one of the best credit ratings in the financial world. Other countries that are having AA+ rating are Belgium and New Zealand, as per S&P.
What is the US debt deal?
The US Congress had on August 2nd approved a plan to raise the US debt level from the current USD 14.3 trillion in the short turn while bringing down the overall deficit by USD 2.4 trillion over the next 10 years. S&P is of the opinion that this USD 2.4-trillion debt reduction is not sufficient and it prefers a USD 4-trillion deficit reduction instead.
What are reasons for the high level of US Government debt?
The United States of America has been living beyond its means – meaning the country has been spending more than its earnings – for more than a decade. At the end of president Bill Clinton’s term, the US has enjoyed huge budget surpluses. But after George Bush took over as president in 2001, the US economy has been hurtling toward one disaster after another. Economists and market pundits have been warning the US about its debt burden for almost a decade. Due to the excessive spending, the US Government debt has mounted to a record USD 14.3 billion in May this year.
How is the US Government funding its fiscal deficit?
As the budget expenditure exceeds its revenues, the US Government every year raises huge money by selling its Treasury Securities and funds the fiscal deficit. The bonds are bought by various foreign governments that are having huge export surpluses. Some of the biggest holders of the US debt are: (in USD billion) China - 1,160; Japan – 910; the UK – 350; Brazil – 210; and Taiwan – 150. India holds USD 41 billion in US treasuries. Other investors in the US government debt are banks, pension funds, sovereign wealth funds and individual investors.
Will investors sell US treasuries now?
A substantial portion of the US debt is held by central banks around the world. They may not sell their holding of US treasuries as they do not have any worthwhile alternative investments to buy at this point of time. Large holders of US debt, like, China, Japan and the UK may hold US treasuries grudgingly for the time being unless a credible alternative to US dollar emerges, which is a remote possibility as of now. Of course, investors have been moving to the Swiss Franc and the Japanese Yen for some time now. The euro is having its own problems. The dollar is relatively stable against major currencies till now.
What is the importance of US treasuries?
--- Till the S&P downgrade, the US treasuries are considered as benchmark securities for various classes of assets across the world.
--- It is a practice in the financial world to benchmark several securities against the US treasuries.
--- Every country will have its own risk-free interest rate. However, the US treasuries are treated as risk-free across the world.
--- With the downgrade, the US treasuries have lost some of their sheen and this will create problems for asset valuation models.
Why are the US economy and dollar so important to the world economy?
--- Till the S&P downgrade, the US dollar was considered as safe to hold it for long term
--- For several decades, the US debt has attracted investors due to the US’ stable growth
--- Much of the world trade in merchandise exports and services is done in dollar
--- The US dollar has become a reserve currency for the world
--- The reserve currency status has become questionable now
--- The US has 43 per cent weight in the MSCI Index, an index of global stocks
--- About one-fourth of the world’s GDP comes from the US
--- About 20 per cent of the oil is consumed by the US
--- Much of the world’s wealth is concentrated in the US
What steps should the US Government take to bring down its huge debt burden?
The following steps will help the US to cut down its debt levels:
--- The US Government should raise taxes without hurting the poor
--- The US Government should cut its wasteful expenditure, like, defence and others.
--- The Government should stimulate the economy through various measures
How does the downgrade impact US economy?
Theoretically speaking, if a country’s debt rating is downgraded the country’s interest burden will increase as the cost of raising money goes up. As such, US Government bond prices should come down and yields should go up. The US companies will have to pay higher interest rates when they raise money abroad for their needs. But it reality, this has not happened. After the downgrade, the benchmark 10-year US Government Treasury yield decreased by 20 basis points – meaning bond prices went up. This aberration is due to the fact that investors selling equities and commodities have moved the money to US Government debt causing the US bond prices to go up. However, in the medium to long term, the downgrade will hamper the ability of the US Government to sell its bonds to investors. Fund houses, like, PIMCO, have completely offloaded their US treasuries in March itself. Already the US economy is slowing down and the downgrade may further put pressure on the US growth. Overall, the downgrade is negative for the US.
