During the week gone by, global markets stood quite buoyant. The buoyancy in markets was boosted by the rise in world stocks on positive China remarks. The moderate sluggishness in US markets was primarily due to the harsh weather. The European markets witnessed healthy rally during the week gone by with the expectation that the European Central Bank may ease the policy rates next week to support the fragile recovery. Germany and France ended higher by 2.6% and 1.8% as at the end of the week. The UK market was up by 0.9% for the week.
Asian markets got the much-needed boost with the upbeat US data and diminishing concerns over the Ukraine/Crimea crisis. Following a recent run of disappointing Chinese data this year, many economists expect lower China's growth missing the government's target of 7.5% this year in the absence of effective support measures. But the hopes of possibility of Chinese stimulus remain. The China markets were down by 0.3% for the week. But Japanese markets witnessed quite a good momentum on account of economic recovery. The Japanese markets stood higher by 3.3% for the week gone by. Back home, the anticipation of positive outcome from the impending elections and the expectation of policy easing by the Reserve Bank of India (RBI) in light of lower inflationary pressures boosted the Indian markets during the week. Indian markets were up by 2.7% for the week.
Most of the sectoral indices ended in positive territory for the week ended 28st March with Power (up 6.8%), Capital goods and banking (up 5.6% each) and metals (up 5.2%) being the biggest gainers. Pharma (down 1.8%) and IT (down 1.1%) were the losers for the week. Expectations that a new government will assume power at the centre and shall break policy deadlock has given a new fillip to Indian stock markets. Also, as inflation has shown signs of cooling down; there are expectations that the RBI may adopt a dovish approach. Therefore, expectations for economic reforms and faster decision making have revived confidence in India's growth story.
Now let us discuss some of the economic developments of the week gone by.
A news agency poll of economists suggests that the Reserve Bank of India (RBI) is unlikely to change its key policy rates from the current 8% in the forthcoming monetary policy scheduled 1st April 2014. After taking over the reins, Raghuram Rajan had hiked interest rates thrice in order to control inflation. This apparently had taken the markets by surprise. Given that the inflation has been trending down in recent periods and has touched the below 5% mark, it is expected that the RBI may maintain a status-quo on 1st April. This is the first time that the inflation has touched this low. In February, the wholesale price index had moved up to 4.7% as food and fuel prices did not surprise much. Consumer price inflation has come down to 8.1%. It is expected that the repo rates will remain unchanged at 8% levels at least by October and cash reserve ratio would be maintained at 4% until July 2015.
The Election Commission (EC) is expected to give conditional nod to RBI's proposal to issue fresh bank licences. Notably, with Lok Sabha elections model code of conduct in place, it is mandatory to seek EC's permission before announcing any major policy decisions. So RBI moved for EC's clearance after the poll dates were announced on March 5. The commission could either defer the decision or give the clearance with conditions. The condition could include barring the prospective licensees not to advertise in newspaper and preventing them from making donations to any political parties. Couple of non-banking finance firms who have applied, are awaiting their bank licences after the RBI's Bimal Jalan Committee scrutinized 25 applications and gave its recommendations by the end of February 2014. Therefore, all eyes are now on the RBI and the final list of applicants who would be allotted the bank licenses.
A research report by property consultant Knight Frank indicates that sales volumes of twenty five of India's largest real estate players have plunged by 43% over the past eight months. Sales volumes stood at 11.8 m square feet as compared to corresponding period's volumes of 21.85 m sq ft. While growth was seen in cities such as Bangalore and Chennai - which collectively reported a market share of 33% in Q4FY14, as compared to 16% in Q4 FY12 - a slowdown was seen in the northern market with the latter's share in sales volumes declining from 75% in Q4FY13 to a little more than half in the latest quarter. In the western region, sales volumes slowed down by a more than a third over these periods. The slowdown is reportedly on the back of delay in approvals, high cost of funds as well as the drying up of funds on the back of inventory buildups as reported by the company. Investors would do well to recall that not so long ago there were reports of huge buildup in inventories, crossing the usual stock levels of 12 months across the country. A key reason for the same is builders unwilling to cut prices despite the overall slowdown being seen in the economy.
State-owned oil marketing companies are likely to slash petrol prices by more than one rupee per litre sometime next week. The reasons for the same are the decline in global crude oil rates as well as the strengthening of the Indian rupee against the US dollar. While petrol prices may come down, diesel rates are set to increase by 50 paise per litre in accordance with the practice of hiking prices by a small quantum every month so as to bring down the subsidy burden. It is expected that the revision on petrol and diesel prices will be announced on March 31, 2014. It must be noted that petrol and diesel prices were last revised upwards by 60 paise and 50 paise respectively on March 01, 2014.
Now let us move on to some more developments in India Inc....
Nation's largest lender State Bank of India (SBI) plans to sell its bad loans of about Rs 30 bn during the current quarter. The bank's management has plans to sell the bad loans in order to lower and contain its mounting NPAs (non performing assets) during the recent times. For this, the bank would invite bids from 18 assets reconstruction companies. And it will sell the bad assets worth Rs 30 bn to the highest bidder. NPAs are loan assets where buyers default paying interest over past 90 days. During the December 2013 quarter, SBI's gross NPA increased from 5.3% to as high as 5.7% of gross advances. Well, given the economic slowdown NPAs stand inevitable unless efficient control measures are initiated. Prolonged economic slowdown has led to increased bad loans and thereafter the rise in restructured loans for the Indian banking system. Moreover, the provisioning norms towards restructured assets are expected to increase starting April 2014. This will tend to hurt the earnings of the banks. Therefore, SBI's move to sell off bad assets comes at an opportune time and is expected to be thebank's bold step- first of its kind- to rectify the NPA problem.
