International crude oil prices finally capitulated on Tuesday as hurricane Gustav, which had buoyed prices for a while, ended with a whimper. The Indian market rallied more than others, thanks to the country’s higher reliance on imported oil.
The last time that oil was at $100 (Rs4,430 today) a barrel was on 19 February, when the Sensex was at 18,075 points. The Sensex has rallied 19.7% from its lows on 16 July, while international oil prices have fallen around 27.5% from their highs around the same time.
While lower oil prices are positive for stocks, the rally in the Sensex has not been as sharp as the fall in crude prices.
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That’s because inflation and interest rates are now much higher than in February and earnings growth has slowed substantially.
Nevertheless, bank stocks will benefit from lower mark-to-market depreciation on securities, which is why the Bombay Stock Exchange’s Bankex index rose 6% on Tuesday.
Mark-to-market accounting assigns a value to a position held in a security based on its prevailing market price.
With stocks and bonds rallying, the odd man out was the rupee, which weakened. Bond market analysts say that’s because the Reserve Bank of India had sold dollars earlier and bought them forward. On maturity, those trades are now being reversed by doing buy-sell swaps, or buying dollars in the spot market and selling them forward. That’s why forward premiums have come down.
On the other hand, the fear of continued selling by foreign investors also hangs over the currency market.
As of now, economists are not revising any of their targets, whether for inflation, or interest rates or the currency. But that could change if oil prices continue their southward journey.
Ashwin Ramarathinam contributed to this story.
Dilution of Tata Motors’ equity known; wait for JLR’s financials
Shares of Tata Motors Ltd fell 1.8% on a day when the markets rose 3.6%, after the company announced the terms of its rights issue. It will make two rights issues— one of ordinary shares, and the other of shares with differential voting rights. Together, the two issues will lead to a dilution of 33% in its equity base. The company will also issue equity-linked securities in the international market, which will further dilute equity at a later stage.
The ordinary share issue is priced 22% lower than Monday’s closing stock price of Rs438. The differential voting right shares are priced at a 30% discount. Recently, Hindalco Ltd had priced its rights issue of ordinary shares at a 30% discount to the prevailing price.
The dilution in Tata Motors’ case is comparatively lower as a result. The reason the shares continue to be subdued is the uncertainty over the financial details of Jaguar and Land Rover (JLR), which it acquired.
Tata Motors has said its rights issue prospectus (expected in about 10 days) will include financial details such as JLR’s performance from January to June 2008. The markets are keenly awaiting this data, as the impact on the company’s consolidated earnings per share will become clear only after these details are known.
The reason Tata Motors’ shares have fallen by about a third since it announced plans to raise funds by issuing equity is that the markets are concerned JLR would not add commensurately to profit. Including the overseas issue, the dilution in equity could be around 40-45%. So, JLR should add 40-45% to Tata Motors’ consolidated profit in order to avoid a dilution in earnings per share. The sharp fall in the company’s share price seems to suggest that hardly anyone’s expecting that outcome.
According to an analyst with a foreign brokerage firm, Land Rover’s results had picked up since last year and its results in the first half of this year may not be indicative of future performance—especially because of the slowdown in the US economy, which will affect the luxury-car maker.
To be sure, the company is facing multiple headwinds, and the only consolation as far as investors go is that most of the negatives seem to be priced in. Having said that, all eyes are on the JLR financials, which will determine the stock’s direction.
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