Indian Markets Thursday Wrap-Up: Good Start to 2009

Markets ended the first day of 2009 on a positive note amidst strong global cues and on the hopes of a decline in interest rates and the second stimulus package for the economy. Barring 3, all the stocks on the Nifty ended in the green. The Sensex closed higher by around 255 points, while the Nifty closed higher by 50 points. Stocks from the mid-cap and small-cap indices also ended in the positive territory. Rupee closed at 48.43 against the US dollar.

With the decline in key commodity prices, FMCG companies are expected to earn higher operating margins in the coming quarters. Prices of commodities such as palm oil and petroleum-linked inputs have fallen by up to 70% from their peaks. Other input costs are down between 25% and 50% from their 2007 average prices. The government’s move to reduce excise duty by 4% will also provide an additional boost. It may be noted that FMCG companies had taken price hikes in 1HFY09 to offset the high input costs. P&G, Hindustan Unilever (HUL), Dabur India and Tata Tea had increased some product prices in the range of 3% to 13%. Interestingly, they have not reduced them with the recent reduction in costs as demand has not witnessed any slowdown. The FMCG pack ended the day in the green.

The reduction in coal and diesel prices will ease the cost pressure for the Indian cement industry, which is reeling under a falling demand and an inventory pile up. Coal prices have dropped to US$ 70 per tonne from US$ 150 per tonne in June this year. In December, the government reduced diesel prices by Rs 2 on account of a fall in crude prices. Power and fuel cost accounts for 22% to 25% of the total cost of production for cement companies. Coal, which is not only used to generate power but is also a key input in the cement production process had pushed the manufacturing cost of cement by Rs 400 per tonne. Moreover, freight, which accounts for about 18% to 20% of the operating cost, had increased due to diesel prices. This decline in input costs will bring in some cheer for the cement players. Cement stocks ended the day in the positive.

As per a leading business daily, India’s current account deficit ((CAD)has ballooned three times to a record US$ 12.5 bn in 2QFY09 on account of a huge rise in the price of crude and commodities. The deficit was primarily due to higher imports. While exports grew at 24.6% YoY, imports registered a growth of 45% YoY. Oil imports accounted for 33.2% of the total imports during the quarter. With commodity prices softening, the situation is expected to get better in the coming quarters.

Oil companies have cut aviation turbine fuel (ATF) prices by 6.8% on account of a decline in crude prices. The fuel now costs Rs 32,691 per kilolitre (kl). This is the eighth straight cut in jet fuel prices since the rates soared to an all time high of Rs 71,028 per kl (in Delhi) in August. Since last month, Indian Oil, BPCL and HPCL have revised jet fuel prices twice a month—on the 1st and 16th based on the average imported price in the preceding fortnight. It may be noted that, ATF contributes around 3% to the topline of the oil companies and is among their fastest growing categories. Indian Oil, BPCL and HPCL ended in the red.