What is the reaction of the US Government to the downgrade?
The US Government has said that the S&P’s analysis was hasty. It further said that S&P has made a USD 2-trillion error in its calculations. President Obama has thundered, “…the US still enjoys AAA rating!” The US Federal Reserve has said that it would keep the US interest rates at the historic low level of 0 to 0.25 per cent till the middle of 2013. The US Fed’s announcement had temporarily brought some relief to the markets.
How have the investors and marketmen reacted to the downgrade?
Several economists and marketmen have long argued that the US has been sinking into an abyss as far as the fiscal deficit is concerned. On the contrary, some argue that the US will bounce back from its debt pangs provided the US political parties act in a bipartisan way. Several experts have been criticizing the credit rating agency, S&P for downgrading the US credit rating. They are of the opinion that the rating agencies are acting like tyrants. It is clear from the debt burden controversy, the Republicans have been blackmailing the US president (who is a Democrat) as the former enjoy majority in the House of Representatives. In the Senate, the Democrats have majority. The Republicans are not allowing the US president to raise taxes which is necessary to reduce the debt burden. China has condemned the US for its “debt addiction” and exhorted the US to fix its debt problems. China will be adversely impacted by the downgrade as its holds a substantial portion of its foreign exchange reserves in the US Treasuries.
Which countries are enjoying AAA rating as of now?
The countries that are still enjoying AAA-rating, the highest credit rating, are: Australia, Austria, Canada, Denmark, Finland, France, Germany, Guernsey, Hong Kong, the Isle of Man, Liechtenstein, Luxembourg, the Netherlands, Norway, Singapore, Sweden, Switzerland, and the United Kingdom. (Source: S&P)
What is the impact of the downgrade on Indian markets?
There are two ways to look at the issue. The issues that are plaguing the world economy are confined to the sovereign debt problems being faced by the US and Europe. To that extent, countries, like, India, China and Brazil are not impacted by the US downgrade. If one believes this assertion, India should do well going forward and it will continue to receive more foreign money in the form of portfolio inflows from foreign institutional investors (FIIs) and foreign direct investment (FDI). Another view is that India cannot remain immune from the global developments and India’s economy is pegged to global growth. However, one needs to take a balanced view on this. As Indian economy continues to be driven by domestic consumption and strong savings, India’s national income is likely to grow at reasonable rates even though its export sector (IT exports, textiles, etc.) may be adversely impacted due to the slowdown in the world economy.
What is the impact on Indian Rupee?
Indian Rupee has depreciated against the US dollar after the downgrade as the FIIs have been selling the Indian equities. In the long term, Indian Rupee should appreciate against the US dollar as: (i). our interest rates are much higher than those in the US, (ii). we are expected to grow much faster than the US, and (iii). the US will find it very difficult to fix its debt burden which may cause the dollar to fall further in future.
What should Indian equity investors do?
Due to inflation, slow policy reforms, tepid profit growth by Indian corporates and problems in implementing projects, Indian stock markets have already lost more than 20 per cent from their peaks last year. In the last three weeks alone since the unexpected hike in interest rates by Reserve Bank of India on July 26th, the benchmark Sensex has lost about 2,000 points or 10.8 per cent. In view of the above, long-term investors will be better off if they keep their cool and not resort to panic selling provided they hold quality stocks in their portfolio. In the stock market, a good nervous system is much better than a good head. If they are over exposed to sectors, like, information technology, they may reduce their exposure temporarily. However, investors need to watch the global developments carefully as there are several rumours about a possible downgrade of other countries’ credit rating.
Monday, 15 August 2011
Saturday, 6 August 2011
Equity Valuation - Price Multiples - vrk100 - 18Jul2011
EQUITY VALUATION - PRICE MULTIPLES
Rama Krishna Vadlamudi, Hyderabad 18 July 2011
This article in PowerPoint presentation form is on Equity valuation and price multiples. One can understand the simple calculation of valuing a share based on price multiples, price-earnings ratio, price-book value ration, price-sales ratio and price-cash flow ratio with some live examples.
