The week was quite a dramatic one for the Indian
stock markets as they sought new peaks in the early part
of the week and came crashing down on Thursday after the
London bomb blasts.
On
Monday the indices continued their surge from the previous
week as operators built up positions in the July derivative
series and took both the indices to all time closing highs.
The
terrorist attack in Ayodhya shook the markets on Tuesday
as they were trading firm in early trades and the Sensex
had crossed the 7300 mark for the first time. The indices
closed weaker on reports of political protests against
the attacks.
Markets
chose to forget about Ayodhya by Wednesday as the met
department came out with some encouraging news on the
monsoon front. The indices managed to close at new all
time closing highs.
The
London bomb blasts led to a market crash on Thursday.
The markets were trading with a negative sentiment when
news of the blasts came and led to a decline of around
2 per cent on both the indices. The losses were partly
recouped on Friday as traders took heart from the positive
closing in the US markets on Thursday after the blasts.
After
trailing the large caps for almost 2 weeks, mid-caps had
another great week as frenzied buying came back to many
of the actively traded stocks. Media and banking stocks
were in the forefront as rumours and speculations about
big ticket deals spread. Even the large drop on Thursday
did not have much of an impact on smaller stocks. CNX
Mid-cap 200 index closed the week very close to its life-time
highs.
US
markets, economy and oil
US
markets saw some volatility during the shortened week
after the markets remained closed on Monday. The strong
manufacturing outlook supported by surging factory orders
as per data released last week and improved guidance from
Wal-Mart supported the US markets on Tuesday.
Record
high crude prices led to a significant decline in the
US markets on Wednesday though technology stocks were
relatively better off. The London blasts led to a further
decline on Thursday morning, but the markets recovered
to close with gains.
Crude
prices surged during the week to record highs of above
$62 to a barrel. The arrival of tropical storms in the
coasts of US raised fears of supply disruptions and refinery
shut downs. Some of the refineries were in fact shut down
temporarily after a storm caused power outages.
Even
the terrorist attacks in London did not have much impact
on crude prices. After crashing more than 4 per cent as
the news spread, crude futures clawed back and closed
only a per cent lower on Thursday.
After
all the worries about dwindling oil supplies as emerging
economies like China and India have started consuming
more and more energy, some of the oil bulls have started
talking about geopolitical risks which could disrupt supplies
in a big way. They believe that a political crisis in
one of the Middle East countries is imminent and such
an event would cause a huge supply shock.
Most
of their fears are about Iran where a new President has
recently assumed power. Some of the analysts believe that
Iran would pursue a more aggressive policy on nuclear
weapon development and this would force the US to launch
pre-emptive strikes against their nuclear installations.
Though
these fears sound far fetched, the fact remains that crude
continues to seek higher ground on these worries. The
large presence of hedge funds and speculators in the crude
market has made it highly volatile. Self serving statements
from investment banks who themselves are large traders
are adding more fuel to the fire.
The
only way crude markets can cool off is a clear sign of
slowing global economic activity. Though there is enough
evidence of a slowdown in growth in China, growth in the
US continues to remain steady. To make matters worse,
record crude prices are not having much of a negative
impact on growth as the global economy is less dependent
on oil than it was a couple of decades ago.
Industry
update
- The
issue of sharing the subsidy on petroleum products between
upstream and downstream oil companies caught much attention
during the week. The government has reportedly put forward
a proposal which would see the share of upstream companies
going up.
As
per the new proposal, private and stand alone refiners
will also be asked to share the subsidy on retail
sales of fuel. The impact on Reliance Industries,
the country's largest private refiner, would be around
Rs700 crore. The company is reportedly not averse
to the idea of sharing subsidies, but the extent to
which it is willing to share the burden is not known.
Stand
alone refiners like Kochi Refineries, Chennai Petroleum
and MRPL will be required to contribute Rs700 crore
between them while GAIL and Oil India will have to
bear a bill of Rs400 crore.
The
company which would be worst affected by this new
formula will be ONGC, which may have to contribute
up to Rs3,500 crore. The decline in the share price
of ONGC over the week reflects the market concerns
over this move.
Presently,
upstream PSU oil companies like ONGC, GAIL and Oil
India are required to share one third of the total
subsidy bill on petroleum products. The oil marketing
companies are demanding that this share should be
raised to 50 per cent as up stream companies enjoy
much better profit margins when crude prices are high.
Hence they are in a better position to bear the subsidy
bill unlike the marketing companies, most of whom
are expected to post losses in the first quarter.
The
price paid by domestic refiners to ONGC for the crude
produced domestically is lower than international
prices. So is the case of natural gas prices paid
by GAIL to ONGC. Even after the recent revision in
natural gas prices, the realisations by ONGC is almost
40 per cent lower than the landed prices offered by
private players like Shell.
