This week the markets, which were optimistic about corporate results in the previous week, were less sure about the sustainability of corporate performance in the year ahead. After trying to stabilise during the earlier part of the week, the indices declined steadily on the last two days of the week as overseas investors remained on the sidelines. The markets came down on low volumes indicating lack of buying support.

Global indicators remained positive through the week as crude oil futures saw a sharp fall and US markets regained some strength. Even Asian markets, which had seen large sell offs the week before, managed to close with gains. Then why have our markets become weak despite all these positive indicators?

The weakness started out of fears of an FII sell-off after some serious selling in other Asian markets in the previous weeks. Sections of the markets were the view that it was only a matter of time before FII's unloaded some of their positions in India as well. Absence of any major activity by the FII's lent credibility to this story, even though they sold nothing.

The yearly outlook from IT major Infosys, due on 14 April along with results, is one of the most keenly analysed statements and the market was expecting positive statements from the company. However, selling in Infosys at the NASDAQ this week gave the impression that overseas investors are not so optimistic about next year's outlook. The fact that selling in Infosys happened even as US tech stocks came back strongly made matters worse and led to a sell off in IT stocks.

So, is the threat of an FII sell-off real and is the outlook really bad? FII selling in Asian markets was on expectations of rising US interest rates, which would make equity investments less attractive. Their investment in India is more long term to capture the growth momentum of the economy and may not see a large-sell off unless the economic fundamentals decline drastically. Some short-term funds may get out if US interest rates rise further, but most foreign investors would remain invested.

As regards the outlook, it is true that some sectors would see growth rates flattening after years of very fast growth. But that doesn't mean there would be no opportunities at all. The more efficient and innovative companies would continue to grow fast. Even as Indian companies continue to seek opportunities in global markets, the huge domestic market would partially insulate them from a global slowdown.

Foreign trade data for last year, released during the week, confirms the improving external competitiveness of Indian companies. Merchandise exports rose 24 per cent to touch $80 billion for the year. This strong performance, even as the Rupee appreciated, points to a gradual shift in our export basket to more value-added products. Going by the number of smaller Indian companies taking over businesses and forging joint ventures abroad, this structural shift will gather momentum in future.

The annual supplement to the Foreign Trade Policy announced during the week continues the tradition of short term policy measures without addressing the structural issues. As expected, the government has decided to continue with the DEPB scheme for another six months till a successor scheme is devised. The DEPB scheme, which subsidises exports by reimbursing the duty on inputs assumed to be imported, is not WTO- compliant. It has also been decided to abolish the export cess on agricultural commodities including plantation products.

The most important factors affecting our export performance are awful infrastructure and high transaction costs, as a result of which, Indian exporters operate with a cost disadvantage of around 20 per cent, according to some studies. With the ongoing expansion of sea ports in Gujarat, Maharashtra and Tamil Nadu and the proposed container terminal at Kochi, these costs would come down.

Inflation for the week ended 26 March declined marginally to 5.05 per cent from 5.11 per cent the week before as prices of non-food items and edible oil dipped. The government has postponed the decision to hike fuel prices by another week. The increase may be much lower than earlier expectations as oil prices have come down by almost 10 per cent from its highs. The government may be more inclined to tinker with the duty structure and reduce the quantum of increase.

Corporate Results

• PSU power utility NTPC announced its provisional results for FY 2004-05. Adjusted for extra-ordinary items, profits have increased by over 30 per cent on a 17 per cent increase in energy sales. The company has improved its performance on parameters like plant load factor and has achieved full recovery from customers, who are mostly the state electricity boards. The company, which added 2,000mw to its capacity last year, plans to invest Rs8,550 crore in the current year. Going forward, the company would face pressure on margins as fuel prices are increasing. The company's natural gas supplier GAIL would increase prices after the government revised the rate payable for domestically produced gas. Coal prices have also gone up substantially and there is a shortage of good quality coal. The company is trying to address the coal shortage by acquiring captive mines.
  
• Sugar major Bajaj Hindustan announced its results for the Jan-March quarter. Profits have more than doubled as the company realised better margins on last season's lower cost stocks sold during the period. The marginal decline in sales came as a disappointment, especially since the company had commissioned a new sugar mill this season. Though the company is carrying most of the current season's production as stocks, margins may decline as input costs for the current season were higher by almost 15 per cent. A further increase in sugar prices is unlikely unless the crop outlook for the next season turns weak.

Corporate moves

• Hindustan Lever is planning to hive off its tea estates in Assam and Tamil Nadu into subsidiaries. In all 14 tea estates and 9 factories would be transferred and these subsidiaries may be sold off in the future. Integrated tea companies are exiting the low margin estate management business to focus more on marketing.
  
• Hindalco has signed an MOU with the government of Orissa for setting up a large aluminium complex in the state. To be set up at a cost of Rs11,000 crore, the complex would have capacities for 3-million tonnes of bauxite mining, quarter of a million tonnes of aluminium and 650mw power generation.
  
• Larsen & Tubro has tied up with Dubai Aluminium to set up an aluminium refinery in the state of Orissa at a cost of Rs3,000 crore. L&T has also won an order from ONGC for building an offshore facility worth Rs930 crore.
  
• Maruti Udyog has finalised plans to invest Rs3,272 crore to set up two joint ventures with parent company Suzuki Motor. Maruti would hold a 70 per cent stake in the joint venture to manufacture new generation cars. Suzuki would hold a majority stake in the engines and transmission venture. The latter would focus on diesel engines, currently a weak area for Maruti.
  
• Tata Steel re-commissioned its largest blast furnace after increasing its capacity from one-million tonnes to 1.8-million tonnes per annum.
  
• Ispat Industries has entered into an agreement with UTI to restructure its outstanding liabilities. Under the agreement, the repayment of outstanding principal and interest is to be repaid over the next three years and UTI would waive part of the interest and penal charges. The deal would save Ispat Rs10 crore in interest every quarter.
  
• Tata Motors' deal with MG Rover to export 20,000 cars per year may be undone as the British company has filed for bankruptcy. The company says it is studying the situation and is fully committed to increasing its presence in the European market. For the month of March, the company has reported a 28 percent jump in vehicle sales as compared to previous year. Passenger vehicle sales have gone up by over 30 percent while exports have doubled.
  
• Telecom major BSNL, which is fully government owned, has announced plans to invest a massive Rs80,000 crore to increase capacity by an additional 7- million lines. The company currently has a subscriber base of around 45 million.
  
• The government and ITC settled their excise duty dispute. Under the agreement, ITC will not claim refund of Rs350 crore already paid to the government and the government would withdraw its additional claim of Rs450 crore made under the ordinance issued earlier.
  
• Bharti Televentures would invest up to $850 million during the current year to increase capacity. Tata Teleservices (Maharashtra) would invest Rs750 crore to increase capacity in the state of Maharashtra

Outlook: The market would remain volatile till the end of the earnings season. The Infosys results and guidance to be announced on 14 April would set the tone. The market may not see any major up move as the possibility of positive surprises in the corporate results are low. In fact, the market may turn weak if the FII's don't turn buyers after the result announcements.

Other articles by Rex Mathew

List of general reports on markets

List of general reports on finance