Higher interest rates ahead?

Higher interest rates ahead?
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First Published: Thu, May 03 2007. 12 34 AM IST
Updated: Thu, May 03 2007. 12 34 AM IST
In spite of the Reserve Bank of India (RBI) decision not to raise interest rates in its annual monetary policy announcement, the bond market is signalling higher interest rates ahead. While there was some immediate easing after the policy was unveiled, bond yields have moved up quite sharply since then. For example, the yield on the benchmark 10-year government bond was around 8.09% just before the policy statement and it went down to 7.99% after it.
On Monday, 30 April, however, the bond market closed with the 10-year yield at a four-week high of 8.17%.
Bond yields are going up for a variety of reasons. One, the second stage of the hike in the cash reserve ratio kicked in on 28 April. Two, the cut-off at the last auction was high and a big auction of government bonds is being planned for May. And finally, RBI has also raised its limit for market stabilization bonds, which means the supply of paper in the market will go up further. That will drive down bond prices and raise bond yields.
The concern about interest rates is also seen from banks’ reluctance to buy at the long end of the market. In contrast, three-month treasury bill rates have barely moved up, from 7.35% before the policy to 7.4% at present.
The saving grace is that banks’ credit deposit ratio is going down, from around 74% at the beginning of March to 73.27% today. If the trend continues (and credit growth should slow in the current slack season), then the upward pressure on interest rates should ease.
If anybody had any doubts about the strength of the country’s investment boom, the results of ABB India Ltd should lay them to rest. Revenues rose by 62%, while earnings per equity share were up 68% year on year.
With the government’s emphasis on enhancing capacities in the power sector, everybody expected ABB, with its strengths in power transmission and distribution products and projects, to do well, but the story keeps getting better and better.
By way of comparison, consider that in the December quarter, ABB’s revenues rose by 44.7% and profits after tax by 42.6%.
What’s more, future prospects, as seen from the company’s order book, are also excellent. ABB had a record order intake in the March quarter, with order growth at 43% over the same quarter last year. The company’s order backlog too rose substantially.
And the icing on the cake may come from the fact that the company’s parent is facing capacity constraints and increased delivery lead times, making the case for outsourcing to ABB India stronger. ABB India’s exports have risen 100% in the March quarter.
In spite of its rich valuation, the stock has gone up sharply in the past month. But even at a price of around Rs4,100 per share, the price earnings multiple for calendar year 2008 (the current price divided by the estimates earnings for 2008) is around 25. That still leaves some upside, in view of the fact that earnings growth this year should hold at around 50%.
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First Published: Thu, May 03 2007. 12 34 AM IST
More Topics: Money Matters | Equities |