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Global markets firm up
Sat, 22 Mar RoundUp

During the week gone by, global markets posted a smart recovery. The recovery has come after the US Federal Reserve reduced its monthly bond-buyback program by US$ 10 bn to US$ 55 bn signaling an improving US economy. The US Federal Reserve also spelt out that interest rates would be raised six months after the end of the quantitative easing irrespective of whether the national unemployment rate of 6.5% is reached or not. This rate is currently at 6.7%. The US factory production, also, increased by 0.8% in February. The US markets were up by 1.5% during the week. The European markets also rebounded with indices in Germany and France up by 3.2% and 2.8%, respectively. The UK market was up by 0.4% for the week.

Barring China that was up by 2.2% on the back of a weak yuan, most of the Asian markets ended on a negative note for the week. The weakness was on concerns of slowdown in foreign capital flows post further tapering in the monetary stimulus program by the US Federal Reserve. The Indian markets retreated after scaling a record high of 22,041 on 18th March 2014 in the run-up to the elections. As a result Indian indices were down by 0.3% for the week. Even the Hong Kong and Japanese markets ended lower by 0.5% and 0.7%, respectively. Japanese indices have fallen despite the country reporting the smallest trade gap in nine months and Bank of Japan stating that the 2% inflation target remains on track.

Key world markets during the week
Source: Yahoo Finance

Many of the sectoral indices ended in positive territory for the week ended 21st March with Metal (up 3.5%), FMCG (up 3.3%) and consumer durables (up 1.8%) being the biggest gainers. Oil & gas (down 1.7%), Capital goods (down 1.5%) and realty (down 1.3%) were the losers for the week. On account of a special trading session on Saturday 22nd March, Indian markets closed almost flat at 21,755.

BSE indices during the week
Source: BSE
Note: The returns have been calculated for the week ended 21st March 2014

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

Retail inflation for farm workers and rural labourers eased in February as compared to the preceding month mainly on account of decline in the price of food items. While the retail inflation for farm workers declined from 9.08% to 8.14%, retail inflation for rural labourers was down from 9.21% to 8.27%. The wholesale price index (WPI) based inflation fell to a nine-month low of 4.68% in February. Even the retail inflation for the month has been reported at a 25-month low of 8.1%.

According to the Reserve Bank of India governor, the central bank has still not moved to inflation targeting as yet and the focus should be on Consumer Price inflation rather than Wholesale Price Inflation for reining in prices. The governor debunked the growth-inflation trade-off saying that additional growth cannot come from generating inflation. According to him, bringing down inflation hinders growth in the short term but it brings sustainable growth in the long run. The tempering down of inflation has stoked hopes of RBI maintaining status quo with respect to bank rates in the upcoming monetary policy scheduled on 1st April 2014.

The Reserve Bank of India has permitted more banks to import gold under the 80:20 scheme. The other banks included are Axis bank, Kotak Mahindra Bank, IndusInd Bank and Yes Bank. Presently only six banks and three financial institutions are allowed to import gold under the 80:20 scheme. To control gold imports and rein in current account deficit, the RBI had introduced the 80:20 scheme in August 2013 under which 20% of the imported shipment has to exported. The government had also raised the import duty on gold from 4% to 10%. The current move is seen as a signal towards easing of restrictions on gold imports, going ahead.

Movers and shakers during the week
Company 14-Mar-14 21-Mar-14 Change 52-wk High/Low
Top gainers during the week (BSE-A Group)
Godrej Consumer710.8770.28.4%977/672
Apollo Tyres132.9143.17.7%144/55
Maruti Suzuki1737.11867.87.5%1900/1217
United Spirits2466.02647.97.4%2816/1708
Top losers during the week (BSE-A Group)
Mahindra Finance276254-7.9%356/187
Bayer Cropscience1,4891,383-7.1%1829/1065
Opto Circuits2927-6.0%66/18
Mahindra & Mahindra Ltd.(M&M)1,026970-5.4%1054/742
Source: Equitymaster
Note: The returns have been calculated for the week ended 21st March 2014

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

Infosys Chairman N.R. Narayana Murthy had earlier predicted a longer recovery period saying that the company's operating margin is likely to remain under pressure and growth is expected to pick up only towards the end of FY15. Now even Tata Consultancy Services (TCS) has said that it expects weak performance during the fourth quarter of the financial year 2013-14. The management expects the US dollar revenue growth to be lower than the preceding quarter (3QFY14) when the growth was 3.1%. In addition, the management expects margins to be down by 40-50 basis points due to rupee appreciation and continued investments in emerging markets and Europe. The company's India business is likely to remain under pressure on account of the upcoming elections.

