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Global markets look for direction
Sat, 18 Jan RoundUp

Global indices had a mixed performance this week as the earnings season kicked off around the world. The US markets ended the week flat after corporate giants like American Express, General Electric and Intel all delivered mixed bag of results. No clear direction has emerged so far, as a trend, in terms of earnings for US firms in the quarter gone by. The Dow was up 0.1% for the week, while the benchmark S&P 500 index slipped by 0.2%. The NASDAQ gained 0.55% for the week.

The European markets were up this week. The German DAX, British FTSE and the French CAC indices were up by 2.9%, 1.2% and 1.8% respectively. The European indices did not respond negatively to an IMF warning about GDP growth in the EU as well as a possibility of future sovereign downgrades by global credit rating agencies. The German markets also shrugged off a report which stated that Deutsche Bank was considering a profit warning for the quarter.

Back home, the Indian indices had a good week as the result season got under way. The benchmark BSE Sensex ended the week up 1.5%. The markets cheered the inflation data which showed a fall in both - wholesale price inflation (WPI) as well as the consumer price inflation (CPI) - on a month-on-month basis.

Key world markets during the week
Source: Yahoo Finance

The sectoral indices had a mixed performance this week. The biggest gainers were engineering stocks with the BSE-Capital Goods index up by 2.9% for the week. Software and banking stocks also had a good week as a few of these companies reported their December quarter results. The biggest losers were consumer stocks, as well as real estate and pharma stocks.

BSE indices during the week
Source: BSE

Now let us discuss some of the economic developments of the week gone by.

The wholesale price inflation or WPI declined to a five-month low of 6.16% during the month of December as against 7.52% in the previous month. This was primarily due to a fall in inflation in food articles. The food articles inflation was down to 13.7% in December from 19.9% in the preceding month. While the overall vegetable prices have gone up, the pace of increase has been on the lower side.

Moreover, with steep contraction in industrial output by 2.1% in November, the worst performance in past six months, the industry expects policy rate reduction to help boost growth. With the moderation in inflation dynamics, the Reserve Bank of India (RBI) definitely has a room to ease interest rates and prop up growth. In the previous Monetary Policy last month, the RBI left the key policy rates unchanged on expectations that wholesale and retail inflation would ease.

As per a report by World Bank, growth in global economy in 2014 is expected to improve from 2.4% last year to 3.2% and retain the pace over the next two years. The gain in momentum of advanced economies is expected to support stronger growth in developing countries as per the report. The World Bank expects the developing economies to grow at a moderate pace of 5.3%. While China and India are expected to see stronger growth, however, concerns on their macroeconomic woes remain. India has struggled with inflation and currency depreciation whereas China has been caught in a vulnerable banking sector and overinvestment. The bank noted that the negative effect of taper is likely to be offset by stronger growth in high-income countries.

As per leading financial news daily, the global ratings agency, Moody has affirmed no ratings downgrade for India. The ratings agency has given India an investment grade rating of Baa3 with a stable outlook. This has come as a major relief to the government. This is followed by the World Bank report which projected India's growth to rise to over 6% in FY15 and 7.1% in FY17. Moody's expects gradual economic recovery in the months of July to December, backed by lower inflation and interest rates. The report further states that the confidence and demand would be low in 2014 on account of complicated taxes and regulations, weak infrastructure and a weak government. Even GDP is expected to remain below potential in the near term. Hence, the rating agency has cautioned that low growth and high inflation could weaken the country's debt profile and raise financing costs.

Movers and shakers during the week
Company10-Jan-1417-Jan-14Change52-wk High/Low
Top gainers during the week (BSE-A Group)
HCL Tech1299.31381.26.3%1,399/653
UPL Limited204.2216.86.2%218/113
Top losers during the week (BSE-A Group)
Core Education2520-19.4%320/13
Ranbaxy Lab463406-12.3%500/254
Multi Commodity525473-10.0%1,431/238
Exide Industries112101-9.9%145/101
IRB Infra9082-9.6%136/52
Source: Equitymaster

Now let us move on to some more news from the corporate world.

India's largest telecom firm Bharti Airtel is in talks to buy out Mumbai based Loop Mobile. Bharti is interested in both the mobile as well as the tower business of Loop Mobile. Loop has a license for the Mumbai circle which will expire in November 2014. It has a subscriber base of about 3 m. It operates about 2,000 mobile towers. Bharti has about 4.1 m subscribers in Mumbai. If the deal were to happen, it would make Bharti the top telco in Mumbai as the market leader Vodafone has about 6.8 m subscribers. Loop has declined to participate in the upcoming spectrum auctions.