This PowerPoint presentation can also be accessed at:
www.scribd.com/doc/61716892
- - -
Disclosure: I've vested interested in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if any.
Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets.
CFA Charter credentials - CFA Member Profile
CFA Badge
He blogs at:
https://ramakrishnavadlamudi.blogspot.com/
Twitter @vrk100
Tuesday, 2 August 2011
Who's Who In India-Political & Business-VRK100-02Aug2011
Who's Who In India-
Political, Administration and Business
Rama Krishna Vadlamudi, Hyderabad
02 AUGUST 2011
CONTENTS PAGE
1. Who’s Who in India – POLITICAL
2. Who’s Who in India – ADMINISTRATION
3. Who’s Who in India – BUSINESS
About the Author:
Passionate about financial markets. Watches equity, bond and currency markets
from a macro point of view. Loves writing articles on financial markets. So
far, has written more than 120 articles running into about 720 pages of
original content, which have attracted more than 165,000 readers on SCRIBD.
Political, Administration and Business
Rama Krishna Vadlamudi, Hyderabad
02 AUGUST 2011
CONTENTS PAGE
1. Who’s Who in India – POLITICAL
2. Who’s Who in India – ADMINISTRATION
3. Who’s Who in India – BUSINESS
|
1. POLITICAL
|
|
|
Name of the Person
|
What is he/she?
|
|
Pratibha Devisingh
Patil
|
President
(Rashtrapathi)
|
|
Mohd. Hamid Ansari
|
Vice President
|
|
Manmohan Singh
|
Prime Minister
|
|
Pranab Mukherjee
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Finance Minister
|
|
Anand Sharma
|
Commerce and Industry
|
|
Kapil Sibal
|
Telecom and Education
|
|
S M
|
Foreign Minister
|
|
P Chidambaram
|
Home Minister
|
|
|
Petroleum Minister
|
|
Sushilkumar Shinde
|
Power
|
|
Sharad Pawar
|
Agriculture Minister
|
|
Salman Khursheed
|
Law Minister
|
|
Kamal Nath
|
Urban Development
|
|
A K
|
Defence Minister
|
|
Veerappa Moily
|
Corporate Affairs
|
|
Jairam Ramesh
|
Rural Development
|
|
Jayanthi Natarajan
|
Environment
Minister (Minister of State)
|
|
Vayalar Ravi
|
Civil Aviation
Minister
|
|
|
|
|
2. ADMINISTRATION
|
|
|
Name of the Person
|
What is he/she?
|
|
Manmohan Singh
|
Chairman, Planning
Commission
|
|
Sunil Mitra
|
Finance Secretary
|
|
Ranjan Mathai
|
Foreign Secretary
|
|
Ajit Kumar Seth
|
Cabinet Secretary
|
|
Montek Singh Ahluwalia
|
Dy. Chairman, Planning
Commission
|
|
C Rangarajan
|
Chairman, Prime
Minister's Economic Advisory Council
|
|
Kaushik Basu
|
Chief Economic Advisor,
Ministry of Finance
|
|
T C A Anant
|
Chief Statistician of
|
|
S H Kapadia
|
Chief Justice of
Supreme Court of
|
|
G
|
Attorney General
|
|
Rohinton Nariman
|
Solicitor General
|
|
Gen. Vijay Kumar Singh
|
Chief of Army Staff
|
|
Admiral Nirmal Verma
|
Chief of Naval Staff
|
|
Air Chief Marshal NAK
Browne
|
Chief of Air Staff
|
|
K Radhakrishnan
|
Chairman, Indian Space
Research Organisation
|
|
Shiv Shankar Menon
|
National Security
Advisor
|
|
Vijay Kelkar
|
Non-executive
Chairman, National Stock Exchange
|
|
Vijay Kelkar
|
Former Chairman of
13th Finance Commission
|
|
Nandan Nilekani
|
Chairman, Unique
Identification Authority of
|
|
U K Sinha
|
Chairman, Securities
& Exchange Board of
|
|
D Subbarao
|
Governor, Reserve Bank
of
|
|
J Harinarayan
|
Chairman,
Insurance Regulatory & Development Authority
|
|
Yogesh Agarwal
|
Chairman,
Pension Fund Regulatory & Development Authority
|
|
|
|
|
3. BUSINESS
|
|
|
Name of the Person
|
What is he/she?
