In the week gone by, global markets remained more or less optimistic led by firm movement of indices in India, US, France and Germany. In India, markets managed to post a 2% rise despite GDP growth coming a below average 4.7% for the December 2014 quarter. Even the US market was able to overcome Ukraine concerns as well as a weaker than expected estimate of its GDP growth rate for the fourth quarter and end 1.4% higher. The country's GDP growth in the fourth quarter slowed down to 2.4% from 4.1% growth logged in the third quarter. Among other developed economies, France and Germany also ended on a positive note.
However a stronger yen weighed on exports dragging down stock index in Japan by 0.2%. Even the stock market in China recorded the sharpest fall of 2.7% as the yuan suffered its biggest weekly loss of 0.9% on central bank intervention to weed out speculation. The sliding yuan further fueled investor concerns about the dragon nation's slowing economy, high levels of government debt and increased risk from its shadow banking system. Even markets in UK fell by 0.4% on firm Euro zone inflation and diminishing prospects of rate cut by European Central Bank.
The Indian equity markets shielded itself from weak economic cues and remained in an uptrend on hopes of a stable government at the centre that will kick start the reform process and revitalize the economy. Majority of the sectoral indices ended in positive territory for the week with capital goods (up 5.3%), pharma (up 4.5%) and auto (up 3.5%) being the biggest gainers. Metal (down 3.4%), power (down 1.2%) and realty (down 0.5%) were the only losers for the week.
Now let us discuss some of the economic developments of the week gone by.
A recent study by Gartner is likely to ring in positive news for IT companies that are predominantly focusing on Indian markets. As per the study, the Government of India is expected to spend close to US$ 6.4 bn on IT products and services in 2014. This is higher by over 4% as compared to the previous year. This spending is expected to be on various segments such as internal IT (including personnel), hardware, software, external IT services and telecommunications. Within this, IT services segment contributes the maximum. The growth rate for this segment is expected to be a little less than 4%. However, the fastest growing segments within this space would include the business process outsourcing vertical. As for the internal services vertical, the same is expected to grow at a pace of 9.4% YoY in 2014. Amongst the large players, Tata Consultancy Services (TCS) has the highest exposure to Indian markets with the same contributing to nearly 6.3% of its revenues.
Data released by Central Statistics Office (CSO) points out to the economic slowdown being witnessed in the country. Corporate investments slipped to a decada low in FY13. Capital expenditure by private companies fell to 9.9% of gross domestic product (GDP) in FY13 after peaking to 18.8% of GDP in FY08. During this period, investments by Indian households have risen to 15.9% of the GDP from 11.7% in FY08. But the breakup of household savings is an interesting feature. The share of savings in financial instruments such as bank deposits, mutual funds, shares, debentures, insurance and pension funds has fallen to 32.4% in FY13 from 52% in FY08, pointing to growing economic uncertainty. To shield from increased economic concerns, Indian households have stepped up investments in land and gold. The share of physical savings in real estate and gold has risen to over 66% in FY13 from 48% in FY08.
There seems to be no respite for coal shortage being faced by domestic power generation companies. Coal India has forecasted its FY15 coal output to be lower at 507 m tonnes (MTPA) compared to its earlier projection of 530 MTPA. It believes its output would be 25 to 30 MTPA higher as compared to FY14 numbers. So this implies output of about 470 to 475 MTPA during FY14 as compared to the company's earlier estimate of 492 MTPA. The main reason for decline in the estimate is due to the problem with securing environmental clearances. Hurdles in environmental clearances saw the company report flat output during FY11 and FY12. As Coal India meets 80% of coal requirements of power sector, the shortfall in output would adversely impact the power industry. Independent power producers would mostly be affected as its plant load factor hits 60%. Their economic viability would also come under scanner due to high fuel costs from expensive imported coal coupled with lower merchant tariffs unless government takes some serious measures.
Now let us move on to some more developments in India Inc....
In a restructuring exercise, Infosys plans to demerge its product, platform and solutions (PPS) business into a separate subsidiary at the start of FY15. The division, expected to be called Edge Works, will be structured with focus on verticals like market requirements, product development and product implementation at the client's site. The division is expected to account for about 5.5% of the overall revenues and would include one of Infosys' most successful banking products, Finacle. Under the company's current vision, it aims to achieve growth of about 33%. But the PPS segment has hardly grown over the last 3 years and therefore it is being hived off as a separate division. Further, the building of the product division is quite different from that of the services and BPO segment. The move would also allow the company to make acquisitions in the segment.
