Post an intense sell-off session last week, the emerging markets calmed and stood steady during this week. The withdrawal of US monetary stimulus and subdued Chinese growth amplified turmoil for few economies from Turkey to Thailand. Japan, India and the UK were the biggest losers with each of the indices tumbling by more than 2.5%.
The US indices were least affected during the week and stood flat underpinned by strong earnings performance by Facebook leading to a tech rally and strong US economic data. However, they closed down by 0.2% towards the end of the week. The Asian stocks struggled during the week, but thanks to the calming down of emerging markets, that did provide some momentum towards the end of the week. Overall, the Asian indices remained in the negative territory. The Singapore exchange and the Japan Index observed maximum pressure.
India surprised with the RBI's move to hike rates that saw the rupee rising 0.7% to 62.65 dollars. However, the markets and the industry alike did not welcome the move. But the central bank's contention to combat inflationary pressures and simultaneously keep an eye on the slowing economic growth justifies the measure. Moreover, the wholesale price index (WPI) and the consumer price index (CPI) at 6.2% and 9.8% respectively still stand above the desirable levels. Indian markets were down by almost 3% in the week gone by.
The sectoral indices remained mostly negative for the week gone by. The biggest losers were realty (down 7.3%), banking (down 6.7%) and metals (down 4.7%). While none of the indices managed to report positive gains, stocks from FMCG and consumer durables were least affected.
Now let us discuss some of the economic developments of the week gone by.
Contrary to the market expectations of status quo, the Reserve Bank of India hiked repo rate by 25 bps in its third quarter review of monetary policy. This rate now stands at 8%. The Cash Reserve Ratio (share of deposits banks have to park with the RBI) is still at 4%. Given the lower inflation rates in December, the rate hike move was unexpected. Moreover the GDP growth rate has not seen any uptick in the recent past. The central bank has cut the growth forecast to less than 5% for 2013-14. But the elevated inflationary levels remain the daunting challenge. The wholesale price index (WPI) and the consumer price index (CPI) at 6.2% and 9.8% respectively still stand above the desirable levels. The central bank continues to battle the challenge of economic growth that remains at a decade low. On the top of it, it has to tackle the persistently rising prices. The inflation fuelled by supply-side shortages stands beyond the monetary policy control. Hence, the government efforts in removing supply bottlenecks stand critical. We hope government plays its part in complementing the RBI's efforts in stimulating economic vitality.
Securities Exchange Board of India (SBI) is considering a proposal to make it mandatory for all listed Indian companies to have a succession plan. The implementation of the proposal is to ensure that the investing community is not adversely impacted by the demise, exit or poor performance of the leader at the helm of affairs of the company. Reportedly, most Indian companies do not have a formal succession plan for appointment to board or senior management positions.
The telecom regulator TRAI has allowed spectrum trading by telcos. It has recommended an outright transfer of spectrum, including full ownership and usage rights, in such deals between telcos. However it has not allowed the leasing of spectrum for now. The Telecom Commission had given an in-principle approval to spectrum trading in October and it was also cleared by the Empowered Group of Ministers (EGoM). The EGoM had then asked TRAI to provide detailed guidelines for trading. This decision is expected to increase more efficient use of spectrum by telcos. As per the new regulations, only the spectrum won at auctions can be traded and there will be a lock in period of 2 years before the traded spectrum can be re-sold by the buyer.
Now let us move on to some more news from the corporate world.
Medicines manufactured by Ranbaxy Laboratories have been cleared by the UK drug regulator. This comes in the backdrop of the US Food and Drug Administration (USFDA) earlier banning medicines manufactured at the company's Toansa plant in Punjab. The Medicines and Healthcare Products Regulatory Agency (MHRA) has said that there is no evidence that medicines in UK are defective and so people should continue to take their medicines accordingly. MHRA has also said that it is working with the other international regulatory partners as well as the regulator of European Union to determine the implications of USFDA findings for UK. The USFDA had found several shortcomings in its latest inspection of the Taonsa plant such as presence of flies in sample preparation and broken storage cabinets as well as no proper control to prevent unauthorized access to data files and folders.
Tata Motors is in the final stages to bag an Rs 10 bn contract from Ministry of Defense to supply over 1,200 heavy duty trucks. The move would change the decade long monopoly where such high end truck supplies were imported and procured from Czech based Tatra trucks. These trucks are six wheeled vehicles and are fitted with material handling cranes. The deal has an option of a follow on order for 600 more vehicles and is a three part procurement project that the ministry signed during the previous year. The company has been producing such category of vehicles over the past 3 decades and had wanted to get in to such projects.
India's second largest software firm Infosys, has won a large contract from an existing customer. TNT Express, the Netherlands based courier service agency, has reportedly signed a deal worth US$ 98.71 m with Infosys which would deepen the business relationship. The contract will be largely offshore in nature and will involve application development and maintenance (ADM) work. The deal will enable TNT Express to cut costs and improve productivity. In 3QFY14, application development and maintenance (ADM) contributed 35.1% of revenues while the contribution from Europe was 24.9% of revenues.