Wipro wants to graduate from being an application developer to a one-stop shop for customers in the US. The outsourcing industry in India has traditionally focused on application development and maintenance that garners more than 60% of the sector revenues. Wipro's system integrator model has been successful in India and the company wants to extend the model globally. As per the company, it wants to sell software, hardware as well as implement and roll it out. The systems integrator unit of Wipro has implemented core banking software for 10 Indian banks and built back offices for two telecom companies. Revenues from this unit contribute 9% to the company's overall revenues.

After domestic pharma companies facing the heat of USFDA for violating regulations, it is now the turn of Indian regulators going tough on multinational pharma companies. Novartis has been pulled up by the Directorate General of Health Services (DGHS) for allegedly faking documents to seek registration of its vertinary product Tiamulin Hydrogen Fumarate. Drugs Controller General of India (DGCI) has already cancelled the company's import licenses as well as registration certificate for the product. DGCI has said that further legal action will be taken in the matter after seeking opinion from the Ministry of Health and Family Welfare. Tiamulin Hydrogen Fumarate is used for respiratory diseases in the poultry industry and is imported by Novartis from its manufacturing facility at Sandoz, Austria. DGHS may also undertake inspection of the manufacturing site in Austria. Novartis has a total of 26 products registered in India.

Maharashtra Food and Drug Administration (FDA) has sent a notice to Glaxo SmithKline Consumer Healthcare (GSKCH) for overcharging on Crocin and stopped supplies in retail chemist shops. As per the Drug Price Control Order (2013), the price of paracetamol is fixed at Rs 9.40 for a 10-tablet strip whereas Crocin Advance is currently being sold at Rs 20 a strip. GSKCH feels that Crocin Advance being a local invention should be exempted from price control. FDA has also written to the National Pharmaceutical Pricing Authority (NPPA) for greater clarity on the issue. If NPPA agrees with Maharashtra FDA, then other States may also stop Crocin Advance from being sold at the current price. GSKCH earns margins on distribution of Eno, Crocin and Sensodyne brands. This auxilllary income is less than 5% of the company's overall revenues.

Crompton Greaves (CG) has signed a contract with the state utility of Paraguay for the expansion of the country's 220 kV electricity network. As per the contract, the company will supply 19 single and three phase transformers amounting to a total of 683.3 MVA. CG has a global manufacturing capacity of 95,000 MVA comprising of 46,000 MVA in Asia, 31,000 MVA in Europe and 18,000 MVA in North America. The company will manufacture the transformers in India and will supply them in three lots.

As stricter provisioning norms are expected to come into effect, banks are increasingly selling off bad loans. State Bank of India (SBI) will be offloading around Rs 50 bn of its Rs 678 bn bad assets to asset reconstruction companies (ARCs) before the end of the month. Such a step is unprecedented in the bank's history of over two centuries. It is to be noted that SBI had reported 5.7% of its assets as bad loans in the December quarter. Generally, ARCs pay 5-10% of the total bad loans being bought in cash and the rest could be security receipts (SRs).

Largest coal producer, Coal India Ltd (CIL) is likely to miss its production target for the current fiscal year (FY14) by about 12 million tonnes (MT). The company is struggling to achieve at least 470 MT of output against a fixed target of 482 MT for financial year 2013-14. As per the company, factors such as delays in securing clearances to projects, infrastructure problems, strike, cyclone Phailin and problems in evacuation have resulted in lower output.

Amid challenging environment and growing competition, Tata Motors has earmarked Rs 15 bn in FY14 for the development and launch of new products in the commercial vehicles segment. The amount will be spent on new products, technology, improvements and innovations in the segment. Currently, the capacity utilization of Tata Motor stands at around 60%-65%.

Global markets would continue to be impacted by the ongoing crisis in Ukraine as well as concerns of slowdown in capital flows in emerging economies. Even slowdown pangs in the Chinese economy can act as a dampener. While Indian markets will continue to respond to these global cues, back home hopes of a positive outcome at elections could lead to stock prices scaling higher. However, investors need to base their decisions on the long term fundamentals and valuations of the companies that they choose to invest in and not on the outcome of the general elections.

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