Indices across global markets witnessed mixed performance in the week gone by. Having said that, losses were more pronounced in the stock markets of Japan, the US and UK. For the week gone by, the US markets fell 3.3%, on concerns over the Fed taper program that is expected to aggressively pick-up in the current calendar year. While the macro environment remains challenging, the focus now would be on the corporate earnings next week.
That said, hope of acceleration in US economic growth followed by Janet Yellen taking over as the Federal Reserve chief end of this month remains. Further both the Central Banks; Bank of England (BOE) and European Central Bank (ECB), kept their policy rates unchanged at 0.5% and 0.25% respectively. Barring UK, all the remaining major European Indices ended the week in the green.
The Indian equity markets started the week on a negative note. Indian equities traded slightly weaker during the week primarily due to downbeat signals from the overseas equity markets. However, on Wednesday, the stocks of gold-based lenders witnessed upsurge after the Reserve Bank of India relaxed the gold lending rules. The upbeat earnings performance of Infosys Ltd assured the market momentum towards the end of the week. Overall, the Indian markets closed the week on a positive note and was up by 0.4%.
Majority of the sectoral indices ended in the red with realty (down 6.5%), capital goods (down 4.0%) and banking stocks (down 3.4%) witnessing maximum selling pressure. The small cap stocks outperformed the broader market recording gains of 0.9% during the week. Stocks from pharma (up 2.3%) and FMCG (up 1.4%) sectors were the major gainers for the week.
Now let us discuss some of the economic developments of the week gone by.
The Indian Banking Association (IBA) has demanded a ceiling of five free transactions at ATMs even in case of customers using their own bank's ATM. In addition, IBA wants RBI to increase the fee from Rs 15 to Rs 18 after five free transactions including own bank ATMs. The demand comes in the wake of higher maintenance costs for banks with a sharp jump in the number of ATMs that presently stand at 1.4 lakh. This has led to a fall in per ATM transactions to below 100 a day. IBA has said that all bank branches will have on-site ATMs by March 2014.
The steel consumption grew by a mere 0.5% to 53.8 m tonnes in the period April-December 2013. This was largely on account of the slowdown in the economy and sharp fall in imports. The Indian economy had grown at a decade low of 5% in FY13 and grew by 4.8% in the September 2013 quarter. Meanwhile, imports fell by as much as 29.2% YoY. Production for the sale of finished steel, however, managed to grow by 5% YoY during the April-December period. This was largely led by growth in production of major players such as SAIL and Tata Steel. Unless there is a recovery in the Indian economy, steel consumption could continue to face pressure in the coming months.
The iron ore production in India is likely to see a moderate growth of 10-12% to 150 million tonnes (MT) in FY15. However, it will be preceded by a small decline in production in FY14. Mr Basant Poddar, the senior Vice President of Federation of Indian Mineral Industries has stated that a big jump in production in FY15 is unlikely unless Goa starts mining. Several mines are in final stages of securing regulatory approvals and are set to restart in Karnataka and the total production is unlikely to exceed 20 MT. As such, the growth is expected mainly from Karnataka and Goa. However, the production cap in Odisha based on Shah Commission recommendations may restrict the production.
Several public sector banks are likely to announce interim dividends for the financial year 2013-14. Eight PSU banks have lined up board meetings this month to take decision on interim dividends. Union Bank of India has already declared an interim dividend of Rs 2.7 per share. It must be noted that this is seen as an attempt to aid the government in meeting its fiscal deficit target for the current fiscal. The banks are lining up interim dividends at a time when most of them have witnessed a substantial drop in profits and increase in non-performing assets (NPA). The news daily has reported Crisil estimates that the government would be able to cut down the fiscal deficit by about 0.2% of the Gross Domestic Product (approximately Rs 200 bn) by using the dividends of PSU banks. The week gone by awaited eagerly for two crucial data - Index of Industrial Production (IIP) for November and trade deficit for the month of December.
In a move to facilitate substantial foreign direct investment (FDI) inflows into the country, the Reserve Bank of India (RBI) relaxed the FDI regulations. The Central Bank has allowed investors to exit their investments subject to the conditions of a minimum lock-in period and without any assured returns.
