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Global markets maintain the momentum
Sat, 22 Feb RoundUp

Barring few, most benchmark indices globally rose during the week gone by. The US markets, however, remained pessimistic on account of weak US housing data that raised concerns about the American economy. Also, the severe climatic conditions weighed down the economic growth, thereby, leading to subdued activity across US indices. Moreover, the cues of scale down in monetary stimulus restricted the momentum in US benchmark indices. While the benchmark S&P 500 index closed weaker towards the end of week gone by, it is expected to remain tepid in the forthcoming week too.

Barring Germany, the European markets delivered a strong performance in the week gone by. The major indices of UK and France were up by 2.6% and 0.9% respectively. The French index is expected to remain buoyant as the investors are counting on the potential economic growth of the country. Moreover, the Ukraine political fiasco kept the European governments busy during the week. That said, the European Union eyeing the G20 growth target would continue to maintain positive sentiments across European indices. The Asian markets stood strong in the week gone by. However, the China benchmark index stood lower as the fears pertaining to the durability of the China economic recovery continue to weigh on indices.

The Indian equity markets ended the week on a firm note. Persistent capital inflows from the foreign funds coupled with positive global cues maintained the Indian markets' buoyancy throughout the week. Moreover, the Finance Minister's commentary in the interim budget brought cheers to the equity markets. The Indian economy is expected to recover at least 5.2% growth in second half of 2013-14 from 4.6% in the first half, as cited by the finance minister.

Key world markets during the week
Source: Yahoo Finance

The sectoral indices ended mixed this week with consumer durables (up 2.3%) and IT stocks (up 2.1%) leading the gainers and power (down 2.8%) and metal stocks (down 2.7%) leading the losers.

BSE indices during the week
Source: BSE

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

Inflation based on Wholesale Price Index (WPI) slowed down to an eight-month low of 5.05% in January as compared to 6.16% in December. The drop in inflation has been on account of sharp decline in vegetable rates. Retail inflation, that forms the basis RBI's monetary policy, fell to 8.79% in January from 9.87% in December. A committee set up by RBI has suggested that the consumer price index (CPI) inflation should be brought down to 8% by January 2015 and to 6% by January 2016. Therefore in view of the high CPI inflation, the RBI is not likely to loosen its monetary policy in the immediate future despite economic slowdown. The next review of the monetary policy is due on 1st April 2014.

The Finance Minister presented the vote on account budget in Parliament on Monday. As expected, there were no big announcements. Excise/customs duty on automobiles was reduced a bit. But otherwise the budget was an exercise to balance the income and expenditure of the government. In this context, it was right to not expect anything significant from the finance minister. The most intriguing aspect of the budget was the government achieving the self imposed target on the fiscal deficit front. The fiscal deficit had been pegged at 4.8% of GDP for FY14. The revised estimate in the budget now pegs it at 4.6% of GDP. A close look at the details of the budget, tells us the entire story. As per the Economic Times, the fiscal deficit has been kept in check because of massive cuts in planned expenditure. Here are just two examples. The revised estimate states that the total central plan outlay will be lower by Rs 660 bn in FY14, compared to the original budgeted estimate. Also, the central government's support to the states and union territories has been cut by Rs 171.3 bn.

The third-quarter earnings season has ended on a positive note. The net profit of 30 Sensex companies has increased 24% YoY. Sequentially, too, these companies have grown their earnings by 14%. A large part of the good earnings cheer has been driven by export sectors such as pharmaceuticals and IT. Nonetheless, the earnings revival is more broad-based in the December quarter than earlier. An improvement in recovery suggests a positive scenario on the demand side. But, what could derail this and put India in a crisis is the highly leveraged overleveraged corporate sector, as suggested by an article in Livemint. While not all companies forming part of India Inc. have too much debt on their books, once again companies belonging to sectors such as telecom, power, construction and infrastructure are highly leveraged. According to the latest review of the economy by the Reserve Bank of India, the ratio of short-term debt to total external debt still stands at around 42% which is an alarming situation.

Most of the big steel companies stayed away from Goa's first e-auction of iron ore following the ban on mining in September 2012. Goa's Directorate of Mines & Geology (DMG) is holding a weekly auction to sell the 15 mt of iron-ore that is lying idle in jetties and ports across the state, since September 2012. While steel majors shied away from the auction, the auction saw high participation from mine owners themselves, in addition to exporters. Out of 0.53 million tonne (mt) of ore put up for this week's auction, all, except a small amount of 1,200 tonne, was sold out. Most of the big steel companies stayed away due to low quality of ore and higher transportation cost. Prices of iron-ore in Goa are higher than Karnataka. It would not make economic sense for them to buy this low grade iron ore and transport long-distance across the country.

