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Stimulus boost stoke markets higher
Sat, 24 Jan RoundUp

Global markets around the world ended on a high note in the week gone by. The optimism was fuelled by the European Central Bank's (ECB) decision to launch a bond-buying program in March to stimulate the deflation-hit eurozone. Under the program, corporate and government bonds to the tune of 60 bn euros a month will be purchased. The higher liquidity is likely to drive global equity markets higher. France was the biggest gainer up 6% for the week. Even the German and UK indices registered gains of over 4%. The US markets were up by a 0.9% for the week.

The Asian indices hit new highs as ECB unveiled its 1 trillion euro stimulus package on the last trading day of the week. India was the biggest gainer recording a gain of 4.1% for the week. Each of the Japan, Singaore and Hong Kong indices were up by more than 3%. However the Chinese index was marginally down by 0.7%.

The last trading day of the week saw an uptick in Brent crude due to market certainty after the death of Saudi Arabia's king, Abdullah. However the US crude fell on signs of oversupply. Saudi Arabia's new king, Salman, is expected to continue the OPEC's policy of maintaining output to protect market share.

Key world markets during the week
Source: Yahoo Finance

The Indian stock markets breached the 29,000 level for the first time to end the week at a life-time high of 29,279. Improving macroeconomic conditions coupled with European stimulus measures helped key indices to reach new highs. Barring FMCG, all sectoral indices ended the week on a positive note with the stocks in capital goods, metal and banking sectors leading the gains.

BSE indices during the week
Source: BSE

Now let us discuss some of the key economic and industry developments in the week gone by.

India's foreign exchange reserves reached a record high of $ 322 bn in the week ending on 16th January 2015 as per date published by the Reserve Bank of India. This surpassed the previous high of $ 320.8 bn achieved in September 2011. The build-up in reserves has been on the back of RBI continuously buying dollars to build a war chest to safeguard against any potential volatility in global currency markets.

Foreign direct investment (FDI) in the country fell by over 6 % YoY in November 2014 to US$ 1.53 bn, as per data from the Department of Industrial Policy and Promotion. However, for the period April-November 2014, FDI was up 22 % YoY and stood at US$18.9 bn. Sectorwise, telecom sector has received maximum investment, followed by services, automobile, pharmaceuticals and computer software and hardware. For the period under review, the maximum FDI was received from Mauritius at US $5.20 bn, followed by Singapore (US$3.7 bn), Netherlands (US $2.4 bn), the US (US$1.4 bn) and Japan (US$1.3 bn). It is estimated that Indian needs around US$1 trillion over five years to overhaul its infrastructure sector to boost growth.

India's crude oil production declined 1.4 % in December, in the wake of continuously sliding oil prices. The fall was led by the decline in output from Cairn India Ltd's fields. However, state run Oil and Natural Gas Corporation (ONGC) reported a 0.7 % rise in output, on the back of 5% growth in offshore production. The privately operated fields reported a 5.2 % decline in production. Further, natural gas production declined 3.5 % as output from privately operated fields like Reliance Industries' eastern offshore KG-D6 block continued to decline.

The number of subscribers using mobile banking increased by 58% to 35.5 m in FY14 as per RBI data. This is quite low as compared to the high mobile density of over 900 m subscribers in the country. As per RBI estimates, the incentive to switch to mobile banking exists for both customers and banks as mobile banking costs 2% of branch banking, 10% of ATM banking and 50% of internet banking. In terms of value of transactions, private banks such as ICICI bank and HDFC Bank are leaders in the mobile banking space. However, SBI dominates in terms of numbers with 12.5 m of its customers transacting on the mobile in 2014 as compared to 8.6 m customers in 2013. According to the Finance Ministry, the government's flagship Jan Dhan Yojana is likely to boost the number of mobile phone consumers in future. 114.3 m banks accounts were opened under the Pradhan Mantri Jan Dhan Yojana as on 16th January 2015.

Movers and shakers during the week
Company16-Jan-1423-Jan-14Change52-wk High/Low
Top gainers during the week (BSE-A Group)
Dish TV6979 15.4%81/43
Adani Enterprise500563 12.5%585/210
Muthoot Finance198222 12.2%235/120
Bharti Airtel343384 12.0%420/282
Max (I) Ltd406455 11.9%470/178
Top losers during the week (BSE-A Group)
Mahindra Finance308252 -18.3%345/230
IPCA labs713639 -10.3%907/630
Suzlon Energy1615 -7.8%37/9
Shriram Transport Finance1,1651,088 -6.6%1222/550
Bayer Cropscience3,6643,449 -5.9%3820/1378
Source: Equitymaster

Now let us move on to some of the key corporate developments of the week gone by.