The consortium of lenders led by State Bank of India (SBI) is expected to declare ailing Kingfisher Airlines (KFA) a willful defaulter. Once the audit report from Ernst and Young confirms misallocation of funds by KFA, then the banks forming part of consortium would declare it as a willful defaulter. SBI has already provided fully for the KFA exposure. Of the total consortium lending of Rs 70 bn, banks have been able to recover merely Rs 6 bn through sale of pledged shares. While the recovery efforts are still underway, the banks are currently battling 14 cases against KFA in various debt recovery tribunals. Besides SBI, Bank of Baroda, Indian Overseas Bank and Punjab National Bank were part of the consortium lending to KFA.
India's generic drug manufacturers are under scrutiny once again. The Regulator has emphasized upon quality over price. It is believed that the recent regulatory warnings are expected to attach a new premium on manufacturers who would demonstrate strong quality over time and contain supply disruptions. Few Indian pharmaceutical companies have already faced setbacks. Ranbaxy Laboratories had faced imports ban on all the Indian plants by FDA. This was due to constant production quality lapses. Also, the US health regulator had banned medicines made at one of the plants of Sun Pharmaceuticals Industries Ltd. Even Dr Reddy's Laboratories Ltd and Wockhardt Ltd have been involved in recent major product recalls. Therefore, such regulatory warnings for Indian pharmaceutical industry will add a new emphasis on quality of medicines.
Maruti Suzuki has gained market share of 4.3% in the passenger car segment for FY14 and almost reached 50%, thanks to aggressive marketing and strong brand presence. The company is planning to double the monthly production capacity of its new hatchback Celerio to 10,000 units a month on robust demand. The company has asked its vendors whether they will be able to meet the incremental production as discontinuation of production of Ritz and A-star has resulted in 17,000 cars per month of spare capacity. On receiving go-ahead from vendors, the production of Celerio can be raised to 10,000 a month by July. Maruti Celerio is the first car to be offered with automatic manual transmission or AMT in the country.
Engineers India Ltd (EIL) has bagged a US$ 40 m contract from Oman Refineries and Petroleum Industries Co (Orpic). The project management consultancy contract is for the Orpic's Liwa Plastics project that has been awarded to EIL against international competitive bidding. The Liwa Plastics Project consists of a new petrochemical complex adjacent to the Sohar refinery that includes 8 lakh tonne a year ethylene cracking plant, high density polyolefin plant, linear low density polyethylene plant, new polypropylene plant and associated utilities and offsite facilities. The feedstock for the plant will be brought from Fahud, 330 km from Sohar, and EIL's contract scope includes gas extraction at Fahud and transfer of natural gas liquids to Sohar.
Fresh trouble looms for Sun Pharma with respect to Taro Pharma, its Israelian subsidiary. The Indian drug maker plans to get two of its nominees re-elected as independent directors to the Taro board. In this regard, Sun Pharma is expected to face major opposition from the minority shareholders. The re-election on voting came up at the Taro's extraordinary general meeting. The extraordinary meeting has come up following a lawsuit filed against the company by BlueMountain and IsZo Capital, two of the company's largest minority shareholders. Notably, there have been various oppositions from minority shareholders ever since Sun's offer of US$ 464 m to acquire Taro during 2007.
Steel major Tata Steel has sold its 25 acres land parcel located in the western suburbs of Mumbai for a sum of Rs 11.55 bn through e-auction. The company opted for real estate developer Oberoi Realty, which emerged as the highest bidder for the process of auction. The participant for the auction included various well known developers. Tata Steel had launched the process for sale during December last year. The proceeds would help the company to lower its debt burden as well as fund expansion. The stock of Tata Steel is trading up by 1.8%, while Oberoi Realty is trading up by as much as 12% today.Indian banks and built back offices for two telecom companies. Revenues from this unit contribute 9% to the company's overall revenues.
Tata Consultancy Services (TCS) has won a multi-million deal from GDF Suez, one of global leaders in the energy sector. It is believed that the deal has been won by its newly integrated entity which came out of its acquisition of Alti SA in July 2013. The scope of work is to improve GDF's strategic objective in making its business efficient and more competitive in Europe and as well as other global regions. TCS has been operating in France since 1992 and has over 50 clients that include several of the CAC 40 index companies. Though the financial details for the deal have not been disclosed, it is considered to be a landmark deal for the company in the region.
The rebound in global markets is expected to remain intact even for the following week. Anticipated healthy economic data from the US and positive cues from the other parts of the globe would more or less maintain the global market buoyancy. 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. Also, the RBI Monetary Policy scheduled for 1st April 2014 is expected to be dovish on account of stable economic recovery. However, investors need to base their decisions not on the outcome of the elections or on weekly developments in the global markets but on the long term fundamentals and valuations of the companies that they choose to invest in.