Sensex at 5-week low on fears high interest rates will pinch corporate profit growth

Key benchmark indices sank to their lowest closing levels in five weeks on fears that higher interest rates will hurt corporate profit growth. The BSE Sensex was down 222.73 points or 1.21%. The market breadth was weak. Index heavyweight Reliance Industries (RIL) fell nearly 3%, extending recent losses triggered by weak Q1 operating performance.

The Sensex has lost 661.77 points or 3.5% in three trading sessions from a recent high of 18,871.29 on Monday, 25 July 2011, on fears that higher interest rates will hurt corporate profit growth. The Reserve Bank of India (RBI) on Tuesday, 26 July 2011, hiked its key lending rate by a steeper-than expected 50 basis points to tame inflation at a policy review.



Coming back to today's trade, bank shares dropped for the third straight day after the Reserve Bank of India revised downwards non-food credit growth forecast for the year ending March 2012 to 18% from 19% earlier at its first quarter review of monetary policy 2011-12 announced on Tuesday, 26 July 2011. Realty stocks extended recent losses triggered by worries that higher interest rates could dent demand for residential and commercial properties.

Cigarette major ITC rose after the firm's Q1 result beat market expectations. Except the BSE FMCG index, all the other sectoral indices on BSE were in the red. IT stocks fell on weaker-than-expected US economic data. US is the biggest market for Indian IT firms. Metal stocks declined across the board.

The market hit one-month low in choppy early trade on weak Asian shares. The market extended initial losses to hit fresh one-month low in morning trade. The market trimmed losses in mid-morning trade. The market continued to remain weak in early afternoon trade. Key benchmark indices trimmed losses in afternoon trade. A bout of volatility was witnessed in mid-afternoon trade ahead of the expiry of the near-month July 2011 derivatives contracts. The July 2011 derivatives contracts expired today. The market extended losses to hit fresh one-month low in late trade.

The BSE Sensex was down 222.73 points or 1.21% to 18,209.52, its lowest closing level since 23 June 2011. The Sensex declined 104.40 points at the day's high of 18,327.85 in early trade. The index slumped 243.37 points at the day's low of 18,188.88 in late trade.

The S&P CNX Nifty was down 59.05 points or 1.06% to 5,487.75, its lowest closing level since 24 June 2011. The Nifty hit low of 5,475.65 in intraday trade.

The BSE Mid-Cap index fell 0.88% and the BSE Small-Cap index shed 0.93%. Both these indices outperformed the Sensex.

BSE clocked turnover of Rs 2556 crore, lower than Rs 2779.08 crore on Wednesday, 27 July 2011.

The market breadth, indicating the overall health of the market, was weak. On BSE, 1,878 shares declined and 974 shares advanced. A total of 129 shares remained unchanged.

From the 30 share Sensex pack, 24 stocks fell and the rest rose.

Index heavyweight Reliance Industries (RIL) fell 2.71% to Rs 837.35, with the stock falling for the third straight day on weak Q1 operating performance. The stock was the top loser from the Sensex pack. RIL's operating profit margin (OPM) declined sharply to 12.25% in Q1 June 2011 from 16.04% in Q1 June 2010 as weak performance from the oil & gas and petrochemicals businesses offset strong performance from the refining segment.

RIL's net profit rose 16.69% to Rs 5661 crore on 39.1% increase in net sales to Rs 81018 crore in Q1 June 2011 over Q1 June 2010. The growth in both net profit and net sales topped market expectations. RIL was seen reporting 15.44% growth in net profit to Rs 5600.35 crore on 28.7% growth in net sales to Rs 74951.47 crore in Q1 June 2011 over Q1 June 2010, as per average estimate of 10 brokerages. The result was announced on Monday, 25 July 2011.

RIL's gross refining margin (GRM) surged to $10.3 a barrel from $7.3 a barrel in Q1 June 2010. Gas production from RIL's KG-D6 field off the east coast declined 18% to 156.2 BCF in Q1 June 2011 over Q1 June 2010. Production of gas condensate from the filed jumped 81.6% to 0.21 million barrels in Q1 June 2011 over Q1 June 2010. The company said gas sales have been prioritized as per government's directive with effect from 9 May 2011.

