Weekly Newsletter

Global stocks slump as bond yields shoot up
Global equity markets continued to be in a state of flux amid growing concerns that a booming global economy could fuel inflation, leading to a fresh round of interest rate increases. The worldwide sell-off worsened after the yield on the benchmark 10-year US Treasury note touched a five year peak of 5.303%, surpassing the Fed's target rate for overnight loans for the first time since June 28, 2006.

Sentiment nose-dived further after former Federal Reserve Chairman Alan Greenspan predicted an increase in benchmark yields and greater premiums on emerging-market debt. US Treasuries also slumped after reports in China and Japan showed rising consumer and producer prices, while the head of the UK central bank signaled that borrowing costs may need to rise to keep inflation in check. The bearish mood in the US bond market took a further knock from a mixed auction of reopened 10-year Treasury notes.

US bond yields are up sharply this month on speculation that accelerating economic growth will boost borrowing costs. Yields have retreated a bit since then, but are still up from just 4.5% three months ago. Bond yields aren't just rising in the US alone. The yield on a global basket of government bonds is at 4% - the highest level since December 2000, according to the Lehman Brothers Aggregate Global Treasury index, which tracks the performance of government bonds from 33 countries. Higher yields make bonds a more attractive investment, and if yields keep climbing, that could lure some investors away from stocks.

Fed policy makers have kept interest rates at 5.25% during their last seven meetings. And, though Wall Street and global markets have been clamouring for a reduction in borrowing costs, the Fed is unlikely to oblige them this year. On the contrary, over the past few days the chances of rate increases have gone up as the US economy regains its momentum after the recent downturn. Options on fed fund futures show traders are split on whether the Fed will lift or cut rates by year-end. Traders see a 36% chance the Fed will lift its target to at least 5.5% in December. A month ago, traders saw no chance of a rate increase by then.

DLF IPO subscribed 3.5 times; ICICI Bk issue opens on June 19

The Initial Public Offering (IPO) of DLF Ltd. was subscribed by about 3.5 times. The issue, which opened for subscription on June 11, closed on June 14. According to the NSE web site, the company received bids for 607,031,910 shares vs issue size of 175,000,000 shares. The QIB portion was subscribed more than five times and the HNI category 1.2 times, but the retail part barely managed to sail through as merchant bankers extended the deadline on the last day up to 8:30 pm. The issue comprised reservation of 1,000,000 equity shares of Rs2 each for the employees. The company priced the issue at Rs525 per share, raising Rs91.9bn (US$2.24bn). It had set a price band of Rs500 to Rs550. The IPO would constitute 10.27% of the fully diluted post-issue capital of the company. KP Singh, the main promoter, will retain a 87.4% stake in DLF post IPO. He will emerge as one of the richest persons in India after the issue is listed on the bourses some time in July. The proceeds from the issue will be invested in acquisition of land, funding existing projects and prepayment of the loans of the company. DLF will invest Rs35bn in acquisition of land and development rights, Rs34.93bn for funding existing projects and the remaining amount for prepayment of loans of the company.

ICICI Bank will hit the primary markets - both local and overseas - on June 19 with a US$5bn follow-on public issue. Half of this, around Rs100bn, will be raised in the local market and the remaining from the overseas market. The price band will be decided after both local and ADR markets close on Friday. ICICI Bank is likely to price the shares at a marginal discount to the market price. The ADR issue may be done at a slight premium to the local offer. This will be the largest-ever equity issue by an Indian company. Retail investors have been earmarked 35% of the issue or around Rs35bn, HNIs 15% while the remaining would go to institutional investors. Among foreign investors, a major chunk of nearly Rs20bn is likely to come from Temasek and GIC, in order to retain their stake. Among the domestic investors, the big subscribers are likely to be the public sector insurance companies which have a stake in the bank. Temasek, GIC, Capital International, T Rowe Price, Legatum Capital, investment arms of Dubai, Abu Dhabi, Aberdeen other than domestic institutions like LIC, SBI, UTI a host of other domestic mutual funds and public sector banks are believed to be interested in the issue.

I walk a lonely road
The only one that I have ever known
Don't know where it goes
But it's home to me and I walk alone

The key indices may have managed to rise for a fourth week in last five weeks, but the start to the week was not at all easy, as worries of rising interest rate globally hurt the sentiments of the bulls. However, the bulls, like many of their counterparts globally, managed to overcome recent misery on the back of buying across-the-board. Compared to other major indices across the globe, the recovery in India has not been swift. Volatility has made the path rather difficult for bulls. The Indian Bulls seeming to be walking alone, unlike in the past when it moved a lot in synch with its global peers. Could it be the signs of things to come?

