While US stock markets celebrated better-than-expected GDP (gross domestic product) data on Thursday, Indian equities rose on Friday due to worse-than-expected Indian GDP numbers. Though all Asian markets rallied, India was easily the best performer.
A look at the sectoral indices provide the clues: the Bombay Stock Exchange’s Bankex and Realty indices were the biggest gainers, which means stocks sensitive to interest rates rallied.
One reason was undoubtedly the lower-than-expected inflation numbers reported on Thursday, which provide hopes that the Reserve Bank of India (RBI) may not further hike interest rates. From that perspective, lower growth may not be such a bad thing, since that’s what RBI is aiming at. The bond market also rallied on the news.
So, now that GDP growth is 7.9%, slightly lower than RBI’s full-year forecast of 8%, does it mean there’ll be no more rate hikes? That’s unlikely, says Gaurav Kapur, senior economist with ABN-Amro Bank, because inflation is likely to be in the double digits and RBI will be more worried about inflation than growth at this time. “The RBI will have to act to keep inflationary expectations low,” Kapur said.
The GDP data also contains some warning signals. As the chart shows, private final consumption expenditure has held up rather well in the last four quarters, growing at an annual rate of 7.99% in the first quarter of the current fiscal year, compared with 7.64% in the second quarter of the previous fiscal. In the same period, growth rate of gross fixed capital formation has decelerated to 8.96% from 16.72%.
Warning Signals (Graphic)
A. Prasanna, an economist with ICICI Securities Ltd, says this kind of growth is inflationary. Capital expenditure raises the hope that inflation will be lower in the future as capacity rises and supply of goods increases, as has happened in the cement industry. In that perspective, a slowing in capital expenditure is not good news.
The steady growth in consumption, on the other hand, shows demand pressures continue to be strong. These pressures will grow stronger once the pay commission bonanza is disbursed.
So, RBI will have to counter the government’s loose fiscal policy. The optimism on the rate-sensitives may, therefore, be premature.
Tata Steel exceeds market expectations, factors in risks
Tata Steel Ltd’s consolidated results for the June quarter were way above market expectations, with profit before tax and exceptionals being 66% higher than the same quarter a year ago.
The company had already reported superlative results for its Indian operations in July, with operating margin rising by 84% on the back of price hikes.
The overseas operations, on the other hand, witnessed a 110 basis points annual drop in operating margin, thanks to a 375 basis points jump in raw material costs and power costs as a percentage of operating revenues. A 100 basis points equal one percentage point.
UK-based Corus accounts for the majority of Tata Steel’s revenues and profit from overseas operations. The company has done well to limit the drop in profit margin by cutting staff costs, freight expenses and other overheads.
This was helped by a rise in volumes and hefty price increases, which more than offset the rise in these overheads. Corus’ volumes rose by an annual 7%, which is heartening considering that a surge in imports from China had led to tepid volume growth for European manufacturers in the second half of the last fiscal year.
The high rise in material and power costs indicates the rise in prices of iron ore and coking coal continue to outpace the increases in steel prices.
Spot prices have now started softening globally, and if the trend continues, the profit could take a hit in the rest of the year.
But an analyst, who attended the company’s conference call, says Tata Steel expects profit on a per tonne basis to be maintained at the June quarter level even in the three months to September.
The better-than-expected results, coupled with this outlook for the near term, led to a 5% rise in the company’s share price on Friday. Even after this, the stock trades at less than five times consensus estimates of institutional brokers for the year till March 2009.
At current levels, analysts feel most risks are factored in and it’s no surprise that 22 of the 28 analysts tracking the company have a buy rating on the stock, according to Bloomberg data.
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