Cigarette major ITC rose 2.61% on strong Q1 results. Net profit jumped 24.51% to Rs 1332.72 crore on 20.57% rise in operating income to Rs 5860.18 crore in Q1 June 2011 over Q1 June 2010. A stronger-than-expected top line growth aided strong bottom line growth. The core operating profit margin declined to 33.72% from 33.81% in Q1 June 2010. The result was announced during trading hours today.

Hindustan Unilever fell 0.98% after the company said at the time of announcement of the first quarter results today, 28 July 2011, that commodity inflation remains high. Hindustan Unilever's profit after tax before exceptional items rose 11% to Rs 578 crore in Q1 June 2011 over Q1 June 2010. Total income rose 14.4% to Rs 5629.96 crore in Q1 June 2011 over Q1 June 2010.

The company said domestic consumer business grew by 15% in Q1 June 2011, driven by strong 8.3% underlying volume growth with double-digit growth across segment. Hindustan Unilever (HUL) said commodity inflation continues to be at high levels with cost of goods sold going up by 480 basis points (bps) in Q1 June 2011. Cost pressures were managed dynamically through aggressive saving programmes coupled with judicious pricing.

The overall competitive intensity remained high, HUL said. Advertising spends were stepped up in personal products and packaged foods while spends in soaps and detergents were calibrated in line with industry trends. Advertising and promotion spends at 11.5% of sales remained competitive. The business continued to focus on driving buying efficiencies, cost saving programmes and return on marketing investments.

Commenting on the first quarter results, HUL chairman Harish Manwani said, "Our strategy continues to deliver consistent and competitive growth. This is the fourth consecutive quarter of double digit growth led by a combination of innovations, market development and relentless focus on execution. In a challenging business environment, we are managing our business dynamically to ensure that we remain competitive and cost efficient."

Titan Industries rose 1.38% after net profit rose 76.74% to Rs 143.66 crore on 62.08% increase in total income to Rs 2043.62 crore in Q1 June 2011 over Q1 June 2010. The result was announced during trading hours today, 28 July 2011.

IFCI rose 0.33% after net profit rose 11.91% to Rs 132.06 crore on 20.55% increase in total income to Rs 610.43 crore in Q1 June 2011 over Q1 June 2010. The result was announced during trading hours today, 28 July 2011.

ONGC was flat. The company's net profit rose 11.83% to Rs 4094.90 crore on 18.65% rise in total operating income to Rs 16401.92 crore in Q1 June 2011 over Q1 June 2010. A sharp surge in the company's subsidy sharing burden restricted profit growth at the state-run oil exploration major. The result was announced after trading hours on Thursday.

Ambuja Cements rose 1.61%, reversing initial losses triggered by weak Q2 results. Net profit fell 11.17% to Rs 347.50 crore on 6.19% increase in total income to Rs 2245.22 crore in Q2 June 2011 over Q2 June 2010. The result was announced during trading hours today, 28 July 2011. Ambuja Cements said operating costs increased substantially during the quarter.

Ambuja Cements said high inflation and hardening interest rates have slowed down housing construction and infrastructure spending, which has adversely impacted cement demand. With steep increases in cost driven by increase in raw material cost, coal cost, high inflation and coupled with subdued demand, profit margins are expected to be under pressure, Ambuja Cements said. The company said it will continue its thrust in improving productivity and operational efficiency to partly mitigate these pressures.

Cement demand is expected to be low during the monsoons, Ambuja Cements said. Revival of the demand thereafter and improvement in realization to absorb the cost increases would be critical for the remaining part of the year, the company said.

ACC gained 2.37% ahead of Q2 results. Consolidated net profit fell 6.11% to Rs 328.12 crore on 17.17% rise in sales turnover to Rs 2538.97 crore in Q2 June 2011 over Q2 June 2010. The result was announced after trading hours today, 28 July 2011.

ACC said while market conditions are presently subdued, the overall cement demand will pick up post monsoon and that ACC is well placed to benefit from this expected increase in demand in the coming months.

UltraTech Cement rose 0.2% extending Wednesday's 2.79% gain triggered by strong Q1 results. Net profit rose 22.40% to Rs 683 crore on like-to-like basis in Q1 June 2011 over Q1 June 2010. Net sales rose 9.40% to Rs 4365 crore in Q1 June 2011 over Q1 June 2010. The result was announced during trading hours on Wednesday. The results are strictly not comparable with the corresponding period of the previous year, the company said.