A sharp pull back on Thursday got some lost smile back on Dalal Street. Also, given the slowdown in inflation at home and some relief on the worries of interest-rate front globally, traders made a beeline on Dalal Street, in a way movie buffers had been queuing up outside theatres for tickets of movie 'Sivaji' starring superstar Rajnikanth. However, the bulls are facing stiff resistance at higher levels making it difficult to sustain gains. In a high volatile week, the BSE 30-share Sensex ended with 52 points or 0.37% to close at 14116 and NSE Nifty added 16 points or 0.38% to close at 4161. Index heavyweights like Tata Steel, BHEL, ACC, L&T and Hindalco advanced further providing much needed support to the bulls.

Cement stocks were in the limelight following reports that the demand for the building material will continue unabated in the monsoon season, which could lead to capacity expansion among the cement companies. ACC was the major gainer, advancing by over 6% to Rs816 during the week. Grasim, Prism and India Cements were among the other major gainers, up in the range of 1-2%.

Metal stocks led from the front following steady gains on LME. An index of six metals traded on the London Metal Exchange (LME) gained 1.9% on Thursday. Copper prices added 2.2% while nickel surged 4.9%. Tata Steel advanced by nearly 2% to Rs596 after Corus raised wire rod prices by at least 7%. Other metal stocks were also in the limelight on expectations that China's lower steel shipments in May will stabilize global prices of the commodity. SAIL advanced by nearly 9% to Rs135 and Hindalco added 2% to Rs161.

Robust economic growth boosted the capital good stocks. Production at factories, utilities and mines gained 13.6% from a year earlier. L&T was the major gainer among the 30-share Sensex. The scrip advanced by over 3% to Rs1943 after India's biggest engineering company won two orders worth Rs9.9bn from SAIL and ONGC. There were also reports that the company plans to set up a $1bn fund to invest in infrastructure projects. BHEL rose by 6% to Rs1389 and Siemens advanced by nearly 3% to Rs1305.

Rising crude oil prices and worries surrounding the interest rates have had better off the auto stocks, as they continued their slide. Tata Motors lost by 1% to Rs648, Bajaj Auto fell by 0.6% to Rs2106 and M&M lost 2% to Rs701. However, Maruti bucked the negative trend and closed higher at Rs743, up by 0.9%.

Volatility in the local currency against the Rupee again dampened the sentiments of the exporters stocks, as IT stocks continue to underperform the broader indices. TCS fell by 3.3% to Rs1181, Wipro also declined by 3% to Rs530 and Satyam Computer lost 3.08% to close the week at Rs480. However, Infosys stood out among its peers and managed to record gains of 2.5% for the week to close at Rs2001. Indian Rupee rose to 40.86 today and in the process managed to advance by 0.6%, recording its biggest gains in four weeks.

Primary market or secondary market?

With uncertainty looming large, retail investors would be better off parking money in quality offers. After market closes on Monday, you may get the price band for ICICI Bank offering. The sluggishness is likely to continue in the near term, given the lack of positive triggers available for the moment. In the near term, we may the markets consolidating at around 14 k. Action could heat up in mid-cap counters. Stay cautious as indices are facing stiff resistance at higher levels. Stronger than expected IIP data for April and FY07 could again heighten the pressure on inflation and hence interest rates in the next few weeks or months. Speculation on what the Fed would do at its meeting on June 28th, will keep global indices swinging. The effect would be felt here too. Remain stock specific. The release of advance tax numbers will keep the stock specific party going.

Inflation hits new 10-month low
India's inflation, based on the Wholesale Price Index (WPI), declined to 4.8% in the week ended June 2 as against the previous week's increase of 4.85%, the Government said. The drop was due to a decrease in food and energy prices. The annual point-to-point inflation rate was the lowest since the end of July last year when it stood at 4.72%. It was in line with average market expectations, and was also down from 4.88% during the corresponding week of the previous fiscal year. This will surely give a big relief to the RBI and the Government, who have been desperately trying to contain inflation, which hit a two-year peak of 6.69% in January this year. The RBI, which has raised its key interest rates nine times since Oct. 2004, will announce its next monetary policy on July 31. The central bank has surprised the markets thrice since December by announcing policy actions before its scheduled policy meetings. There is considerable pressure on rates across the world amid a booming global economy, and it won't be a surprise if the RBI too decides to pre-empt any escalation in inflationary expectations by lifting the repo rate.