|
|
A M Naik
|
CEO, Larsen and Toubro
|
|
Adi Godrej
|
Chairman, Godrej Group
|
|
Anil Ambani
|
Head, Reliance ADAG
Group
|
|
Azim Premji
|
Chairman & CEO,
WIPRO Limited
|
|
B Prasad Rao
|
CMD, BHEL
|
|
Chanda Kochchar
|
CEO, ICICI Bank
|
|
Kumarmangalam Birla
|
Head, AVBirla Group of
Companies
|
|
Manoj Kohli
|
CEO, Bharti Airtel
(Global Operations)
|
|
Mukesh Ambani
|
Chairman & CEO,
Reliance Industries
|
|
|
CEO, TCS
|
|
N R Narayanamurthy
|
Chief Mentor and
Chairman, Infosys Limited
|
|
Pratip Chaudhuri
|
Chairman, State Bank
Group
|
|
|
CEO & MD, Infosys Limited
|
|
A K Hazarika
|
CMD, ONGC
|
|
Aurp Roy Choudhury
|
CMD, NTPC
|
|
R
|
Chairman, Indian Oil
Corporation
|
|
Ratan Tata
|
Chairman, Tata Group
of Companies
|
|
Sanjay Kapoor
|
CEO, Bharti Airtel (
|
|
N C Jha
|
CMD,Coal India Limited
|
|
Shikha Sharma
|
CEO, Axis Bank
|
|
Sunil Mittal
|
Non-executive
Chairman, Bharti Airtel Group
|
|
Y C Deveshwar
|
CEO, ITC Limited
|
Abbreviations:
CEO - Chief Executive Officer
CMD - Chairman & Managing
Director
MD - Managing Director
NB: All data updated as on 2nd August 2011.
Disclaimer: This is for information purpose only.
Monday, 1 August 2011
Free Float Indices-Nifty and Junior Nifty-VRK100-30Jul2011
Free Float Indices - Nifty and Junior Nifty
Rama Krishna Vadlamudi
July 30, 2011
This article can be accessed at:
www.scribd.com/doc/61291923
This is about free float indices of National Stock Indices - Nifty 50 and Junior Nifty.
Rama Krishna Vadlamudi
July 30, 2011
This article can be accessed at:
www.scribd.com/doc/61291923
This is about free float indices of National Stock Indices - Nifty 50 and Junior Nifty.
Market Outlook-VRK100-01Aug2011
Market Outlook
Rama Krishna Vadlamudi, HYDERABAD 01 August 2011
In its latest review of the monetary policy, Reserve Bank of India has raised interest rates by 50 basis points against the consensus market estimate of 25 basis points. The reverse repo rate is increased to 7.0 per cent and the Marginal Standing Facility rate is hiked to 9.0 per cent. The unexpected 50-basis point hike has caught the stock and bond markets unawares and both the bond prices and stock prices have reacted negatively to the news. The corporate quarterly results continue to be mixed with several large- and mid-cap companies declaring their results. However, stock market has been punishing companies not only with poor performance but also with average performance. Public Sector Banks have been reporting a substantial jump in loan provisions due to rising non-performing assets.
RBI’s Monetary Policy-from baby steps to dinosaur steps
Following an aggressive move by Reserve Bank of India to increase its Repo rate by 50 basis points (under its liquidity adjustment facility or LAF) from 7.5 per cent to 8.0 per cent with effect from 26 July 2010, many banks like, Punjab National Bank, IDBI Bank, Oriental Bank of Commerce, Bank of India, DCB, Yes Bank, Corporation Bank, and Bank of Baroda, have raised their base rates by 40 basis points (100 basis points = one per cent) to 75 basis points. This is likely to push up interest rates of corporate loans, housing loans and auto loans.