UltraTech said it will incur capital expenditure of over Rs 11000 crore over the next three years to raise capacity. UltraTech Cement said the surplus cement scenario is likely to continue over the next 2 to 3 years resulting in selling prices remaining under pressure. With commodity prices rising, input costs will be affected, which will squeeze margins, the company said.

Shares of diversified Jaiprakash Associates slumped 3.46%.

Bank shares dropped for the third straight day after the Reserve Bank of India revised downwards non-food credit growth forecast for the year ending March 2012 to 18% from 19% earlier at its first quarter review of monetary policy 2011-12 announced on Tuesday, 26 July 2011. India's largest private sector bank by net profit ICICI Bank fell 0.7% in volatile trade ahead of its Q1 result tomorrow, 29 July 2011.

India's largest commercial bank by branch network State Bank of India (SBI) declined 1.95%. The bank's Chairman Pratip Chaudhari was quoted by the media as saying on Tuesday that the bank sees a need to raise short-term deposit rates.

India's second largest private sector bank by net profit HDFC Bank dropped 2.84%.

Yes Bank shed 0.72%. In an instant reaction to the RBI's policy move, private sector bank Yes Bank on Tuesday, 26 July 2011, raised its base rate by 50 basis points to 10.25% with immediate effect. The bank also increased its prime lending rate by 50 bps with immediate effect. The increase in base rate and PLR will enable the bank to fully absorb the increased costs on account of rising interest rates, Yes Bank said in a statement. The rate hike will also serve the purpose of effective and immediate transmission of monetary policy objectives of RBI, Yes Bank said.

Canara Bank fell 3.56%, extending Wednesday's 3.4% losses triggered by weak Q1 results. Net profit fell 28.37% to Rs 725.85 crore on 30.75% increase in total income to Rs 7707.59 crore in Q1 June 2011 over Q1 June 2010. The result was announced during market hours on Wednesday, 27 July 2011.

Bank of Baroda shed 0.61%, extending Wednesday's 2.69% decline triggered by a sharp sequential decline in the state-run bank's net interest margin (NIM) to 2.87% in Q1 June 2011 from 3.45% in Q4 March 2011. The NIM declined 3 basis points on year-on-year basis. Net profit rose 20.21% to Rs 1032.85 crore on 36.08% rise in total income to Rs 7272.46 crore in Q1 June 2011 over Q1 June 2010. The result was announced during market hours on Wednesday.

Punjab National Bank fell 1.96%. The bank announced during market hours today that net profit rose 3.44% to Rs 1105.07 crore on 36.94% rise in total income to Rs 9398.91 crore in Q1 June 2011 over Q1 June 2010.

Vijaya Bank fell 6.04% after net profit plunged 58.37% to Rs 72.22 crore on 28.49% rise in total income to Rs 1953.40 crore in Q1 June 2011 over Q1 June 2010.

Infrastructure Development Finance Company (IDFC) fell 3.51%, extending Wednesday's 0.67% fall triggered by weak Q1 results. IDFC announced during market hours on Wednesday that consolidated net profit fell 6.39% to Rs 313.69 crore on 23.76% rise in total income to Rs 1357.98 crore in Q1 June 2011 over Q1 June 2010.

Realty stocks extended recent losses triggered by worries that higher interest rates could dent demand for residential and commercial properties. Purchases of both residential and commercial property are largely driven by finance. Indiabulls Real Estate, DLF, Orbit Corporation, Sunteck Realty, Peninsula Land, Unitech, Ackruti City and Mahindra Life Space Developers fell by 1.43% to 7.16%.

Sun Pharmaceutical Industries rose 0.14%, reversing initial losses. The company's consolidated net profit fell 11.22% to Rs 501 crore on 25.41% rise in total income to Rs 1701.03 crore in Q1 June 2011 over Q1 June 2010. Sun Pharma said Q1 June 2010 results were boosted by a significant component of non-recurring sales and profits from a few products. Therefore margins reported in Q1 June 2011 are not comparable to those of Q1 June 2010.