April industrial output growth at 13.6% yoy

India's industrial production grew by 13.6% in April as against 9.9% in the same month last year, the Government said. The March industrial output figure was revised, from 12.9% to 14.5%. Growth in the manufacturing sector accelerated to 15.1% in the month under review from 11% in April 2006, the Government said. However, it was down from last month's revised gain of 15.9%. Mining output was at 3.4% while electricity sector expanded by 8.7%. The revised annual growth for the year ended March 2007 stands at 11.5% over the corresponding period of the pervious year. The revised annual growth in mining, manufacturing and electricity during 2006-07 is 5.3%, 12.5% and 7.2% respectively. As many as 16 of the 17 industry groups showed a positive growth during April compared to the same month last year. Growth in Basic Goods, Capital Goods and Intermediate Goods stood at 8.9%, 17.7% and 12.6%, respectively. Consumer Durables and Consumer Non-durables recorded a growth of 5.3% and 21.9% respectively, with the overall growth in Consumer Goods being 17.7%.

Govt clears transfer of RBI stake in SBI

The Government gave its approval for transferring the Reserve Bank of India's (RBI) 59.73% stake in the State Bank of India (SBI) to the Government at an estimated cost of Rs400bn by the end of this month. The Union Cabinet cleared the proposal to carry out the requisite amendments to the SBI Act, 1955 through an Ordinance to allow the stake transfer to take place by the end of this month. Cabinet spokesman Priya Ranjan Dasmunshi told reporters in New Delhi that the Government would bring a legislation in the coming monsoon session of Parliament to replace the Ordinance. The Finance Ministry is apparently pushing for an Ordinance as a bill to amend the SBI Act is pending with a Parliamentary Standing Committee. In his budget speech, Finance Minister P. Chidambaram had said that the RBI's stake in SBI would be transferred to the Centre in order to separate ownership and regulatory functions of the central bank.

Kamal Nath unveils steps to combat rupee's rise

Commerce & Industry Minister Kamal Nath announced a package of wide ranging measures to counter the negative impact of rupee appreciation on India's exports. He urged the Finance Ministry to increase the rates on DEPB and Duty Drawback schemes by 5%. He also stated that the interest rate on pre-shipment and post-shipment credit be reduced for exporters to 6%. At present, the rate of interest charged is in the region of 9% to 11%. The Commerce Ministry also wants the Exchange Earners’ Foreign Currency (EEFC) accounts to be interest bearing. It also wants banks to meet 15% export credit disbursement target. It wants the Finance Ministry to notify the Service Tax Exemption / Refunds for exports announced in the Foreign Trade Policy 2007 without further delay. All arrears of TED (Terminal Excise Duty) and CST (Central Sales Tax) reimbursement would be cleared by June 30, and the Finance Ministry will be requested to provide additional funds, if necessary. Export Credit & Guarantee Corporation (ECGC) will reduce its premia rates by up to 10% to make exports more competitive. A committee is also being set up to assess job losses due to rupee appreciation and loss of export orders, Nath said.

Foreign inflows may blunt India's competitiveness: RBI

Despite playing a key role in the rupee's sharp appreciation this year, the RBI is not comfortable with the development, as it has exacerbated the already complicated exchange rate and monetary management. The relentless inflows of foreign capital into the country could add to the overvaluation of the rupee and hurt Indian companies' global competitiveness said RBI Deputy Governor Rakesh Mohan. Given the fact that more people are in the goods sector, the human aspects of the exchange rate management should not be lost sight of, Mohan said while addressing a seminar in Paris on June 14. The deputy Governor of the RBI said the strong overseas inflows have so far been managed by building forex reserves and sterilisation, thus preventing excessive nominal appreciation and higher inflation. The big question, however remains how long and to what extent such an exchange rate management strategy would work given the fact that India is facing large and continuing capital flows apart from strengthening current receipts on account of remittances and software exports, he said.

Strike by Indian employees called off

Around 13,000 ground-staff of Indian (formerly Indian Airlines) and some cabin crew, went on a flash strike, leaving thousands of passengers across the country stranded owing to the cancellation of several flights. The adamant attitude of the striking workers forced Civil Aviation Minister Praful Patel to threaten closure of the airline. The Delhi High Court too held the strike by Indian employees as prime facie illegal and asked them to resume duty at the earliest in the interest of air travelers. However, the strike was called off following an agreement between the union of the airline's ground staff and the management on higher wages and promotion. The wage arrears of Rs2.67bn to be paid to the employees have been agreed upon. It will be paid in 18 months. "There are some minor issues on wage arrears and promotion which are amicably settled between the management, ministry and the workers," an aviation ministry spokeswoman said. "They will see how soon normalcy can be brought about."

