The fall in crude oil prices has been the trigger for a bounce in the markets. The UBS Bloomberg Constant Maturity Commodity Index is down 8.5% from the heights it reached on 3 July. The worry that slowing global growth will soon send commodity prices down has led to an about-turn in the behaviour of the so-called Bric (Brazil, Russia, India and China) markets.
Till June this year, it was the Brazilian and Russian markets that were doing relatively well. For instance, in the three months to 30 June, the MSCI Russia index was up 9.7% and Brazil up 7%, while MSCI China was down 4.5% and India down a huge 14.23%. Now, consider what has happened this month: The MSCI China index is up 0.02%, while the other three have fallen—India by a small 0.42%, Russia by 9.41% and Brazil by 11.04%. The reason for the diverging performances is simple—Brazil and Russia are commodity producers and exporters, while India and China are net commodity importers. Any fall in commodity, especially in energy, prices is negative for the BR part of Bric and good for the IC part.
The big question, of course, is whether oil prices are headed downwards. The experts don’t seem to believe so, with the International Monetary Fund’s, or IMF’s, World Economic Outlook Update, issued last week, pointing out that “oil and food prices are likely to remain high and volatile, with the baseline forecast showing only moderate declines…” If IMF is right, the bounce in Indian and Chinese stocks is likely to be temporary.
For Colgate, volume growth accelerates
Colgate-Palmolive (India) Ltd reported a healthy 11.5% rise in volumes for the June quarter, up from 9% in the March quarter. Together with price hikes, the quarter saw savings in raw material and packaging expenses, and in overheads such as administration expenses. However, staff costs soared and the savings on raw material and overheads were ploughed back into the business through advertising and promotion spend.
The net result was a 100 basis points dip in margins, but analysts aren’t unduly worried about it since investments in sales promotion have been bearing fruit in terms of steady volume growth. Its net profit grew 18% last quarter, which is fairly decent considering that its stock, at Rs350, traded at about 19 times trailing earnings just prior to the results announcement. What’s more, analysts expect the firm to pay a dividend of Rs14-15 a share this year, which means it also had an attractive dividend yield of more than 4%. It’s no wonder then that the stock jumped nearly 6% on Friday.
If the firm continues to deliver the steady growth, the stock could continue to outperform the market.
Colgate’s emphasis on advertising and sales promotion has led to gaining market share in value terms, and analysts expect this to continue. Besides, the relatively new plant at Baddi, where it enjoys tax incentives, is expected to generate further savings as capacity utilization increases. However, if inflation continues to be high, consumers could move to either cheaper offerings from Colgate or to other brands. Insufficient monsoon could also affect rural incomes and hurt demand.
But, with high dividend yield, the downside will be limited for Colgate shares compared with most others.
IDFC: in a capital conservation mode
The June quarter results of Infrastructure Development Finance Co., or IDFC, were welcomed enthusiastically by the market on Friday, with the stock gaining 15%. There were good reasons for the jump—profits after tax increased by 20% compared with the year-ago period, and net interest income showed a growth of 60%. Net interest income from the company’s infrastructure loans increased by 71%.
However, the slowdown was pronounced in that part of the company’s business which relates to the capital market, with income from investment banking and its principal investment business down 29% and 19%, respectively. IDFC’s spread, on a 12-month rolling basis, was 2.2% for the 12 months ended June 2008, compared with 2.1% for the 12 months ended March.
However, there are clear signs of a slowdown on the lending front. Gross disbursements increased 12%, while gross approvals rose a mere 5%. To put things in perspective, in the first quarter of last fiscal year, gross disbursements increased by 83%, while gross approvals rose by 57%.
As the IDFC management put it in the company’s conference call, the results reflect the momentum of activity that has taken place over the past 12 months and that activity is going to slow in the future.
That’s not only because of the general macro slowdown, but also because the IDFC management is not going to grow assets as aggressively as it has in the past. The management also said the degree of uncertainty in the downward leg of this cycle is greater than the last time around. It has pointed out that there’s a lot of uncertainty on the robustness of its clients and that IDFC would focus on managing the assets that it has rather than on booking new assets. The company would be, the management said, in a “capital conservation mode”.
That’s partly because the rating agencies have been taking a much harsher stance and, in spite of IDFC’s tier-I capital being as high as 17,7%, the company would need to raise capital this year to maintain its ratings. The management mentioned, however, that the company would strive to keep the dilution to the minimum. These factors will no doubt weigh on the stock.
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