Now let us move on to some more news from the corporate world.
ONGC Videsh, an overseas arm of explorer major Oil and Natural Gas Corporation Ltd. (ONGC), is considering various options to fund the acquisition of a Mozambique gas field. The field has the potential to become world's largest hub for producing liquefied natural gas. The company is exploring options such as raising funds in exchange for its future oil output from its producing assets like Russia or Brazil. It is also considering other options like term loans, bond issue and so on. However, the cost of funds would be a key catalyst for fund augmentation. Notably, the company along with Oil India has acquired 10% stake in June 2013 in the Mozambique deepwater gas field from Videocon for US$ 2.5 bn. Further, during August it bought another 10% in the field for little over $2.6 bn. ONGC Videsh has already raised US$ 1.5 bn through bridge loans to fund the acquisition and expects to raise another US$2.5 bn by March 2014.
This comes as a positive move and we also believe that the long term prospects for the company stand bright. However, decline in production rate from mature fields and subsidy burden remain the concern areas for ONGC.
Engineering giant Larsen & Toubro's (L&T) construction division has bagged orders worth Rs 29.6 bn across various business segments. In a filing with the BSE, the company has reported that the Buildings and Factories Business has bagged new orders worth about Rs 15.6 bn. The contracts include a large turnkey order from an information technology major for construction of two technology centres in Bangalore and a turnkey order for infrastructure development of three government medical colleges in Cuttack, Sambalpur and Behrampur in Odisha. In addition, Cochin International Airport has awarded an order to build the new international terminal complex building in Kochi with the capacity to handle 10 million passengers annually.
L&T's Water & Renewable Energy Business has won new orders worth Rs 7.3 bn. This includes contracts for a combined water supply scheme to 1,891 habitations in Pudukkottai and Sivagangai districts in Tamil Nadu from Tamil Nadu Water Supply & Drainage Board. The Power Transmission & Distribution Business has also received new orders worth Rs 2.6 bn. Besides, the company has also received additional orders worth Rs 4.2 bn from various ongoing projects in Metallurgical & Material Handling, Heavy Civil and Transportation Infrastructure Businesses of L&T Construction.
India's second largest commercial vehicle maker Ashok Leyland is planning to launch up to 18 different types of trucks for different applications in 2014 under its new brand for commercial vehicles- Captain. The Hinduja Group flagship firm has invested about Rs 6-7 bn in the development of the new range of medium and heavy commercial vehicles under the Captain range. The Captain series will be available in 16-49 tonnes in various types such as tippers, tractors and haulage vehicles. Apart from marketing it in the domestic market, the company plans to export the Captain range of trucks to Middle East, Latin America, Africa and South East Asian countries as completely built units.
The earnings season for Indian corporate kick-started with Infosys Ltd announcing its results during early hours of Friday. India's second largest software services firm Infosys announced its results for the third quarter of the financial year 2013-14 (3QFY14). During the quarter, the company reported consolidated revenues of about Rs 130.3 bn, marginally higher by 0.5% on a quarter-on-quarter (QoQ) basis. Gross profit for the quarter grew by 2.7% QoQ to Rs 47.1 bn on account of 0.8% QoQ decline in cost of sales. Gross profit margins expanded from 35.3% in 2QFY14 to 36.1% in 3QFY14. Operating profits reported a surge of 14.9% QoQ owing to lower selling and marketing expenses and administrative expenses. Net other income increased by 43.3% QoQ to Rs 7.3 bn. At the bottomline level, net profit increased by 19.4% QoQ to Rs 28.8 bn. Net profit margin expanded from 18.6% in 2QFY14 to 22.1% in 3QFY14.
The week gone by saw the release of two crucial data points - Index of Industrial Production (IIP) for the month of November and trade deficit data for December. The trade deficit widened in December on account of subdued export growth, which is expected to impact the already weak current account balance. The trade deficit stood at US$ 10.1 bn as against US$ 9.2 bn in November. And the industrial output contracted 2.1% signaling dramatic decline in consumption activity. Hence, it will be interesting to see what stance the Central Bank takes on its key policy rates in the forthcoming monetary policy.