Dear Reader: I'd like to extend to you my warmest wishes on behalf of the entire Equitymaster family. May the special occasion of Deepawali fill you with happiness and prosperity! And May you have A Wonderful New Year too! - Rahul
It is a truncated trading week for the Indian markets on account of Diwali. Global markets staged a weak recovery in the first half of the week. The Japanese markets bounced back after a beating that it took last week. US markets were relieved when one of the US Fed governors stated that the fed should reconsider the end of QE.
In Europe, markets were up despite nervousness surrounding the possibility of the Euro Zone slipping back into recession. Markets continue to believe that the European Central Bank (ECB) will inject more liquidity into the system to prevent this possibility.
Back home, markets were in a buoyant mood leading up to Diwali as the ruling BJP did well in two state elections and the government has unveiled key reforms in the Energy sector. Also, the results season is on in full swing.
Now let us discuss some of the economic developments of the week gone by.
The telecom regulator TRAI has told the government that it will not be in a position to start the process of conducting the spectrum auction in February 2015 without receiving additional information. The regulator has asked the Department of Telecom (DoT) to clarify its position regarding the availability of spectrum. The government wants to auction spectrum for 3G services early next year in the 900 1,800, 2,100, 2,300 and 2,500 MHz bands. While the regulator has fixed the base price for the 900 and 1,800 MHz bands; it has asked the government to quickly make up its mind about exactly how much spectrum and in which service areas it wants to put up for auction. TRAI has also made a recommendation that all vacant 3G slots should also be put up for auction.
In a key development in the coal sector, the government has recently proposed an ordinance to allow e-auction of mines to private players while adding that state-run companies would be allocated mines directly. The process is likely to take three four months and the proceeds of auction would go to states where the respective mines are located. The decision follows de-allocation of coal blocks by Supreme Court. However, full commercial mining is not allowed yet, something that has disappointed the key sectors related to coal mining such as power. The Finance Minister Mr. Arun Jaitley has stated that the ordinance would only feature an "enabling provision" to allow the same in future.
In a key development in the energy sector, diesel prices have been deregulated and price formula for natural gas has been formalized. Just like petrol, diesel prices will be allowed to move as per market conditions. It will immediately lead to easing of diesel prices by Rs 3.5 per litre, since crude prices have come down considerably. The move will reduce the subsidy burden for government, upstream and downstream oil companies. In another development, gas prices have been raised by about a third to US$ 5.61 per million British thermal units (mBtu). Initially, the proposal was to double the prices. The move is likely to boost investment in the gas sector. However, Reliance Industries Ltd (RIL) will keep being paid the earlier price of US$ 4.2 per million British thermal units until they make good the shortfall in the envisaged production from D1, D3 discoveries of Block KG-DWN-98-3. One must note that the matter is still under arbitration. The difference between the new prices and US$ 4.2 per mBtu would be credited to the gas pool account and outcome of arbitration will decide whether or not it will be paid to RIL. The new gas price will be effective from November 1 until March 2015, but the next revision would be valid for six months.
Now let us move on to some corporate developments in India Inc.
Tata Motors owned Jaguar Land Rover (JLR) expects its volume growth in China to halve to 20% this year. The company management said that sales in the second half were a bit slower than the first half. It expects sales next year to decelerate further on account of high base and slowdown in the auto market in the country. It may be noted that China is the biggest and fastest growing market for JLR. It had recently set up its first overseas factory in China to overcome huge import duties and price its car competitively in the market.
India's largest two wheeler manufacturer, Hero MotoCorp has outlined plans to invest in excess of Rs 50 bn that includes manufacturing plants in Columbia and Bangladesh as well as new plants being set up in Gujarat and Andhra Pradesh and a Hero Global Centre for Research and Design in Rajasthan. The company has invested Rs 10.5 bn at the Neemrana facility having an annual capacity of 0.75 m units. Post the setting up of this unit, the company's overall annual capacity has increased to 7.65 m units. Hero MotoCorp will commence work on the Halol plant in Gujarat in November followed by the Andhra Pradesh plant with each of them having annual capacities of 1.8 m units. Each of the Columbia and Bangladesh plants will have annual capacities of 0.15 m units. The company has targeted to set up 20 manufacturing and assembly facilities across the world to scale up its capacity to 12 m units per annum over the next five years.