RBI started raising interest rates since February 2010 gradually with 25 basis points raise each time which was described as ‘baby steps’ by RBI itself. But in a matter of just under three months, RBI has raised the Repo rate by 125 basis points signifying a change to a hawkish monetary policy stance. Clearly, RBI is worried about inflation and wants to control the stubborn inflation with stern measures.
First Quarter results
BHEL has recorded a 22 per cent rise in net profit for the first quarter aided by surge in other income. Its order book decreased to Rs 1,59,600 crore as on 30 June 2011.
RIL has posted an increase of 17 per cent in net profit aided by higher refining margins and other income. Sales growth for the quarter was 39 per cent.
Maruti Suzuki’s net profit has gone up by 18 per cent mainly due to higher other income, while sales were up by a mere 3 per cent.
ICICI Bank’s first quarter net profit surged by 30 per cent due to lesser loan provisions following improved asset quality.
Andhra Bank has recorded an increase of 21 per cent in net profit while that of Corporation Bank was a mere five per cent.
Syndicate Bank has recorded a 29-per cent jump in net profit due to surge in other income.
Grasim Industries reported a surge in net profit by over 30 per cent due to improved realizations from VSF and cement businesses.
Hindustan Unilever has posted good results with a rise in net profit of 18 per cent in the first quarter helped by volume growth, cut in advertisement cost and better product mix.
Punjab National Bank has shown a mere 3 per cent increase in net profit due to aggressive loan provisioning, though it managed to keep the net interest margin at 3.84%.
Bank of Baroda has posted decent numbers with a rise of 20% in net profit aided by interest income and fee income. Compared to other public sector banks, BOB’s loan book is of superior quality.
Canara Bank’s net profit was down by 28 per cent due to sharp rise in loan provisions and steep decline in treasury profits.
UltraTech Cement has reported a rise of 22% in its quarterly net profit.
ITC’s net profit has grown by 25 per cent while sales growth was 20 per cent.
Land Acquisition Bill
Government of India has come out with a draft Land Acquisition Bill which aims to provide better market values to land owners and to safeguard the livelihoods of the project-affected people. The salient features of the Bill are:
Government will not acquire land for private companies
In urban areas, land owners will get a minimum compensation of twice the market value
In rural areas, land owners will get a minimum compensation of six times the market value
A comprehensive rehabilitation package for land owners and the landless people affected by the project
The Bill will enjoy primacy over specialized legislations
Karnataka Lokayukta Report
Karnataka state ombudsman Mr Santosh Hege has named several firms, like, JSW Steel, Adani Enterprises, NMDC and Sesa Goa to be involved in illegal mining of iron ore in Bellary district of Karnataka between 2006 and 2010. The share prices of these companies have crashed after the report made public. The report estimated a loss, in taxes and royalty, of Rs 16,085 crore to the Karnataka Government. Following the report, the Supreme Court has suspended iron ore mining in Bellary district.
SEBI takeover code
On 29 July 2011, the Securities and Exchange Board of India (SEBI) has raised the threshold limit for open offer to 25 per cent from the existing 15 per cent. The capital market regulator, SEBI, has also decided to increase the open offer size to 26 per cent from the present 20 per cent. What this means is, from now onwards, companies in India can acquire shares worth up to 25 per cent of the target company’s paid-up capital without triggering any open offer. Once this 25 per cent threshold limit is reached, the acquiring company has to come out with an open offer to acquire another 26 per cent stake in the target company. SEBI has done away with the provision of non-compete fee. Till now, an acquirer was allowed to pay non-compete fee on takeover.
