The June numbers from the ABN Amro purchasing managers’ index (PMI) paint a very different picture of the economy than the one portrayed by the stock market. The June reading for the seasonally adjusted output index is the highest in six months, the new orders index is the highest in four months and the export order index put in its best performance in seven months. What’s more, the index of finished goods stocks was below 50 for the third successive month (a reading below 50 indicates that stocks of finished goods are contracting). That’s an indication that demand is still very strong and hence companies will increase output. The buoyant export order index, of course, is on account of the depreciating rupee that makes Indian products cheaper abroad.
The PMI report also points to inflationary pressures, with the input price index at its highest level in 19 months. The index of output prices is also at the highest level in eight months, an indication that companies are able to pass on the increase in input prices to consumers.
Commenting on the data, ABN Amro senior economist Gaurav Kapur says the economy seems to be in a better shape than the doomsters would have us believe. He points to the buoyant tax collections as another indication of a robust economy.
At first glance, the PMI data seem to be at odds with the slowing growth in non-oil imports seen in May, which appears to suggest growth has slowed substantially. As Lehman Brothers economist Sonal Varma points out, non-oil imports grew at a much slower pace of 17.4% from 32.3%, suggesting some possible moderation in investment activity. However, it’s also worth remembering that the growth has occurred on top of a strong 41.6% rise in non-oil imports in May last year.
The robust PMI data is a validation of the Reserve Bank of India’s view that demand and manufacturing activity is still strong and needs to be slowed further. The full impact of the central bank’s tightening measures will be felt with a lag, which means that growth is expected to slow in the future. But if the PMI numbers are correct, the corporate results for the June quarter are likely to hold some positive surprises.
The changing market views on MTN deal
Is a merger with South Africa’s MTN Group Ltd good or bad for Indian telecommunication companies?
Don’t look to the stock market for the answer—it’s clueless.
About a month ago, when Reliance Communications Ltd entered into talks with the South African company (after Bharti Airtel Ltd backed out), its shares fell by 5%. Also, Bharti’s shares rose by about 5%—its investors were relieved that the company will not be involved in an expensive bid for MTN.
So a month ago, it seemed like the markets didn’t look favourably on the deal with MTN.
This Tuesday, Reliance Communications’ shares fell by as much as 11%, which according to analysts, was because of concerns that the deal with MTN may not materialize as the deadline for exclusivity in negotiations was nearing. This is a complete reversal in how the market is viewing the deal. Or is it? Perhaps it just illustrates the overall gloom and doom scene on the market currently.
Oversupply concerns to hurt sentiments on cement stocks
News reports suggest that cement companies are taking the unusual step of raising prices marginally during the monsoon season. Normally, prices drop during monsoon because offtake is low. But the cost of inputs such as coal and freight expenses continue to soar, leaving these firms with hardly any option.
But the hike is reported to be rather small, and as a result, has hardly caused any excitement in cement stocks. The ACC Ltd stock was among the rare ones to have dropped in Wednesday’s market bounce-back. Most other cement majors gained at rates lower than the 5% rise in the National Stock Exchange’s Nifty index.
Meanwhile, India Cements Ltd reported March quarter results earlier this week, which reiterated the fact that companies based in the South are enjoying better pricing power. Average realizations of the company improved by 1.6% over the December quarter. But the sharp rise in costs led to a drop in operating profit calculated on a per-tonne basis. Some analysts believe South-based companies continue to be the best pick within the cement industry, given a more conducive operating environment. Apart from better realizations (until the demand-supply situation gets corrected in financial year 2009-2010), it is estimated that they enjoy a lower cost for imported coal compared with firms based in western India. This is because the imports come from Indonesia, compared with South Africa for companies based in western India.
Of course, given the fact that the industry may be in an oversupply situation in less than two years and considering that demand may soon taper, sentiment for cement stocks overall is expected to remain weak.
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