In a consolidation move, the board of Gujarat Gas has given a go-ahead for the merger of the state-run gas distribution companies with itself. As per the proposal, GSPC Distribution Networks, GSPC Gas, Gujarat Gas Financial Services and Gujarat Gas Trading Co will be merged with Gujarat Gas. The merger is likely to propel the company's valuations.
In a bid to reduce its debt burden, Jaiprakash Associates is in discussion with Holcim-owned ACC Ltd to sell off its 74% stake in two cement joint ventures with India's leading state-run steel maker Steel Authority of India Ltd (SAIL) for Rs 29 bn. Jaiprakash Associates has a consolidated debt burden of about Rs 600 bn. The group wants to cut down its debt pile by about 25% before the end of the current fiscal year. Jaiprakash Associates is India's third largest cement maker with a capacity of 33.3 million tonnes per annum (mtpa).
Cadila Healthcare or Zydus Cadila has won final approval from US Food & Drug Administration (USFDA) to market Clonidine Hcl injections in 0.1 & 0.5 mg/ml and 10 ml strengths. Clonidine Hcl injections are indicated in combination with opiates for the treatment of severe pain in cancer. Zydus Cadila has filed 216 Abbreviated New Drug Applications (ANDA) and has received 90 approvals so far. The topline of Cadila Healthcare registered a healthy 17% YoY growth during the December 2013 quarter driven by strong growth in exports. The US business recorded an impressive growth of 61% YoY during the quarter. The company filed 31 ANDAs during the quarter.
However, Ranbaxy Laboratories continued to reel under quality issues. The company has voluntarily suspended drug ingredients shipments from two of its manufacturing plants. The Toansa and Dewas plants have suspended all shipments as the company is examining processes and controls. Both plants are currently banned from shipping products to the US following US FDA ban on quality concerns. The suspension will hit its supplies in other markets including Europe and India. The voluntary decision has been taken as a precautionary measure and it plans to resume the shipments after reassurance of the processes and controls. Further the company has set up committee with primary role to oversee the problems of manufacturing and quality operations, systems, organization and integrity.
With quadricycles officially being allowed from 1st October 2014, Bajaj Auto, has begun marketing its quadricycle, the RE60. The new vehicles are being positioned as a replacement for the three-wheeler auto rickshaws. It is expected to be priced between an auto rickshaw and a hatchback at about Rs 200,000. The RE60 weighs about 400 Kilograms and has a top speed of 70 Kmph. Bajaj has spent about Rs 5.5 bn to develop the vehicle. The safety features of the vehicle are significantly better than an auto rickshaw but not as good as a car.
Indian Oil Corporation (IOC) is set to acquire 10% stake in the shale gas and liquefied natural gas (LNG) project of the Malaysian firm Petronas in British Columbia for US$ 900 m. The proposal was cleared by the Cabinet on 12th February 2014 and IOC has secured a one-year bridge loan to finance the deal. This acquisition will pave way for IOC's entry into North America. Reportedly, IOC and its subsidiaries account for 49% share in the petroleum products segment, 31% share in refining capacity and 71% downstream sector pipelines capacity in the country. The company owns and operates 10 refineries with an aggregate refining capacity of 65.7 million tonnes per year.
Hindustan Unilever has the set the ball rolling for the nation-wide launch of the world-famous Magnum ice-cream. The ice cream was launched in Chennai in April 2013 and introduced in Mumbai and Hyderabad last week. The company is already present in the ice cream segment through Kwality Walls range and this move will further widen its portfolio. Magnum is positioned as a premium product made of Belgian chocolate and priced at Rs 85 a stick. Unilever is the world's largest ice cream company with brands such as Cornetto, Breyers and Ben & Jerry's retailing under its Heartbrand range. In India, HUL faces competition from market leader Amul and other players such as Mother Dairy and Vadilal. Amul has been able to maintain a competitive edge due to aggressive pricing, distribution and launches.
Going ahead, global markets are expected to be volatile from the ongoing problems in Ukraine as well as economic concerns in US and Euro zone countries. In India, the markets continued to revel in the pre-election rally. A clear mandate in the 2014 elections is expected to boost the economy and thereby attract domestic and foreign equity investors. Apart from these short term fluctuations, India's long term growth story remains intact.