NTPC plans FPO, says Power Secy

Public sector giant National Thermal Power Corporation Ltd. (NTPC) is planning to come out with a Follow-on Public Offering (FPO) and has sent a proposal to this effect to the Power Ministry. "NTPC may go for a FPO, I have seen the proposal," Power Secretary Anil Razdan said while announcing the second stage of NTPC's Dadri project in Uttar Pradesh. However, NTPC Chairman and Managing Director T Shankarlingam refused to confirm the public issue plan. NTPC offloaded a 10% stake through its IPO in November 2004. At the same time, the Government diluted its 10% stake in the state-run power generation company. NTPC is planning a huge capital expansion and is targeting to double its capacity to 50,000 megawatt (MW) by 2012 from 27,904 MW. The company also plans to venture into nuclear power and hydropower sectors.

Vijay Sheth gets SEBI nod for Great Offshore buy

Shares of Great Offshore Ltd. rose as much as 4.4% on Friday after the Securities and Exchange Board of India (SEBI) allowed Managing Director Vijay Sheth to buy the 18.5% stake held by cousins - Bharat Sheth and Ravi Sheth - without triggering the mandatory open offer. The development marks an end to the long-standing dispute among the Sheth brothers over the ownership of Great Offshore, which has been de-merged from the parent company Great Eastern Shipping Ltd. (GE Shipping). Vijay, who currently holds around 6% in Great Offshore, will get the majority control of the company. He will have to pay Rs5.8bn or Rs825 per share for the stake. Reports say GE Capital and IL&FS will lend around Rs5bn to Vijay for the acquisition. The deal is reportedly being managed by Mumbai-based Motilal Oswal Securities. Meanwhile, Vijay will sell his 3% stake in GE Shipping to Bharat and Ravi as part of the informal arrangement among the warring Sheth brothers.

Carborundum Universal, Strides unveil buyouts

Carborundum Universal Ltd. said it would purchase 84.14% equity stake in Volzhsky Abrasives Works located in the city of Volzhsky in the Volgograd region of Russia. Volzhsky Abrasive Works is the largest producer of Silicon Carbide (SiC) abrasives in Russia, with 65,000 tons per annum installed capacity. It also produces Bonded Abrasives and Refractories. Volzhsky Abrasive's sales in 2006 were about US$54mn. Carborundum Universal is a fully vertically integrated company with operations in Australia, Canada, China, Middle East, the US and India.

Strides Arcolab Ltd. said it would acquire Grandix Pharmaceuticals Ltd. and its subsidiary Grandix Laboratories Ltd. on a cash and debt free basis for Rs1bn (about US$24mn). The transaction is EPS accretive and offers a platform to grow a domestic strategy by infusing a robust pipeline, Strides said in a statement. Grandix is a branded pharma company mainly focused on South India. For FY06, Grandix posted sales of Rs485mn (US$11.8mn) and EBITDA of Rs108.9mn (US$2.6mn). Sales in 2007 is expected to grow at over 30%.

Time Technoplast soars on debut

Shares of Time Technoplast Ltd., the maker of technology based polymer products, jumped as much as 58% on listing on June 13. The stock opened at Rs415.55 as against the issue price of Rs315, translating into a premium of 32%. The scrip closed the week at Rs473 after touching a peak of Rs516.70. Time Technoplast had come out with an IPO of 39,21,500 equity shares of Rs10 each. The issue was subscribed 49.55 times. The price band for the issue was fixed at Rs290 and Rs315 per share. The issue constituted 18.74% of the fully diluted post-issue paid-up capital of the company. Time Technoplast plans to use the IPO proceeds for domestic projects and funding its subsidiaries overseas which include Elan Inc. in Sharjah, UAE. It also plans a production facility in Poland under its subsidiary Novo Tech SPZoo for auto components and lifestyle products.