Movers and shakers during the week
Company 14-Feb-14 21-Feb-14 Change 52-wk High/Low
Top gainers during the week (BSE-A Group)
ABB India Ltd.578.5682.618.0%720/448
Adani Enterprises215.1248.915.7%287/126
Financial Tech.281.9325.715.5%232/116
Jaiprakash Power13.615.413.6%32/9
Adani Ports & SEZ147.0166.713.4%175/118
Top losers during the week (BSE-A Group)
Core Education18 16 -11.1%304/13
Opto Circuits 29 26 -10.2%66/18
Reliance Communications 121 112 -8.1%164/50
Suzlon Energy 11 10 -7.5%25/6
Corporation Bank 239 224 -6.5%485/222
Source: Equitymaster

Now let us move on to some more developments in India Inc....

Indian Drug Manufacturer's Association (IDMA) has partnered with global safety science company UL to empower domestic pharma companies in meeting increased compliance levels and navigating complex regulatory issues. The move comes on the back of a number of domestic pharma companies being issued import alerts and bans by US Food & Drug Administration (USFDA). As per IDMA, domestic pharma companies are going wrong not due to lack of intent but rather lack of information. UL will offer training to domestic pharma companies in good manufacturing practices (GMP) guidelines, rightful implementation and full proof audit processes to ensure consistency.

The chairperson and managing director of United Bank of India took a voluntary retirement on concerns of growing non-performing assets (NPA). The bank posted a net loss of Rs 12.4 bn in the December 2013 quarter due to higher provisioning for bad loans. In proportion to advances, the bank's gross NPA rose to 10.8% from 4.4% whereas net NPA increased to 7.4% from 2.2% in 9mFY13. The bank has made provision of Rs 18.5 bn towards NPA which was more than four times, the bank provided for in the year-ago period.

Leading steel manufacturer Tata Steel has reported results for the quarter ending December 2013 (3QFY14). The net sales during the quarter were up 14% YoY. The sales volumes in India for the quarter increased 9.5% YoY. The delivery volumes in the European market have increased by 6% YoY during the quarter. The operating profits for Indian operations registered a growth of 24% YoY. For European operations, the company posted operating profit of Rs 8.6 bn versus losses of Rs 4.3 bn in the corresponding quarter last year. The company reported net profits of Rs 5 bn for the quarter compared to a net loss of Rs 7.9 bn in 3QFY13. This was mainly led by higher sales volumes and improved profits in the European business. The management has said that with an improvement in the European economy, the company is likely to benefit from the growth in European steel demand.

India's largest telecom service provider, Bharti Airtel, is facing legal troubles in Africa. Its subsidiary in the country of Nigeria has lost a long standing case to Econet Wireless Nigeria (EWN). The case relates to the shareholding of the company. A Nigerian court has upheld EWN's claim that it holds 5% stake in the firm and Airtel has been ordered to pay it a compensation of about US$ 3 bn. Bharti has challenged the order in the Supreme Court of Nigeria. Bharti Airtel holds 79.06% stake in Airtel Nigeria. Nigeria is the largest market for Airtel in Africa as it contributes about 30% of revenues from the continent.

The IT major Tata Consultancy Services (TCS) has secured a global IT infrastructure management deal from Diageo, a leading premium drinks maker. As per terms of the deal, TCS will manage Diageo's global IT infrastructure, data centres and servers. It will also provide service desk support to employees. The financial details of the deal have not been divulged. It must be noted that in 3QFY14, TCS won 8 large deals. What is more, the management stated that the deal pipeline was healthy and more large deals would be signed in the coming two quarters. These contracts are to be executed over the next two years.

Ashok Leyland has launched the latest backhoe Loader (435E Backhoe Loader) under its joint venture with construction equipment manufacturer John Deere. The 435E Backhoe Loader is targeted at first time buyers and offers 10% improvement in fuel efficiency. The Backhoe Loader is manufactured from the company's Gummidipoondi facility and equipped with 'H' series engine of Ashok Leyland. Ashok Leyland John Deere Construction Equipment Company have 155 plus touch points across the country and has 1,000 customers in two years of operations.

Dr Reddy's and GSK will register their first product in the European Union (EU) this calendar year, under a partnership struck five years ago mainly to tap emerging markets for medicines. The company has not divulged the name the product or the therapeutic segment it falls under. It typically takes one-two years for a medical product to be approved once registered in Europe. GSK in June 2009 entered into an alliance with Dr. Reddy's to develop and sell select products across emerging markets outside India in fast-growing therapeutic segments such as cardiovascular, diabetes, oncology, gastroenterology and pain management.

In the week to come, the global markets are expected to remain volatile. While the US markets would await the stimulus program announcements, the European Union expect a revival in the economic growth if supported by adequate reforms. In the absence of any domestic triggers, Indian equity markets would largely follow global cues. Also, with the liquidity expected to tighten, measures such as open market operations may be in the offing. That said, we believe that investors should not get carried away by short term gyrations in the stock markets.

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