Hence
ONGC contends that if it is to share a larger part
of subsidy on liquid fuels, the subsidy on natural
gas should also be shared on a more equitable basis.
The company also argues that higher subsidy burden
would seriously affect its plans to acquire energy
assets abroad.
Since
the arguments of both upstream and downstream companies
are valid, the government would find it tough to arrive
at a subsidy sharing formula which will satisfy all.
Many in the petroleum ministry would be praying for
a downward correction in crude prices in the immediate
future.
- After
remaining out of market radar for a couple of months,
consolidation among smaller banks has once again caught
the attention of investors. While it was mergers between
smaller PSU banks which were talked about earlier, now
the attention is only on smaller private sector banks.
The merger between Centurion Bank and Bank of Punjab
has raised expectations about more such deals to follow.
It
does make sense for most of the smaller private banks
to look at mergers to increase their geographical
reach and achieve critical size. Many of these banks
are niche players present only in some parts of the
country. Many of them are based in the south with
negligible presence in other parts of the country.
Some of them rely too much on business from NRI's
and hence business risks are relatively high.
Since
many of them have similar profiles in terms of business
and geographical presence, it would be difficult to
find mutually complementing candidates for merger.
Therefore, apart from increasing the balance sheet
size not much can be expected from these mergers.
The
more intriguing are the stories of foreign banks and
domestic corporate bodies acquiring some of these
banks. The present policy framework clearly discourages
such deals and still rumours continue to fly around.
The
Reserve Bank has identified some weak banks which
may be allowed to be taken over by foreign banks or
domestic institutions. Corporate groups are not allowed
to buy them as yet. None of the banks in this list
by RBI are listed on the exchanges. The rumours about
takeovers of listed banks by domestic corporate groups
sound incredulous.
Most
retail investors get enticed by such unsubstantiated
rumours and speculations. They would do well to remember
the frenzy in PSU bank stocks not so long back. Even
the merger ratios were discussed and reported by the
financial media as if the deals are finalised and
everybody was waiting for the signing ceremony. Many
months have passed by and still there is no clarity
on the government policy despite occasional statements
from the finance minister favouring bank consolidation.
Corporate
moves
- The
Videocon group has completed 2 major acquisitions in
the last 2 weeks which would make it one of the largest
consumer electronics and appliances players globally.
After the acquisition of the television picture tube
manufacturing facilities of Thomson in Italy, Mexico,
Poland and China, the group acquired the Indian operations
of Swedish giant Electrolux this week.
The
Electrolux deal involves the manufacturing facilities
for white goods as well as brands like Kelvinator
and Allwyn. These brands were acquired by Electrolux
in the nineties when it had large plans for the country.
Electrolux will also source appliances from Videocon
for its global operations. This is expected to bring
in business worth over Rs5,000 crore annually in the
next 2 to 3 years.
Videocon
group also announced the merger between group companies
Videocon International and Videocon Industries. The
former focuses on consumer electronics and appliances
and had posted a turnover of over Rs4,000 crore last
year. Videocon Industries has been focussing on the
energy sector and had acquired working interest in
soil and gas fields in Myanmar and Sudan.
The
more interesting part of the deals is that both Thomson
and Electrolux will be investing in Videocon Industries,
after the merger. While Thomson will hold a 14 per
cent stake, Electrolux will be taking a 5 per cent
stake. Thomson will also have representation on the
Videocon board.
While
the size and nature of the deals are impressive, the
group will face considerable challenges in integrating
the businesses. The businesses of the 2 companies
have very little synergy and the only positive aspect
of the merger is to achieve an impressive balance
sheet size. The size would help the company while
going for more acquisitions in the energy space.
Appliances
and consumer electronics business in the country is
highly competitive and offers very low margins. South
Korean companies Samsung and LG have a dominant position
in the market and it would be difficult for Videocon
to break their dominance. On the positive side, the
company can expect to become a major supplier to multinational
brands given the large capacities it has under its
control now.
The
management expects total turnover for the current
year to be close to Rs18,000 crore, which is a huge
jump from under Rs5,000 crore for the last year. Bulk
of this growth will come from overseas operations.
The future will depend on how well the company will
be able to manage costs as it will become a predominantly
contract manufacturing operations. Energy business
could offer significant upsides provided the company
can continue to make large enough investments.
*Disclaimer:
The author doesn't have any position in the stocks
specifically mentioned above at the time of writing this
article. This analysis/report is only for the purpose
of information and is not an investment advice. Readers
are advised to consult a certified financial advisor before
taking any investment decisions. While efforts have been
made to ensure the accuracy of the information provided
in the content the author or publisher shall not be held
responsible for any loss caused to any person whatsoever.
Other
articles by Rex Mathew
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