Chinese Premier hints at further tightening

With the latest batch of economic reports not revealing any moderation in economic growth, Chinese Premier Wen Jiabao said his government will need to boost interest rates to prevent the world's fourth largest economy from overheating. "Monetary policy needs moderate tightening," Wen said. He didn't say when the next monetary tightening move will come, nor did he specify the nature of the action. However, economists feel some sort of monetary tightening is on the cards in the next few days. It could be in the form of another interest rate hike or an increase in the reserve ratio requirement for the lenders. The People's Bank of China has raised interest rates twice this year and ordered banks five times to set aside more money as reserves. It has been four weeks since the central bank raised rates and the reserve ratios, besides widening the trading band for the yuan. "China still faces prominent problems in the economy, including rapid growth in industrial production and the trade surplus, fast investment growth, excessive liquidity, increasing inflationary pressure and energy conservation challenges," Wen s

Japan's economic growth revised up

Buoyed by increased spending by companies, the Japanese economy grew at a much faster pace than what the government had initially anticipated in the first quarter. The performance of the Japanese economy was much better than both the United States and the euro zone, stoking fears that the Bank of Japan (BOJ) will hike interest rates later this year. The world's second-largest economy grew at an annual 3.3% rate in the three months ended March 31, the Cabinet Office said. The reading was faster than the 2.4% preliminary estimate. The revision was in line with the median estimate. The economy expanded by 0.8% in January-March from the previous quarter, revised up from an initial reading of 0.6%, on robust growth in capital spending. The government expects Japan to achieve economic growth of 2% in the fiscal year ending March 2008.

BOJ keeps key rate unchanged

The Bank of Japan (BOJ) kept interest rates unchanged for a fifth consecutive meeting as it seeks more evidence that the world's second largest economy is in a better shape after several years of stagnation. Central Bank Governor Toshihiko Fukui and his colleagues held the key overnight lending rate at 0.5%, the BOJ said today. The decision was unanimous and widely in line with market expectations. Financial markets expect a rate hike by September. Many economists reckon the BOJ will raise its overnight call rate target to 0.75% at its August 22-23 meeting, after an upper house election in July and GDP growth figures for the April-June quarter. The yen fell to a 4 1/2-year low against the dollar and approached a record low against the euro after the BOJ Governor said he will raise the overnight lending rate only gradually. The Japanese currency is heading for its biggest weekly drop since January against the dollar.

IEA ups forecast for global oil demand
The International Energy Agency (IEA) raised its forecast for global oil demand this year, based on the new data received from Nigeria, Indonesia and other oil producing countries. Global fuel demand is expected to rise 2% to 86.1mn barrels in 2007 from a revised 84.5mn barrels in 2006, the Paris-based IEA said. That's 420,000 barrels per day (bpd) more than what IEA projected in May. World demand is estimated to have grown by 0.9% in 2006 or by 250,000 bpd to 84.5mn barrels. "It's difficult to escape the conclusion that the oil market will be tight in the second half of the year," the IEA said in its monthly report. The increase in the IEA's demand forecast reflects revisions to 2005 data and higher-than-expected demand in countries including Nigeria, Indonesia, Singapore, Venezuela and former Yugoslavia. Meanwhile, oil cartel OPEC kept its 2007 world oil demand growth forecast broadly unchanged in this month's report and brushed aside calls from consuming countries that it should increase supply in a bid to lower oil prices.

China not a currency manipulator: US
Notwithstanding the unrelenting pressure from the US Congress, Treasury Secretary Henry Paulson refused to accuse China of currency manipulation but said that the yuan was undervalued. "China is allowing its currency, the yuan, to rise at a pace that is much too slow and should be quickened," the Bush Administration said in it's semi-annual report on currency policies. Separately, the US trade representative Susan Schwab rejected a petition by 42 House members who wanted the Bush administration to bring a trade case against China before the World Trade Organization (WTO) over the currency issue. It was the third time that Washington has rejected such a request. US lawmakers were not impressed with the Bush administration's handling of the issue. In fact, four US senators introduced legislation that would allow US companies to seek steeper anti-dumping duties to counter the threat from manipulative currency practices by China or any other country.

Nymex may sell itself out: report

Nymex Holdings, the parent company of the New York Mercantile Exchange, has reportedly approached larger rival bourses to sell itself out. The world's leading market for energy futures contracts has held talks with NYSE Euronext, Deutsche Boerse and Chicago Mercantile Exchange Holdings, Bloomberg News reported citing two people close to the matter. Top Nymex executives met their counterparts at the three exchanges, and its Board has been informed of the talks. Unlike many of its rivals, Nymex doesn't have its own electronic trading platform. Instead, key contracts such as the WTI oil futures contract trade electronically on a Chicago Mercantile platform called Globex. Meanwhile, the Tokyo Stock Exchange (TSE), the world's second-biggest equities market, said that it had acquired a 4.99% stake in Singapore Exchange (SGX) to enhance alliances between the bourses. The exchange is considering developing the alliance further, it said. The largest Japanese exchange said that it had informed SGX of the purchase after the end of Friday's trading in the Singapore market.