Oil and Natural Gas Corporation (ONGC) is planning to acquire 26% stake in Indian Oil Corporation's (IOC) liquefied natural gas (LNG) import plant at Ennore in Tamil Nadu. IOC is setting up the 5 m tonnes per annum (mtpa) LNG terminal at a cost of Rs 43.2 bn which is likely to be completed by 2017. The move comes in the backdrop of ONGC targeting to have 30% of its revenues from non - exploration & production business by 2030. Apart from this, the company is also setting up a 2.5-5 mtpa LNG import terminal at Mangalore in Karnataka. ONGC also has a 12.5% stake in Petronet LNG that has LNG import terminals at Dahej in Gujarat and Kochi in Kerala. However, ONGC does not have marketing rights over the gas imported at these terminals.

Coal India Ltd has declared an interim dividend of Rs 29 per share amounting to around Rs 183 bn for FY14. CIL has cash reserves at around Rs 622 bn as on March 2013 and it will pay the dividends from January 25, 2014. This will help the central government receive around Rs 165 bn for its 90% stake in the company. The announcement follows a meeting between finance minister P Chidambaram and Chairmen of top PSUs, including Coal India, ONGC and Indian Oil Corporation with an aim to look for ways to meet the disinvestment target. The central government has a disinvestment target of around Rs 400 bn this year. Including the dividend distribution tax of Rs 31 bn, the government will get around Rs 196 bn.

The Indian government plans to sell its 12% holding in Axis Bank, India's third largest private bank. Government has 20.72% stake in the bank through The Special Undertaking of Unit Trust of India (SUUTI). The stake sale in the bank would entail exchequer about Rs 60 bn in value. Earlier, the government had increased the FII limit in the Indian companies to 62% from 49%. FII holding in Axis Bank is currently about 45%. Further, the government has stake through SUUTI in three other private companies and it has plans to sell the same in all the companies. However, SUUTI stake sale plan in ITC and L&T has been put on hold for the time being.

Let us take a look at some of the corporate results that were announced this week.

Axis Bank, the country's third largest private sector lender, announced its third quarter FY14 earnings in the week gone by. The company reported a 19% YoY growth in profitability primarily on account of lower provisions. The net interest income or NII climbed 19.6% YoY to Rs 30 bn for quarter. The earnings growth was driven by retail banking business, followed by treasury and corporate banking. The Net interest margin (NIMs) declined marginally to 3.71% versus 3.79% on sequential basis. The asset quality, however, worsened during the quarter with gross NPAs rising 15 bps YoY to 1.3% and net NPAs climbing 9 bps YoY to 0.4%. The Capital adequacy ratio (as per Basel III norms) stood at 15.5% in the third quarter as against 15.9% in second quarter of FY14.

IT heavyweight, Tata Consultancy Services (TCS) also announced its results for the quarter and nine month period ended December 2013. The company reported a revenue growth of 1.5% QoQ during the quarter. In constant currency terms, revenues were up by 3.8% QoQ. The company's operating margins fell by 0.3% QoQ to 29.8% during the quarter as compared to 30.1%. This led its operating profits rise to slow down to 0.5% QoQ. A sharp surge in other income (which came in at Rs 6.8 bn) led the profit before tax to grow by about 12% QoQ. A lower tax rate led the company's profits to rise at a sharper pace of 15.1% on a QoQ basis.

2-wheeler major, Bajaj Auto announced its results for the quarter and nine month period ended December 2013 recently. The company's revenues declined by over 5% YoY during the quarter and remained flat during 9mFY14. However, its sales volumes declined by 12% YoY and 10% YoY respectively during these periods, thereby giving an indication of the change in product mix which led to a relatively lesser decline in revenues. At the operating level (adjusted for marked to market gains and losses), the company's profits were up by 3% YoY during 3QFY13 and 15% YoY during 9mFY14. Profit before tax came in higher by 5% YoY during 3QFY14 and 15% YoY during 9mFY14. At the net level, the company reported an 11% YoY increase in profits during the quarter ended December 2013 and by 9% YoY during 9mFY14. The rise in profits during the quarter was largely due to the marked to market fluctuations.

India's fourth largest software firm HCL Technologies has announced its results for the second quarter of FY14 (the company has a June year ending). Sales increased by 2.8% QoQ while the rise in the same in constant currency terms was 3%. The company suffered a forex loss of Rs 1,580 m during the quarter. Despite this, net profits were up by 5.6% QoQ due to lower depreciation charges. The net margin improved to 18.3% in the quarter compared to 17.8% in the previous quarter.

Going forward the global markets will take cues from the quarterly earnings as well as any indication by the US Fed of a more detailed plan on tapering its QE program. Back home the markets will be driven by quarterly earnings as well as expectations from the RBI next move on interest rates.

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