Saturday, 8 September, 2007

Weekly Newsletter

Global central banks pause to calm markets

With the Federal Reserve Chairman Ben Bernanke expressing his willingness to cut rates to stabilise the markets, other central banks continued their efforts in restoring investor confidence and ease the liquidity squeeze. As expected, the European Central Bank (ECB) and the Bank of England (BOE) maintained a status quo on interest rates so did central banks in Brazil, Australia, Canada and South Korea. But, the People's Bank of China hiked the reserve requirement for banks yet again to cool down the overheated economy. The central bank in Sweden raised a key rate by a quarter percentage point to quell inflation.

Not only did the central banks decided to hold rates steady, they also injected cash to combat the liquidity crunch arising out of the meltdown in the US housing sector, especially the subprime mortgages. The ECB added €42.2bn (US$57.7bn) in emergency cash to ease a credit drought that had pushed overnight deposit rates to a six-year high. The BOE offered extra money to reduce unusually high overnight rates. Australia's central bank said it will buy debt backed by home loans to add cash to the financial system. Central banks have added more than US$400bn to money markets since Aug. 9 to ease lending between banks.

The BOE issued an accompanying statement, signalling its awareness of market conditions. It was only the third time in the decade-long history of the bank's policy-setting body had done so while holding rates on hold (the last occasion being May 1999). ECB president Jean-Claude Trichet signaled that no rate increase was likely next month either, and added that providing extra liquidity was essential as an element of confidence. He promised the ECB would provide funds at whatever price at whatever interest rates the market has to function.

The Organization for Economic Cooperation and Development (OECD) cut its forecasts for US and European economic growth and said they may be reduced further following the rout on financial markets. The ECB too reduced its forecast for growth in Europe this year, and warned that continued volatility in financial markets could dampen its projections further. Meanwhile, China asked its banks to set aside more money as reserves to cool lending and investment after inflation accelerated to a 10-year high. The reserve ratio will increase 0.5% to 12.5% on yuan deposits starting Sept. 25. The ratio is now the highest in almost 10 years.

Bajaj-TVS spar over engine technology

A major fight broke out between two-wheeler majors Bajaj Auto and TVS Motor over the use of twin spark plug technology. While Bajaj Auto accused TVS of stealing its so-called 'DTSi' technology used extensively across bikes, TVS shot back saying the technology has been known for years, and therefore cannot be a proprietary technology of Bajaj Auto. Countering Bajaj Auto's charges of technology infringement, TVS said it would press libel charges against its Pune-based rival for making malicious allegations, and insisted that the latter withdraw all the charges against it.

Last week, TVS introduced seven new products, including a new 125 cc bike, called Flame. This led to Bajaj Auto threatening legal action against its smaller rival for what it said was a violation of intellectual property rights. Though the engine of Flame is of a similar size and employs the twin spark plug technology, TVS said its technology does not infringe Bajaj Auto's patent in any way. TVS said the concept of using twin spark plugs in motorcycles is old and existed even before Bajaj Auto introduced it in India. TVS said it has developed the CC-VTi engine in association with Austrian company AVL.

TVS filed an application for revoking Bajaj’s DTSi patent, and Bajaj Auto said it has received the Chennai-based manufacturer’s application seeking to revoke its patent. "If our IPR is violated, we shall defend it," Bajaj Auto chairman Rahul Bajaj said. On the other hand, TVS Chairman Venu Srinivasan said, "We are taking the advice of our counsel." He, however, declined to comment on the company’s future course of action. Meanwhile, Bajaj Auto MD Rajeev Bajaj said the company would wait for TVS’ Flame to be out in the market to decide on its future course of action.

On the business front, TVS said the launch of Flame (initially scheduled for November) is on course for October launch. Bajaj Auto, Meanwhile is busy preparing for the launch of its much hyped new 125 cc bike, 'Exceed' over the coming weekend. Separately, a media report indicated that Srinivasan and Rajeev Bajaj may have decided to burry the hatchet at a closed-door meeting at the SIAM Annual convention in New Delhi. Still, with competition in the sector getting stiff and stakes being so high, it remains to be seen whether the two companies will end up in court or decide to go for an out-of-court settlement.

Market up for 3rd straight week

Despite the slight fall on the last trading day of the week, the key indices managed to rise for a third week running, putting behind last month's crash due to the global market meltdown and concerns on the political front. The benchmark Sensex added 1.8% or 271 points to close at 15590 and the NSE Nifty advanced by 1% or 45 points to 4510.

Power, Banking, FMCG, Pharma and Cement stocks led the rally on the bourses. The small-cap stocks continued their dream run with the BSE Small-Cap Index hitting an time high of 8289.81 during the week. The Indian bulls managed to overcome the recent misery on the back of buying from both FIIs and MFs.

The 14 new entrants in the F&O segment had a terrific debut, as institutions rushed to take positions in these stocks. Reliance Capital and BNP Paribas acquired 2.2 lakh and 1.2 lakh shares, respectively of LMW at Rs2925. Others like Aptech, Bhushan Steel and NIIT Tech also had a good run over the week.

Value buying was seen in FMCG shares with HUL and ITC leading from the front. Also, expectations of good quarterly numbers next month have been driving interest in these counters. ITC surged by over 4% to Rs177, Hindustan Unilever advanced by 2.5% to Rs213 and Tata Tea gained 1.1% to Rs761.

Strong set of monthly sales by cement companies and buoyant domestic demand helped cement stocks record concrete gains. Also, there were reports that Pakistan has raised the prices of cement, helping ease concerns of cheaper cement entering India. There was also talk of a fresh round of price hike in the local market post monsoon. Grasim climbed by over 8.5% to Rs3182, Ambuja Cements rose by over 5% to Rs140 and ACC added 2% to Rs1086. Among the Mid-Cap stocks Kesoram, India Cements and Mangalam Cement were the major gainers.

Power stocks continued their winning streak led by gains in REL, NTPC and Tata Power. REL rose on reports that the company may sell shares in the new engineering unit. NTPC also had a good run as the Government plans to divest 4.75% of its stake in the company. REL was the top gainer in the Sensex. The scrip rose over 9% to Rs850. NTPC jumped by over 8% to Rs187 and Tata Power surged by over 5% to Rs718.

Banking stocks had another good week, as speculation increased about a possible rate cut by the Fed. The BSE Banking index gained 3.2% on the week. Mid-Cap stocks were in the limelight. Dena Bank, Axis Bank and Bank of Rajasthan were among the top gainers. ICICI Bank rose over 3.5% to Rs920, HDFC Bank gained 2.1% to Rs1196 and SBI added 1.2% to Rs1620.

Sensex eyes 16k

That we are heading towards 16k on the Sensex is sure now, with the market rebounding sharply over the past three weeks. The big question is how much more time it will take for the Sensex to get there and will the market sustain for long above that level. There could be a few hiccups before the main indices hit their new lifetime highs. But, nothing to unduly worry about, as renewed buying from FIIs will ensure that they will get there as early as next week. Still, one should not get carried away by these statistical events, as they tend to distract attention from the critical issue, which is to focus on one's personal holdings. Last time the bulls hit historic highs, the fall from grace proved to be too tough for them. The current momentum suggests that the same may not get repeated, though one has to keep a close eye on global developments as well as the developing political situation in the country. All eyes and ears are on the Federal Reserve. The American central bank is expected to move swiftly to prevent a recession but the moot point is whether it will be enough? Investors should continue to be wary of any rise and play safe by booking some profits. A correction is overdue as the valuations look expensive and there are no major positive triggers.