Israel-based Taro Pharmaceutical Industries (Taro) became a subsidiary of the company on 30 September 2010. The above results for the current quarter includes the results of Taro and its subsidiaries and therefore are not comparable with the corresponding figures of previous year, Sun Pharma said.

IT stocks fell weaker-than-expected US economic data. US is the biggest market for Indian IT firms. Tech Mahindra, Infosys, Wipro, TCS and Patni Computer Systems fell by between 0.32% to 2.13%.

HCL Technologies shed 2.36%, extending Wednesday's 2.32% losses as profit taking in the stock continued after the company reported strong Q4 results before trading hours on Wednesday. The company's consolidated net profit as per US accounting standards rose a stronger-than-expected 9% to Rs 510.50 crore on 3.9% rise in revenue to Rs 4299.50 crore in Q4 June 2011 over Q3 March 2011. An increase in operating profit margin to 18.5% from 17.3% in Q3 March 2011 aided the strong bottom line growth.

The top line growth, however, lagged market expectations. HCL Tech's consolidated net profit as per US accounting standards was seen rising 7.52% to Rs 503.44 crore on 5% growth in revenue to Rs 4345.08 crore in Q4 June 2011 over Q3 March 2011 as per average estimate of 5 brokerages.

HCL Technologies on Wednesday said it is cooperating with the London Metropolitan Police in their investigation into the recent alleged phone-hacking scandal at News International, one of the software exporter's clients. News International, News Corp.'s U.K. newspaper arm, is being probed over allegations that employees of its now-defunct tabloid News of the World allegedly intercepted voicemail messages of celebrities, politicians and crime victims. News International has been a customer of HCL Technologies since 2009. HCL manages the data center operations for News International in different parts of the world.

The company announced after market hours today that it has been chosen by the Blue Cross and Blue Shield Association (BCBSA) to be part of a national purchasing arrangement for the ICD-10 transition. Through this arrangement, HCL's products and service capabilities will be available to the 39 independent Blue Cross and Blue Shield companies across the country.

Metal stocks declined across the board. Hindalco Industries, Hindustan Zinc, Sterlite Industries, Sail, Tata Steel, JSW Steel and Nalco shed by between 0.17% to 4.98%. Jindal Steel & Power dropped 2.84% ahead of its Q1 result today.

Hindustan Construction Company fell 5.39% after net profit slumped 89.86% to Rs 2.87 crore on 6.58% increase in net sales to Rs 1057.70 crore in Q1 June 2011 over Q1 June 2010.

State-run power equipment maker Bharat Heavy Electricals (Bhel) rose 1.2% on bargain hunting after recent sharp losses triggered by disappointing Q1 results. The stock hit 52-week low of Rs 1802 today. The company's net profit rose 22.15% to Rs 815.51 crore on 9.97% increase in net sales to Rs 7125.68 crore in Q1 June 2011 over Q1 June 2010. The net profit was boosted by a steep 52.12% jump in non-operational income to Rs 248.65 crore in Q1 June 2011 over Q1 June 2010. The result was announced during trading hours on Tuesday, 26 July 2011.

The top line growth fell short of market expectations. Analysts were expecting a much stronger revenue growth in Q1 June 2011 from Bhel on expectations of a strong execution of the large order book of the power equipment major. The company's outstanding order book was Rs 159600 crore as on 30 June 2011.

Most of the other capital goods stocks declined. Usha Martin, Bharat Bijlee, Larsen & Toubro, Havells India, Reliance Industrial Infrastructure, ABB, Everest Kanto Cylinders, Praj Industries, Thermax, Walchandnagar Industries, Lakshmi Machine Works, Areva T&D India, Kalpataru Power Transmission and fell by 0.14% to 2.85%.

Most auto stocks extended recent losses on concerns higher interest rates could crimp sales of automobiles. Purchases of automobiles, including that of cars, utility vehicles and commercial vehicles are substantially driven by financing. India's largest truck maker by sales Tata Motors fell 0.56%.

Utility vehicles and tractors major Mahindra & Mahindra (M&M) declined 0.24%. Last week, Ssangyong Motor Company, the South Korean subsidiary of M&M, reported 43% growth in revenue to KRW 1349.2 billion in the first half of the calendar 2011 over the previous corresponding period. Ssangyong Motor's sales rose 53% to 55,873 vehicles in the first half of the calendar 2011 over in the first half of the calendar 2010. This is the highest level of sales volume achieved by the company in a half year period since 2007.