Debt pangs continue for the United States
The deadlock about raising the $14.3-trillion US debt level continues between the US president and the Congress. If no consensus is reached between the warring parties, the US Treasury Department will run out of money to pay its bills on August 2nd. The Republican Party seems to be blackmailing the US president about debt reduction. Rating agencies have threatened to downgrade US’ AAA-rating if the US lawmakers fail to reach an accord. However, rating agencies may still downgrade the US rating due to the fact that fiscal deficit is a long-term problem. The new managing director of the International Monetary Fund, Christine Lagarde, has warned that the US debt default/shock will have huge repercussions not only for the US but also for the rest of the world.
The huge US fiscal deficit is a big problem for other countries which hold their foreign exchange reserves in US government debt. Some of the biggest holders of the US debt are: (in USD billion) China - 1,160; Japan – 907; the UK – 333; and Brazil – 190. Other investors in the US government debt are banks, pension funds, sovereign wealth funds and individual investors.
The outlook
Sensex ended down at 18,197 for the last week and Nifty was down at 5,482. As I am writing this, the flash news is that an agreement has been reached in the US to reduce government debt. This will be a big relief for the markets around the world. However, in the medium to long term, markets will be guided by what is happening in the US and their decisions on the deficit-cut will be closely tracked. For over 10 years, the US has been living beyond its means. Between 2001 and 2011, the government debt has almost trebled from $ 5.8 trillion in 2001 to $ 14.3 trillion in 2011 (one trillion is equal to one lakh crores).
With Indian Parliament opening its monsoon session today, the market will be watching the progress of several pending bills which will have huge consequences economically and socially. The market will be watching the quarterly results also.
Snippets
State Bank of India Commercial and International (SBICI) Limited was merged with State Bank of India effective 29 July 2011.
The US gross domestic product has increased by 1.3 per cent annual rate during the second quarter (April to June 2011). The growth rate of 1.3 per cent is much below the expected rate of 1.8 per cent due to weak consumer spending. The US economy contracted at an annual average rate of 0.3 per cent between 2007 and 2010 as per the latest estimates.
SEBI, the capital market regulator, has reintroduced entry load for mutual funds. Existing investors have to pay an entry load of Rs 100 per transaction. New investors have to pay Rs 150 per transaction. However, investments up to Rs 10,000 will not attract any entry load.
SEBI has proposed to allow setting up of KYC Registration Agencies, which will enable mutual fund investors to have a single and uniform KYC (know your customer) procedure across the securities market.
Mogul Resources Limited is coming out with an initial public offer of 7.5 million Australian dollars with a listing on the Australian Securities Exchange (ASX) in October. The company is exploring for copper, gold and other metals in Rajasthan, Karnataka and Andhra Pradesh.
Anshu Jain has been named as co-chief executive officer of Deutsche Bank Group along with Juergen Fitschen. They will take over from the current CEO, Josef Ackermann, next year.
Moody’s has cut Greece’s credit rating by three notches.
Quote of the week
“If you hold your currency perennially depreciated, it amounts to giving away goods for free. That is good news for everybody except the person giving it away thus. The right policy is to sell cheap for a while to get people used to your product and then raise the price and reap the benefit of the habit of buying your goods that you have inculcated in people.” – Kaushik Basu, chief economic advisor, on being asked whether it is a good idea for China to let its currency, Yuan, appreciate now.
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.
About the Author: Passionate about financial markets. Watches equity, bond and currency markets from a macro point of view. Loves writing articles on financial markets. So far, has written more than 120 articles running into about 720 pages of original content, which have attracted more than 165,000 readers on SCRIBD. www.scribd.com/vrk100
Rama Krishna Vadlamudi, HYDERABAD 01 August 2011
In its latest review of the monetary policy, Reserve Bank of India has raised interest rates by 50 basis points against the consensus market estimate of 25 basis points. The reverse repo rate is increased to 7.0 per cent and the Marginal Standing Facility rate is hiked to 9.0 per cent. The unexpected 50-basis point hike has caught the stock and bond markets unawares and both the bond prices and stock prices have reacted negatively to the news. The corporate quarterly results continue to be mixed with several large- and mid-cap companies declaring their results. However, stock market has been punishing companies not only with poor performance but also with average performance. Public Sector Banks have been reporting a substantial jump in loan provisions due to rising non-performing assets.