Moody's Investor Service has stated that the recent plans of Tata Steel will prove credit positive. Tata Steel has decided to sell its long product business in the UK and its bank debt refinance plan and this would prove credit positive. That's because this sale would dispose off loss-making assets, alleviating funding pressures for the next six years. Moreover, now the company can focus on growing the profitable Indian business. The Moody's Investor Service expects the company to maintain its volume growth and strong profitability with EBITDA per tonne of around US$ 260. Moreover, Tata Steel is slated to launch the first phase of the Odisha project early next year which will add 3 million tonnes of crude steel capacity. This will bring the capacity of the Indian business to 10 m metric tonnes, or 50% of Tata Steel's total capacity. When Tata Steel India acquired Corus in 2007, this proportion was 15%.
Let's move to few corporate results declared during the week:
India's leading telecom operator Idea Cellular has reported results for the quarter ending September 2014 (2QFY15). http://www.equitymaster.com/research-it/company-info/latest-company-results.asp The Company has reported a marginal increase in the consolidated revenues on a quarter-on-quarter (QoQ) basis. It has thus reversed the last 2 years trend of sequential revenue decline during the seasonally weak quarter (ending September) due to contraction in voice minutes of use. The operating profit slipped 0.5% QoQ and margin declined 20 basis points to 32.9%. The net profit for the quarter grew 3.8% QoQ on account of low finance cost due to the reduced debt. The average revenue per minute (ARPM) grew by 1.8 % to 45.9 paise from 45.1 paise on sequential basis. While the voice rate realization was under pressure, the company witnessed 22.5% QoQ jump in mobile data revenue.
UltraTech Cement Ltd has announced results for the quarter ending September 2014 (2QFY14). The company has reported net sales growth of around 20% on a year on year (YoY) basis helped by the growth in the cement volumes. The volumes for the quarter grew 11% YoY on the back of higher demand and additional volume from the acquired units in Gujarat. Operating profit of the cement company spiked 29.2 % YoY. The net profits for the quarter grew by 55% YoY on standalone basis. On a consolidated basis, the bottomline was up 47% YoY while revenue growth came in at 18% YoY. The management has stated that the cement demand is likely to grow at 8%, driven by renewed government focus on housing and infrastructure spending. The company plans to increase its cement capacity by bidding for assets of Lafarge and Holcim and aims to add 20 million tonnes per annum to its capacity over the next three years.
HDFC Bank announced its results for the quarter ended September 2014 today. The bank reported a 20% YoY rise in profits during the quarter, while its net interest income grew by 23% YoY. The bank's net interest margins stood at 4.5%, as compared to 4.3% during same quarter last year. Further, advance growth stood at 22% YoY. As per the bank, the growth was led by both, domestic retail loans as well as wholesale loan segments. Gross non-performing assets stood at stood at 1.02% as compared to 1.09% in same quarter last year and 1.07% in preceding quarter i.e. for the quarter ended June 2014. Net NPAs remain stable at 0.28%. The stock of HDFC Bank ended with marginal gains today and is currently trading close to its 52-week high price.
Piramal Enterprises, the flagship company of the Piramal Group, has announced its financial results for the quarter ended September 2014. During the quarter, the company's consolidated net sales increased by 9.4% YoY to Rs 12.2 bn. Operating profit grew by 38.7% YoY to Rs 2.1 bn. Other income plunged by 81.6% YoY to Rs 178 m. The company reported an exceptional loss of Rs 3.7 bn during the quarter as against an exceptional gain of Rs 158.3 m in 2QFY14. Tax expenses shot up by 329.9% YoY to Rs 674.9 m. At the bottomline level, the company reported a consolidated net loss of Rs 3.9 bn as against net loss of Rs 322.6 m in 2QFY14.
Going forward, the Indian markets will continue to look for more reforms from the government as well as the corporate results. However, investors will do well to follow a bottom up approach to investing. Investing in fundamentally sound companies for the long term will yield good returns.