The drop in crude oil prices has sparked a huge rally in equities across the world and that’s been aided and abetted in India by the return of political stability and hopes that the long-put-off reforms will finally be accelerated. Where can this rally take the markets?
Well, if international oil prices fall to $115 (Rs4,865) a barrel, that’ll take us back to where we were at the beginning of May. On 5 May, when Nymex oil futures opened at $115 a barrel, the Sensex reached a high of 17,735, a level it hasn’t been able to achieve since then. Although it must be noted that high domestic inflation continues to be a worry.
The energy markets have suddenly woken up to the realization that as world growth slows, demand for oil, too, will come down. The International Energy Agency forecasts global oil demand to fall to 1.03 million barrels per day this year, compared with 2.11 million barrels at the beginning of the year. Lehman Brothers Holdings Inc.’s recent research note, Demand Demolition, talks about this large reduction in demand and predicts that “the deteriorating demand picture reinforces our belief that oil prices are approaching a tipping point” with prices expected to average $110 a barrel in the fourth quarter of 2008, and a further decline to a more supportable $90 by the first quarter of 2009. That will certainly help equities.
In India, while domestic oil prices are still way below international levels, the fact remains that lower international prices will mean that fewer oil bonds will need to be issued and both the current account as well as the fiscal deficit will improve—hence, the softening in bond yields and the strengthening of the rupee.
And, although cooling international prices will have little impact on domestic inflation, it will certainly lower headline inflation in the US and provide some relief to the US consumer. (Domestic inflation is expected to remain high on the back of inadequate monsoon in parts of the country.) It will also lessen the probability of the US Federal Reserve having to tighten its monetary policy, which is good for liquidity and should boost sentiment in equity markets.
Any disinvestments pushed through by the government will also help the fiscal situation, taking the pressure off interest rates.
However, the situation now is very different from the Goldilocks scenario that took the Sensex to 21,000 points. That bull market was on the back of high growth and low inflation. Currently, while the cooling off of oil prices may lower global inflation, it’ll be a low-growth, low-inflation environment. But at least it’s better than low growth and high inflation.
Mastek’s FY09 forecast looks ambitious
Mastek Ltd surprised the markets with a rather upbeat guidance that dollar revenues would grow 32% in the year to June 2009. Industry body National Association of Software and Services Companies expects the country’s software and services revenues to grow 21-24% in dollar terms for the year till March 2009.
The company grew at a healthy pace of 33.8% in its last financial year, but that was aided by acquisitions. It marginally missed the guidance (of a growth rate of 35%) given a year ago, which hadn’t taken any acquisition into account.
While the industry growth is expected to slow because of the recession in the US, one must note that Mastek’s exposure to that region is only about 28%. Still, the guidance looks ambitious. It said revenues will grow about 6% sequentially in the September quarter, which implies revenues need to grow about 13% sequentially in each of the remaining quarters to achieve the annual target.
That’s an exceptionally high rate of growth to expect, especially since it has also announced that one of its key clients will scale down business with the company. This could be the reason the stock lost 1% in a strong market, despite the bullish guidance.
Thermax: quite a few positive features in June quarter results
At first glance, engineering company Thermax Ltd’s June quarter results appear nothing to write home about, with consolidated net profits rising by a mere 5%. A closer look, however, uncovers quite a few positive features about its performance.
For starters, net profit growth for the stand-alone company is much better at 13.7% and the difference in the consolidated numbers is due to a sharp rise in “other expenditure”, partly because pre-operative expenditure on its Chinese subsidiary has been charged to the profit and loss (P&L) account, in accordance with local accounting rules. “Other expenditure” in its stand-alone P&L has also increased and the company said that’s partly on account of provisions for bad debts. It also had a forex loss of Rs15.6 crore in the June quarter.
Interestingly, Thermax has been able to increase operating margins both in its energy and environment segments compared with the year-ago quarter. Even more surprisingly, the raw materials to sales ratio is also lower. The reason is because much depends on the costs of components of projects undertaken in a particular quarter and it may not be a very good idea to compare margins of engineering companies on a quarter-to-quarter basis. That holds for revenues too, which were up a lacklustre 8%.
However, this is because of a lower level of orders carried forward at the beginning of April compared with April 2007. As a matter of fact, analysts had started worrying about its order book at the end of the April quarter, with the order intake as well as the order backlog declining in fiscal 2008. Revenues for the year will be boosted by around Rs200-250 crore due to a new plant at Savli, near Vadodara, commercial production from which has started in the June quarter.
The high point of the June quarter results is the improvement in Thermax’s order intake, which is up 46% compared with the same quarter a year ago. The company has also recently received a Rs820 crore order from an oil refinery, which is a major breakthrough. At June-end, its consolidated order book was of Rs2,835 crore, of which Rs2,328 crore are for the energy segment and the balance for the environment segment.
The management does not as yet see any overall slowdown, but is unwilling to offer any guidance on account of an uncertain market. While the management says it will make every effort to protect margins, it also acknowledge that customers are looking for lower prices and that most orders are on a fixed-price basis. Nevertheless, the reversal of the decline in order flows is a net positive for the stock.
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