Biocon is planning to introduce its recently launched breast cancer drug CANMAb in other emerging markets. CANMAb has been jointly developed along with US drug company Mylan. Biocon wants to launch the drug in Latin America, West Asia and North Africa that are witnessing rising incidence of breast cancer cases. Reportedly, Biocon's optimism stems from the fact that despite being 25% cheaper, CANMAb is as effective as Roche's breast cancer drug. For the quarter ended December 2013, Biocon's topline grew by 10% YoY largely led by the strong performance of the contract research business. Its operating margins improved by 1.6% due to a significant fall in R&D costs (as percentage of sales) from 6.8% in 3QFY13 to 2.9% in 3QFY14. The reason for this was attributed to the fact that there has been a clamp down on clinical trials in India.
Let us take a look at some of the corporate results that were announced this week.
Voltas Ltd has announced its results for the third quarter and nine month period of the financial year 2013-2014 (3QFY14). The company reported a 3.1% YoY decline in sales during the quarter. Operating profits however increased sharply by 193.9% YoY during the quarter as margins expanded from 2% in 3QFY13 to 6.1% in 3QFY14. The company however reported a net profit decline of 19.4% YoY for the quarter, as exceptional gains during the quarter stood at Rs 43 m as against Rs 598 m reported in 3QFY13. The order book of electro mechanical projects and services segment stood at Rs 39.5 bn during the quarter as against Rs 42.1 bn in 3QFY13.
Gas Authority Of India Ltd. (GAIL) (India) Ltd announced results for the quarter ending December 2013. The company has reported 28% year on year (YoY) growth in revenues. The growth in the revenues was mainly on account of increase in gas price. GAIL sold 8.6 million standard cubic metres per day (mscmd) of imported natural gas during the quarter, as compared to just 3.2 mscmd in the corresponding quarter last year. The operating profits for the quarter grew by 14.4 % YoY with operating profit margins at 14.3%, as compared to 16.0% in the corresponding quarter last year. The company was exempted from paying fuel subsidy as the Government has decided to cap the company's contribution towards fuel subsidy to Rs 14 bn (which the company has already paid in first six months of FY14). As such, the net profits for the quarter witnessed a growth of 31% YoY. Besides, the profits were boosted by sale of shares in China Gas. The company sold 60 million out of 210 million shares in China Gas at a price of US$ 8.2 per share (as compared to a buy price of US$ 1.15 per share). Excluding the gains from shale sale, the growth in the net profits comes at around 9%.
Titan Company Ltd announced results for the quarter ending December 2013. The company witnessed poor retail sales in the festive quarter in both its watches and jewellery businesses. The net sales for the quarter declined by 11% YoY. The revenues in the watches segment grew by 7.5% YoY despite 10% drop in volumes. The revenues in the jewellery segment (80% of the revenues) fell by 15.4% YoY. The operating profit for the quarter also declined by 14% YoY with expenses dropping by 11% YoY. However, margins in jewellery segment improved to 10.2% in the quarter from 9.8% in the same period last year. The margins in the watch segment fell 11.3% to from 12.1% in the corresponding quarter last year. The net profit for the quarter declined by 18.6% YoY. Apart from the weak operating performance, the bottomline was also hurt by finance costs that more than doubled on a YoY basis.
Bharti Airtel has announced its results for the quarter and nine month period ended December 2013 recently. The company's total revenues witnessed a growth of 13.3% YoY. The average revenue per user (ARPU) increased by Rs 9.7 to Rs 195 during the quarter. As per the management, the data customer base in the country has increased by 31.2% to 54.4 million customers and usage per customer gone up by 54.4 %, leading to 97.0 % increase in total data traffic. The domestic revenues witnessed a growth of 10.3% YoY during the quarter while international revenue increased 18.5% YoY. The operating profits for the quarter grew by 22.8% year-on-year, with margin at 32.3% versus 29.8% in 3QFY13. The improvement in margins was led by better operational performance in India. The net profits for the quarter grew by 115.1% YoY.
India's biggest car maker, Maruti Suzuki, announced its earnings performance for the third quarter of FY14. The company reported a whopping 36% rise in profits driven by strong operational performance. On sequential basis, the profits grew 1.6% YoY. Due to Suzuki Powertrain merger, the YoY numbers are not comparable. The company Board has also decided to expand its manufacturing facilities in Gujarat. The board had approved for purchase of land in Mehsana district of Gujarat after more than two years. On account of tepid market conditions, the expansion plans were on hold. The expansion plans will be implemented through a 100% Suzuki subsidiary. Moreover, the Suzuki subsidiary will not sell vehicles manufactured in this plant to anybody else. Rather this subsidiary will produce vehicles as per the Maruti Suzuki requirements and will be sold to the company only. This will obviate the need for Maruti Suzuki to invest in capex. Instead the funds will be used for marketing and expanding its distribution network.
The global markets are expected to keep a close watch on the economic performance of emerging economies, particularly China. Back home, amidst the RBI rate-hike and the weak global cues, domestic markets continued to remain under pressure. However, we believe that investors should not get carried away by short term gyrations in the stock markets. The focus should be on selecting companies with sound business models, strong management and available at attractive valuations.