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Global markets slide 
(Sat, 25 Jan RoundUp) 
 
As sell-off by investors intensified, global indices have fallen for the week. The bearish sentiment was aggravated by factors such as slowdown concerns in the second largest economy, China, reduced support from US monetary policy as well as political problems in Turkey, Argentina and Ukraine. France, Germany and the US were the biggest losers with each of the indices tumbling by more than 3%.

Also indices in UK and Japan slipped by 2.4% and 2.2%, respectively. China's manufacturing sector continued to battle sluggish demand from traditional markets in US and Europe. Its Purchasing Managers' index slipped to 49.6 in January, the first time in six months, signaling a contraction. The index was 50.5 in December. However, China's benchmark index saw a jump of 2.5% as money market rates fell and property companies rallied on better earnings prospects. But Hong Kong and Singapore indices declined by 3% and 2.3%, respectively.

Even the Indian markets reported a subdued performance. Slowdown in manufacturing in China as well as fears of a rate hike in the monetary policy by RBI on 28th January weighed down on the markets. The wholesale price inflation (WPI) is still ruling higher despite easing off in retail inflation. This in turn has sparked speculation of a rate hike to rein in inflation.

Key world markets during the week
Source: Yahoo Finance

The sectoral indices remained mostly negative for the week gone by. The biggest losers were oil & gas (down 1.5%), realty (down 1.5%) and power (down 1.4%). The IT stocks were the biggest gainers on the back of strong quarterly results with the BSE IT index (up 1.4%). Banking, consumer durable and pharma were the other indices that managed to report positive gains.

BSE indices during the week
Source: BSE

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

With an aim to put a check on black money market and counterfeiting of currency notes, the Reserve Bank of India (RBI) has announced that currency notes issued prior to 2005 would be withdrawn from 31st March 2014. A differentiating factor for currency notes issued after 2005 is that they have the date of printing on them. All notes issued prior to 2005 do not have the printing date on them and such notes would have to be exchanged at bank branches. Also from 1st July 2014, anyone looking to exchange more than 10 notes of Rs 500 or Rs 1,000 denomination would have to carry their identity and residence proof to the bank.

As per the UN World Economic Situation and Prospects 2014 (WESP) report, good monsoons, mild recovery in investment coupled with strong growth in exports will aid in the gradual pick-up in the Indian economy. According to the UN report, the slowdown in the economy has bottomed out. The economic activity is forecast to expand by 5.3% in 2014 and 5.7% in 2015 after growth had decelerated to 4.8% in 2013. The report says that the external conditions continued to be challenging for India as significant capital outflows led to a sharp depreciation of the rupee. The global economy is projected to grow at 3% in 2014 and 3.3% per cent in 2015, compared to an estimated growth of 2.1% in 2013, as per the UN report.

Movers and shakers during the week
Company17-Jan-1424-Jan-14Change52-wk High/Low
Top gainers during the week (BSE-A Group)
Opto Circuits26.631.016.6%91/18
Torrent Pharma475.5538.213.2%558/328
Aurobindo Pharma385.0421.29.4%446/127
Axis Bank1152.81207.04.7%1549/764
Divi's Laboratories1270.01327.84.5%1343/905
Top losers during the week (BSE-A Group)
Ranbaxy Lab406337-17.2%490/254
Mahindra Finance279246-11.9%356/179
Godrej Consumer771707-8.4%977/693
Mcleod Russel287266-7.2%387/240
Financial Tech314291-7.2%1180/102
Source: Equitymaster

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

Ranbaxy Laboratories' manufacturing practices came under the scanner, once again. This time the United States Food & Drug Administration (USFDA) has banned the company from producing and distributing drugs for the US market from its Toansa facility in Punjab. The drug regulator has also prohibited drugs made by Ranbaxy's Ohm Laboratories facility in New Jersey. In addition, the company has been banned from manufacturing active pharmaceutical ingredients (API) at its Toansa facility for FDA-regulated drug products; exporting API from Toansa to the US for any purpose; and providing API from Toansa to other companies, including other Ranbaxy facilities that manufacture products for US consumers.

In a positive move, Indian drug companies received a breather after relaxation in guidelines for cheap generic inhaler alternatives to GlaxoSmithKline's blockbuster respiratory drug, Advair. The drug is used as inhaled medicine for asthma and chronic obstructive pulmonary disorder. As per the new guidelines, pharma companies will no longer be required to conduct long and expensive human tests. Advair is the world's 3rd best selling drug with a turnover of US$ 8 bn in the previous year out of which US alone accounts for US$ 5 bn a year. Indian pharma giants like Sun Pharma, Lupin and Cipla are gearing up to launch their generic inhaler alternatives in the US markets. The opportunity for the inhaler segment is significant with the US market alone being pegged at about US$ 23 bn.