Maruti Suzuki fell 1.66%, reversing initial gains, on reports production has been halted at the company's Manesar plant due to a strike by some workers. Nearly 2,000 workers of the Manesar plant had struck work in June, forcing the auto maker to stop production for 10 working days.

Maruti's net profit rose 18% to Rs 549.20 crore on 3.3% increase in net sales to Rs 8319.90 crore in Q1 June 2011 over Q1 June 2010. Other income jumped 79.2% to Rs 180.07 crore in Q1 June 2011 over Q1 June 2010. The company said at the time of announcing Q1 June 2011 results that the passenger car market was sluggish in Q1 June 2011, mainly due to a sharp increase in fuel prices and higher interest rates.

The result was announced during trading hours Tuesday, 26 July 2011. Maruti said higher commodity prices and foreign exchange volatility put pressure on profit margins in Q1 June 2011.

Bike makers reversed initial losses. India's largest bike maker by sales Hero Honda Motors rose 1.1%. India's second largest motorcycle maker by sales Bajaj Auto gained 0.56%

Bharatiya Global Solutions clocked highest volume of 4.07 crore shares on BSE. Birla Cotsyn (73.43 lakh shares), Sanraa Media (61.04 lakh shares), Arvind (57.85 lakh shares) and Rushil Decor (52.73 lakh shares) were the other volume toppers in that order.

Bharatiya Global Solutions clocked highest turnover of Rs 126.03 crore on BSE. RIL (Rs 84.34 crore), SBI (Rs 71.86 crore), JSW Steel (Rs 70.01 crore) and Coal India (Rs 68.94 crore) were the other turnover toppers in that order.

As the crucial corporate earnings season gathers steam, investors will closely watch the post-Q1 June 2011 result management commentary to gauge the future earnings outlook at a time when Indian firms are witnessing cost pressures amid rising interest rates and staff costs.

ICICI Bank, Power Finance Corporation, Bhushan Steel, Idea Cellular and TVS Motor unveil Q1 results tomorrow, 29 July 2011. Sun TV announces Q1 results on 1 August 2011. Power Grid Corporation unveils Q1 results on 2 August 2011. Bharti Airtel and United Spirits unveil Q1 results on 3 August 2011. Adani Power, Mundra Port And Special Economic Zone and Indian Hotels announce Q1 results on 4 August 2011. Cipla and IL&FS Transportation Networks are set to announce Q1 results on 5 August 2011.

M&M announces Q1 results on 8 August 2011. ABB, Tata Communications, Mahindra Satyam and GMR Infrastructure announce quarterly results on 9 August 2011. Tata Power and Rural Electrification Corporation unveil Q1 results on 10 August 2011. Tata Motors and Castrol India unveil quarterly results on 11 August 2011. Hindalco and Coal India unveil Q1 results on 12 August 2011. Aditya Birla Nuvo unveils Q1 results on 13 August 2011.

Food prices rose in the week ended 16 July 2011 due to costlier vegetables and fruits, the latest data showed. The wholesale price index for food articles rose 0.8% to 193.3 from 191.7 in the previous week, data from the Ministry of Commerce and Industry showed Thursday. The index has risen three out of four weeks ending July 16. Data also showed the index for primary articles, which includes food and non-food articles, was little changed at 198 in the week ended July 16, compared with 197.7 a week earlier.

The Reserve Bank of India (RBI) raised its key lending rates by 50 basis points at a policy review on Tuesday, 26 July 2011, to tame high inflation. The RBI has raised its end March 2012 inflation target to 7% as against the previous estimate of 6%, saying inflation has been higher than its expectations. It kept its economic growth forecast of 8% for this fiscal year. The RBI revised downwards non-food bank credit growth projection to 18% for the year ending March 2012 (FY 2012) from 19% earlier.

Although the impact of past monetary policy actions is still getting transmitted, considering the overall growth and inflation scenario, there is a need to persevere with the anti-inflationary stance, the RBI said. Going forward, the monetary policy stance will depend on the evolving inflation trajectory, which, in turn, will be determined by trends in domestic growth and global commodity prices, the RBI said. A change in stance will be motivated by signs of a sustainable downturn in inflation, it added.