RBI’s Monetary Policy-from baby steps to dinosaur steps
Following an aggressive move by Reserve Bank of India to increase its Repo rate by 50 basis points (under its liquidity adjustment facility or LAF) from 7.5 per cent to 8.0 per cent with effect from 26 July 2010, many banks like, Punjab National Bank, IDBI Bank, Oriental Bank of Commerce, Bank of India, DCB, Yes Bank, Corporation Bank, and Bank of Baroda, have raised their base rates by 40 basis points (100 basis points = one per cent) to 75 basis points. This is likely to push up interest rates of corporate loans, housing loans and auto loans.
RBI started raising interest rates since February 2010 gradually with 25 basis points raise each time which was described as ‘baby steps’ by RBI itself. But in a matter of just under three months, RBI has raised the Repo rate by 125 basis points signifying a change to a hawkish monetary policy stance. Clearly, RBI is worried about inflation and wants to control the stubborn inflation with stern measures.
First Quarter results
BHEL has recorded a 22 per cent rise in net profit for the first quarter aided by surge in other income. Its order book decreased to Rs 1,59,600 crore as on 30 June 2011.
RIL has posted an increase of 17 per cent in net profit aided by higher refining margins and other income. Sales growth for the quarter was 39 per cent.
Maruti Suzuki’s net profit has gone up by 18 per cent mainly due to higher other income, while sales were up by a mere 3 per cent.
ICICI Bank’s first quarter net profit surged by 30 per cent due to lesser loan provisions following improved asset quality.
Andhra Bank has recorded an increase of 21 per cent in net profit while that of Corporation Bank was a mere five per cent.
Syndicate Bank has recorded a 29-per cent jump in net profit due to surge in other income.
Grasim Industries reported a surge in net profit by over 30 per cent due to improved realizations from VSF and cement businesses.
Hindustan Unilever has posted good results with a rise in net profit of 18 per cent in the first quarter helped by volume growth, cut in advertisement cost and better product mix.
Punjab National Bank has shown a mere 3 per cent increase in net profit due to aggressive loan provisioning, though it managed to keep the net interest margin at 3.84%.
Bank of Baroda has posted decent numbers with a rise of 20% in net profit aided by interest income and fee income. Compared to other public sector banks, BOB’s loan book is of superior quality.
Canara Bank’s net profit was down by 28 per cent due to sharp rise in loan provisions and steep decline in treasury profits.
UltraTech Cement has reported a rise of 22% in its quarterly net profit.
ITC’s net profit has grown by 25 per cent while sales growth was 20 per cent.
Land Acquisition Bill
Government of India has come out with a draft Land Acquisition Bill which aims to provide better market values to land owners and to safeguard the livelihoods of the project-affected people. The salient features of the Bill are:
Government will not acquire land for private companies
In urban areas, land owners will get a minimum compensation of twice the market value
In rural areas, land owners will get a minimum compensation of six times the market value
A comprehensive rehabilitation package for land owners and the landless people affected by the project
The Bill will enjoy primacy over specialized legislations
Karnataka Lokayukta Report
Karnataka state ombudsman Mr Santosh Hege has named several firms, like, JSW Steel, Adani Enterprises, NMDC and Sesa Goa to be involved in illegal mining of iron ore in Bellary district of Karnataka between 2006 and 2010. The share prices of these companies have crashed after the report made public. The report estimated a loss, in taxes and royalty, of Rs 16,085 crore to the Karnataka Government. Following the report, the Supreme Court has suspended iron ore mining in Bellary district.
SEBI takeover code
On 29 July 2011, the Securities and Exchange Board of India (SEBI) has raised the threshold limit for open offer to 25 per cent from the existing 15 per cent. The capital market regulator, SEBI, has also decided to increase the open offer size to 26 per cent from the present 20 per cent. What this means is, from now onwards, companies in India can acquire shares worth up to 25 per cent of the target company’s paid-up capital without triggering any open offer. Once this 25 per cent threshold limit is reached, the acquiring company has to come out with an open offer to acquire another 26 per cent stake in the target company. SEBI has done away with the provision of non-compete fee. Till now, an acquirer was allowed to pay non-compete fee on takeover.