In the domestic markets, stringent regulatory requirements for clinical trials has compelled Biocon to shift its numerous Indian projects to the US and Europe. As per the new regulations, companies conducting clinical trials have to share clinical trial contract details with Drugs Controller General of India as well as an audio-visual recording of consent by the subject to participate in the trial. As a result, the company is facing challenges for conducting clinical trials in India for a vaccine used in treatment of cervical cancer jointly being developed along with US-based Advaxis. Even the ongoing research programme on oral insulin (IN-105) is taking a longer time. Reportedly, the cost of conducting a trial in the US or Europe is 10-12 times higher as compared to India. As a result, Biocon's spend on research & development has more than halved to Rs 200 m in December quarter as many of the clinical trials have been deferred to the next quarter. These expenses are expected to increase in the future as the company will have to incur trials outside India that are more expensive.

As part of a restructuring exercise, Infosys plans to cut down on non-performing units. The units that are currently not generating revenue would be down-sized and employees would be transferred to other departments. Among the departments being restructured are the education and research unit, the main R&D unit Infosys Labs, and the Intellectual Property (IP) cell. This cost optimization exercise has now been extended to all cost centers of the company.

Coal India has halved the premium it charges on coal from power plants that have linkages. This premium is an add-on price above the applicable rates charged to power plants with captive mines for mining beyond the normative date of production. The company has reduced the premium to 20% from 40% that it charged earlier to power plants with coal linkages. The move comes on the back of growing protest from the industry as well as the power ministry. However, the power ministry is still not content and is demanding the premium to be totally abolished.

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

Colgate announced results for the third quarter ended December 2013. The company posted a 13.7% YoY growth in revenues driven by 10% YoY growth in offtake. The toothpaste segment recorded a growth of 11% YoY during the quarter. Robust growth in the company's brands such as Colgate Dental Cream, Active Salt, Max Fresh, Colgate Total and recently launched Visible White led to strong market gains. However, the robust topline growth failed to improve profitability due to a steep rise in other expenses that increased by 3.5% YoY in proportion to sales. This together with a 0.9% YoY increase in ad-spends to sales ratio more than offset the 2.1% YoY savings in staff costs to sales ratio. As a result, the operating margin contracted by 2.2% YoY during the quarter. At the net level, the company managed to register a 1.6% YoY growth in profits aided by 38% rise in other income.

Larsen & Toubro has announced its results for the third quarter of the financial year 2013-14 (3QFY14). During the quarter, the company's standalone net sales grew by 11.8% on a year-on-year (YoY) basis. Operating expenditure increased at a slower rate of 9.5% YoY. As a result, the company's operating profit increased by 33.1% YoY. While other income declined by 20.1% YoY, depreciation charges and interest expenses increased by 12% YoY and 16.7% YoY respectively. The company reported exceptional gains of Rs 1,043.9 m during the quarter. At the bottomline level, net profit increased by 22.4% YoY. Net profit margins expanded from 7.8% in 3QFY13 to 8.5% in 3QFY14.

HDFC declared its results for the third quarter of the financial year 2013-14 (3QFY14). The net interest income grew by 15.8% YoY backed by 21% YoY growth in total loan book. 89% of the incremental growth in loan book came on the back of individual loans during 9MFY14. Net interest margin fell from 4.2% in 3QFY13 to 4% in 3QFY14. Other income dropped for third quarter in a row by 18.1% YoY in 3QFY14. Net profit grew by 12.1% YoY for 3QFY14 aided by healthy net interest income and lower provisions for the quarter. Capital adequacy ratio and gross NPAs stood at 19% and 0.8% respectively at the end of December 2013.

Ashok Leyland announced its results for the December 2013 quarter. The company saw its top line decline by 19% YoY during the quarter. But as expenses fell at a slower pace, the company reported a loss of Rs 969 m at the operating level. Further, higher finance charges and lower exceptional income (on a YoY basis) further widened the net loss to Rs 1.6 bn for the quarter.

UltraTech Cement announced results for the third quarter ended December 2013. On a standalone basis, sales fell by 1.5% YoY as a result of flat volume sales and lower realizations. Operating margins fell from 21.1% in 3QFY13 to 16% in 3QFY14. Other income decreased by 17.8% YoY during the quarter. Depreciation charges and interest expenses rose by 10.7% YoY and 73.6% YoY, respectively. On account of the poor performance at both the topline and operating profit level, net profits declined by 38.5% YoY during the quarter.

The global markets are expected to keep a close watch on the economic performance of emerging economies, particularly China. In the domestic markets, RBI's monetary policy on 28th January will set the future course of action for the markets.

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