The uncertain global macro-economic environment poses a challenge for the domestic economy from the perspective of financing the current account deficit, RBI said. In this context, the composition of capital flows remains a concern. In recent months, some shift in composition of capital flows towards foreign direct investment (FDI) has been observed. This trend needs to be reinforced through policy actions to improve the quality of financing of the current account deficit, RBI said.

Finance Minister Pranab Mukherjee on Wednesday, 27 July 2011, said food inflation at 8% around the current level, is not acceptable. He added that the government would take steps to support the RBI's battle against stubbornly high inflation, which is likely to see further rate rises. "I don't think we have reached the end of tunnel," Mukherjee said referring to the RBI's rate tightening cycle. "Appropriate measures will be taken," Mukherjee said, referring to government support of the central bank's policy action, without giving specifics.

Mukherjee said the government would keep its spending in check to meet its deficit target but did not give details. "We are looking at ways to compress expenditure. There is revenue buoyancy and together I think they will help us in reaching fiscal deficit target," he said.

RBI Deputy Governor Subir Gokarn on Wednesday said the decision to go for a 50 basis point increase in the policy rate, instead of the baby steps of 25 basis points that the RBI mostly has taken, was influenced by strong demand in the economy, which was partially unaffected by the interest-rate moves. The government's high spending was also fueling demand pressures, he said on a conference call with analysts.

Gokarn said the downside risks to growth from the rate increases would be "fairly bounded" and that a milder hike could have been perceived as inadequate. "We thought that the stronger action was essentially consistent with the new stance that we had signaled in May," he added.

Monsoon rain in India this year is likely to be close to normal, and there is no change in the rainfall forecast of 95% of the 50-year average, the country's weather chief said on Tuesday, 26 July 2011, giving some cheer to policy makers who are battling high inflation. The distribution of rains is very good, and it is one of the best monsoons in recent years, Ajit Tyagi told reporters on the sidelines of a conference on Tuesday. He said that the monsoon rain is lagging only in the states of Gujarat, Haryana, Assam and some parts of Andhra Pradesh.

Gujarat is the country's largest cotton and groundnut producer, while Assam is a key tea-growing region. Andhra Pradesh is one of India's leading rice producers. The June-September monsoon is crucial for summer-sown crops such as rice, sugarcane, pulses, cotton and oilseeds. It holds the key to food prices and farm incomes. Tyagi said the slight shortfall in rain won't have any significant impact on crop output. Monsoon rains have now been around 2% below normal so far.

Meanwhile, foreign ministers of India and Pakistan on Wednesday agreed on measures to promote increased travel and trade across their border in the disputed Himalayan region of Kashmir, moves aimed at boosting trust between the countries as they seek a thaw in their long-frosty relations.

European stock markets posted losses on Thursday, 28 July 2011, as nervousness over US debt negotiations, as well as poorly received earnings from BASF SE, Alcatel-Lucent SA and others, weighed on the region's main bourses. The key benchmark indices in UK, France and Germany were down by between 0.64% to 1.48%.

Asian stocks fell Thursday, 28 July 2011, on US debt tensions and on weaker-than-expected US economic data. The key benchmark indices in South Korea, Singapore, Indonesia, China, Japan, and Taiwan fell by between 0.12% to 1.45%. Hong Kong's Hang Seng rose 0.13%.

Japanese retail sales rose 1.45% in June from a year earlier, according to government data released Thursday, rebounding from a 1.3% drop in May.

Trading in US index futures indicated that the Dow could fall 2 points at the opening bell on Thursday, 28 July 2011. Wall Street suffered its worst day in eight weeks on Wednesday, hit by weak earnings, lackluster economic data and no movement in Washington talks as the deadline for a US default looms. US lawmakers remain locked over the path to raise the debt-ceiling, as the August 2 deadline required for action to avoid a possible default drew closer.

New orders for long-lasting US manufactured goods fell unexpectedly in June, and a gauge of business spending plans slipped. Also, the Federal Reserve's "Beige Book" report showed the pace of the recovery slowing in most districts surveyed.

A clearer picture on the health of the US economy will be delivered Thursday, 28 July 2011, with jobless claims and home-sales data due to be released.