Debt pangs continue for the United States
The deadlock about raising the $14.3-trillion US debt level continues between the US president and the Congress. If no consensus is reached between the warring parties, the US Treasury Department will run out of money to pay its bills on August 2nd. The Republican Party seems to be blackmailing the US president about debt reduction. Rating agencies have threatened to downgrade US’ AAA-rating if the US lawmakers fail to reach an accord. However, rating agencies may still downgrade the US rating due to the fact that fiscal deficit is a long-term problem. The new managing director of the International Monetary Fund, Christine Lagarde, has warned that the US debt default/shock will have huge repercussions not only for the US but also for the rest of the world.
The huge US fiscal deficit is a big problem for other countries which hold their foreign exchange reserves in US government debt. Some of the biggest holders of the US debt are: (in USD billion) China - 1,160; Japan – 907; the UK – 333; and Brazil – 190. Other investors in the US government debt are banks, pension funds, sovereign wealth funds and individual investors.
The outlook
Sensex ended down at 18,197 for the last week and Nifty was down at 5,482. As I am writing this, the flash news is that an agreement has been reached in the US to reduce government debt. This will be a big relief for the markets around the world. However, in the medium to long term, markets will be guided by what is happening in the US and their decisions on the deficit-cut will be closely tracked. For over 10 years, the US has been living beyond its means. Between 2001 and 2011, the government debt has almost trebled from $ 5.8 trillion in 2001 to $ 14.3 trillion in 2011 (one trillion is equal to one lakh crores).
With Indian Parliament opening its monsoon session today, the market will be watching the progress of several pending bills which will have huge consequences economically and socially. The market will be watching the quarterly results also.
Snippets
State Bank of India Commercial and International (SBICI) Limited was merged with State Bank of India effective 29 July 2011.
The US gross domestic product has increased by 1.3 per cent annual rate during the second quarter (April to June 2011). The growth rate of 1.3 per cent is much below the expected rate of 1.8 per cent due to weak consumer spending. The US economy contracted at an annual average rate of 0.3 per cent between 2007 and 2010 as per the latest estimates.
SEBI, the capital market regulator, has reintroduced entry load for mutual funds. Existing investors have to pay an entry load of Rs 100 per transaction. New investors have to pay Rs 150 per transaction. However, investments up to Rs 10,000 will not attract any entry load.
SEBI has proposed to allow setting up of KYC Registration Agencies, which will enable mutual fund investors to have a single and uniform KYC (know your customer) procedure across the securities market.
Mogul Resources Limited is coming out with an initial public offer of 7.5 million Australian dollars with a listing on the Australian Securities Exchange (ASX) in October. The company is exploring for copper, gold and other metals in Rajasthan, Karnataka and Andhra Pradesh.
Anshu Jain has been named as co-chief executive officer of Deutsche Bank Group along with Juergen Fitschen. They will take over from the current CEO, Josef Ackermann, next year.
Moody’s has cut Greece’s credit rating by three notches.
Quote of the week
“If you hold your currency perennially depreciated, it amounts to giving away goods for free. That is good news for everybody except the person giving it away thus. The right policy is to sell cheap for a while to get people used to your product and then raise the price and reap the benefit of the habit of buying your goods that you have inculcated in people.” – Kaushik Basu, chief economic advisor, on being asked whether it is a good idea for China to let its currency, Yuan, appreciate now.
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.
About the Author: Passionate about financial markets. Watches equity, bond and currency markets from a macro point of view. Loves writing articles on financial markets. So far, has written more than 120 articles running into about 720 pages of original content, which have attracted more than 165,000 readers on SCRIBD. www.scribd.com/vrk100
Monday, 25 July 2011
Market Outlook & Crompton Greaves-VRK100-25July2011
Follow @vrk100
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.
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.
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