In order to reduce third-party manufacturing, Britannia wants to increase the proportion of in-house manufacturing of products from the present level of 50% to 60%. For this the company plans to invest Rs 4 bn over the next 18 months in 12 new lines across the country. The company presently has 35 contract manufacturers across the country which presents difficulty in control purposes. The company does not intend to go for 100% in-house manufacturing as it will result in higher freight costs. Apart from Tamil Nadu and Gujarat plants, the company will open three new lines at its upcoming Bengaluru plant in Bidadi. Another new line is likely to come up at its Odisha plant.

With an aim to regain its lost share in the two-wheeler market, Bajaj Auto Ltd is planning six product launches in the next six months. These will include a new 100 cc motorcycle besides a 400cc model under its flagship brand Pulsar. As per the management, there will be one launch every month. The company's new 100 cc bike is likely to hit the market in the ongoing quarter. Regarding the outlook for the fourth quarter, the management has said the company will cross the one million mark in total sales. For the whole of 2014-15, the company is likely to cross four million units.

Reliance Industries is looking to cut investments in its three US shale ventures amidst falling crude prices. The company is looking to optimize its operating and capital expenditures in these ventures, which were expected to contribute to the company's profitability in the current year. As per the business daily, the amount invested in these businesses stood at about US$ 8 bn till date.

Tata Motors is planning to develop a slightly bigger hatchback to take on Maruti Suzuki's Alto. To gain from economies of scale, the 'Pelican' will be manufactured at the Sanand factory, along with the Nano. The plant, which has an annual production capacity of 250,000 units - about 20,000 a month - is currently manufacturing only about 1,300 Nanos a month due to extremely low demand for the car. Tata Motors' overall domestic passenger vehicle sales, in volume terms, have declined sharply over the past few years. During the April-December period of this financial year, sales fell 11% on a year-on-year basis to 92,227 units.

Now that the result season has begun, let us take a look at the interim performance of some of the companies.

Hindustan Unilever has declared results for the quarter ended December 2014. The company posted a 7.6% revenue growth on a 3% underlying volume growth in the domestic consumer business. The muted growth has come on account of sluggish performance in soaps & detergents and personal products businesses. The company has been able to maintain operating margin at 17% on the back of lower raw material costs and other expenses (both as a proportion of sales). However net margin, excluding exceptional income from sale of properties, has contracted by 3.4% YoY to 11% due to higher tax outgo and depreciation charges. Hindustan Unilever has cut down prices of soaps and detergents, its largest category that yields 50% of its revenues, by 5-10 %, during the third quarter.

ITC, also, announced a subdued financial performance for the December 2014 quarter. It topline grew by a paltry 2.5% due to flat growth in the cigarettes biz that forms more than 40% of overall revenues. Steep hike in excise duty and VAT adversely affected the company's cigarette sales. Its operating margin expanded by 1.1% for 3QFY15 due to lower cost of goods sold and other expenses (both as a proportion of sales). Net profit grew by a faster 10.5% in 3QFY15 aided by a steep rise in other income.

Cairn India has reported a decline of 53.2% YoY in net profit for December 2014 quarter due to falling crude prices. Revenues for the quarter fell by 29.9% YoY. The operating profit declined by 43% YoY, with margins at 57.84% as against 71.1% in the corresponding year-ago quarter. During the quarter, the company's average crude oil price realization stood at US$68.7 per barrel, a fall of 28.8% YoY. The company also reported a decline of 2% YoY in the daily production of oil and gas for the quarter.

Biocon Ltd has reported a 13% YoY fall in the bottomline for the quarter ended December 2014. The revenues for the quarter were up 8% YoY. Further, it has announced sale of 10%-15% (from current stake of 85.54%) stake in its research services arm Syngene through offer for sale route. The timing of listing of Syngene on the Indian stock exchanges will be dependent on regulatory approvals and market conditions. As per the management, the company continues to invest in its uniquely differentiated Biosimilars portfolio, which spans both Insulins and Monoclonal Antibodies.

While factors such as gradually improving macroeconomic climate, reform measures initiated by the government coupled with higher foreign inflows unleashed by the Europen quantitative easing bode well for the domestic stock markets, investors should still not lose track of fundamentals while investing in the markets.

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