2015 has certainly not started on a positive note for global markets. The extremely sharp fall in crude prices has stroked fears of deflation in the developed world. This has also dampened expectations of an interest rate hike by the US Fed in the first half of the year. While the US economy continues to add jobs, the economic data still remains mixed.
In Europe, fears of outright deflation are now rampant. To add to the worries is the general elections in Greece on the 25th of this month. The vote could hasten Greece's exit from the Euro Zone if the left-wing Syriza Party were to win and form the new government. This along with the strengthening US dollar resulted in the Euro falling to a nine year low (against the US dollar). European stock markets have understandably weakened over the past few weeks. Bond yields in the developed world fell to all time lows in the week gone by on deflation fears.
Barring a few stock markets, most ended the week lower. The French CAC index was the biggest loser while the Chinese markets continued its good momentum this week. Indian markets were down by 1.5% this week.
Now let us discuss some of the key economic and industry developments in the week gone by.
As per a leading financial daily, the government is thinking of asking public sector banks (PSBs) to form a separate holding company. This separate holding company will be holding its stake as well as the banks' stakes in their various subsidiaries. Reportedly, the recommendation for reforming the sector includes the creation of a holding company that will own the government's stakes in all banks and which can raise money. This will be the first step towards a more fundamental reform that could help the nationalised banking sector getting freed from majority state ownership.
The market regulator Securities and Exchange Board of India (SEBI) has recently proposed e-IPO norms in order to boost fund raising from markets. Through this, the investors will be able to bid for shares through internet and eventually on mobiles. Also, already listed public sector undertakings (PSUs) will be provided a 'fast-track' route for share sales to meet the disinvestment targets. Under the 'fast-track' route, a listed company will not need to file any draft offer document for its FPO or rights issue and it can proceed with the fund-raising programme without necessarily getting 'observations' from SEBI. Under the new norms, SEBI has proposed to shorten the timeline for listing of shares within 2-3 days of the IPO, as against 12 days currently. The fast track route has been proposed for companies with public shareholding market valuation as low as Rs 2.5 bn, versus Rs 30 bn currently. In fact, as per SEBI, the public sector companies can use the fast track route even without complying to this minimum average market value limit, if they meet other conditions. SEBI has invited public comments until January 30, post which it would put in place final norms for e-IPO as also for fast-track issuances.
As per a leading financial daily, the government is not planning to impose any further curbs on gold imports. This is because it believes that the current account deficit is under control and thus there would be no need to do so. It may be noted that the country has imported 7 tonnes of gold so far in January, while 39 tonnes of gold was imported during the whole of the month of December. Further, the government is also said to be considering a reduction in the import duty currently levied on gold.
With the increase in the excise duty by at least 4% since January 1, 2015, car prices have shot up by 5%-6% (by amounts in the range of Rs 15,000 to Rs 1.3 lakh). Also, other costs like road tax and value-added tax have made the price increase much bigger. Carmakers like Hyundai, General Motors, Toyota Kirloskar, Honda Cars and Tata Motors have already passed on the increase to customers, sports utility vehicle segment leaders Mahindra & Mahindra (M&M) and Nissan are likely to increase prices this week. The prices of two and three wheelers also have been raised by amounts in the range of Rs 2,000 and 7,000 as duty has gone up to 12% from earlier rate of 8%. As a result of this development, the companies in the auto sector are expecting the demand to come under pressure.
The Union Cabinet has recently approved the largest ever telecom spectrum auction which is likely to fetch around Rs 648 bn. The government will sell 380.75 megahertz (MHz) of second generation (2G) spectrum in the premium 900 MHz, 1,800 MHz and 800 MHz bands in February 2015. Spectrum in 2,100 MHz is also likely to be auctioned simultaneously after the defense ministry vacates it. Further, the Cabinet has approved a reserve price of Rs 36.5 bn pan-India per MHz in 800 MHz, Rs 39.8 bn for 900 MHz band pan-India, excluding Delhi, Mumbai, Kolkata, and J&K.
Now let us move on to some of the key corporate developments of the week gone by.
FMCG major Godrej Consumer Products Ltd (GCPL) has further expanded its footprint in the African market by acquiring hair extensions company Frika Hair Pty Ltd based in South Africa. Frika's product range comprises of hair extensions, wigs, synthetic weaves, braids in the premium end of the market. This is likely to provide synergistic benefits to GCPL's hair care portfolio. Rapidol, Kinky, Tura and the Darling Group are the other acquisitions made by the company in Africa. However, Frika's annual revenues of around Rs 400 m may not add significantly to GCPL's overall revenues but it can enable the company to cross-sell products and introduce innovations in the other markets in Africa and UK. The company recently launched the hair colour innovations developed by its African operations in the Indian market.
IT major Wipro is amongst the top performing stocks amongst stocks forming part of the Sensex on news of the company winning a contract worth US$ 400 m from engineering giant ABB. As reported, the company will maintain the back end technology of Zurich based ABB. This is the second biggest contract won by the company after last year US$ 1.2 bn contract it bagged from ATCO, a Canadian utility. The stock of Wipro has been quite volatile in the past few months, especially after the latest results disappointed the market. While the company's revenues were up by 5% on a QoQ basis, its profit were down by 1% on a sequential basis, with operating profits falling by 3.5% QoQ. Margins took a beating due to the wage hike given from the month of June 2014.
As reported by a leading business daily, steel majorSteel Authority of India (SAIL) is looking to spend Rs 1.5 trillion by 2031, to more than double its capacity to 50 m tonnes. The company's current capacity stands at 23 m tonnes. As per SAIL's Chairman, this investment would be a mix of green field and brown field projects. Of this amount, the company would be looking to invest about a fourth in the state of West Bengal - towards new capacities and allied activities including mining. As of FY14 end, the company had a gross block of Rs 566 bn. The capex over this planned period comes to about Rs 93 bn per year, which has been pretty much in line with what the company has been spending over the past few years. As of FY14, SAIL had a comfortable debt to equity ratio of 0.6 times.
Two wheeler major Bajaj Auto, is looking to launch two new brands this year in order to regain back its market share which current stands at about 17%. In FY10, the same stood at about a fifth. As per reports, the company has been unable to make a dent in the entry level scooter segment, a segment which forms about two thirds of the overall market - wherein it planned to leverage on its Pulsar and Discover brands. The company is also planning to launch new variants of the existing brands. While the company's management has seemingly acknowledged the mistakes it has made in terms of positioning its brands, whether it will be able to learn from its mistakes and achieve its target market share in the future will be interesting to see. It may however be noted that when it comes to profitability, the company stands way above its listed players.
Going ahead the Indian markets will continue to look for cues from global events as well as the results season which has just begun. However, investors would be best served if they focus on the long term and invest only in fundamentally strong companies trading at attractive valuations.