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Global Financial Markets Brace for Brexit Impact
Sat, 1 Apr RoundUp

The United Kingdom formally notified the European Union (EU) of its intention to withdraw from the bloc. This starts a two-year process of negotiations with the EU on trade and other important economic issues. The UK contributes a sixth of the economic value generated by the European Union. UK markets ended lower by 0.3% as compared to last week.

The consequences of Brexit for India and the global economy could be negative, what with the sharply rising odds of an unravelling EU and euro. Uncertainty and risk aversion will rise. Capital flows will be pushed away from the region and toward key safe-haven markets including the U.S. - especially treasuries - and to Japan.

This will further lower market interest rates and raise relative currency values. The higher U.S. dollar also triggers additional pressure on China to float the yuan lower, as it's caught in the divergence between its two largest export markets - the EU and the US.

The European markets closed higher led by Germany which ended 2.1% higher as compared to last week. This was accompanied by a slump in the Euro. A weaker Euro is beneficial for the German Index as majority of its components are big exporters that sell their products globally.

Key World Markets During the Week

Back home, Indian stock markets closed higher by 0.7% over the last week. This was on back of the GST bills being passed in Lok Sabha. The Lok Sabha signed off on the last batch of bills on the GST paving a path for unified tax across the country. Market participants expect GST to be the key game changer to bring about a structural change in the Indian Economy.

BSE Indices During the Week

Now let us discuss some key economic and industry developments during the week gone by.

The National Democratic Alliance (NDA) government is likely to table supplementary goods and services tax legislations in Parliament today. As per the news, the legislations are likely to be introduced in the Lok Sabha today and could be taken up for discussion as early as March 28.

Along with the above legislations, amendments to the excise and Customs Act are said to be placed before the House. These amendments are placed to abolish various cess as well as furnish Bills for exports and imports under the new GST regime.

All the above developments have set the stage for implementing the landmark tax reform by 1 July 2017.

We believe that the Goods and Service Tax (GST) is one of the key reforms that will bring about a structural change in the Indian economy. The implementation of the same is bound to bring more companies under the new tax regime, thus providing a level playing field to organized players forming part of sectors having a high proportion of the unorganized segment.

Players from the footwear, plywood, textiles and sanitary-ware sectors are likely to be strong beneficiaries of the above tax legislation. Battery as well as paint and adhesive manufacturers will gain from this move as well.

Finance Minister Arun Jaitley introduced four items of legislation that provide for a peak goods and services tax (GST) rate of 40% and the setting up of an authority to protect consumers from profiteering by businesses.

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The 40% levy will be allocated equally between the Centre and the states.

Also, a few important changes have been proposed in the bills including zero rating of supplies to special economic zones (SEZs), introduction of duty drawback and the exclusion of Jammu and Kashmir from the definition of 'India' for GST purposes.

Apart from the GST, the Notebandi move by the government will also lead to a value migration from unorganised players to organized players. And companies with solid fundamentals and a competitive moat will capture most of this value.

In another development, as per a report in The Economic Times, come July 1, leasing of land, renting of buildings as well as EMIs paid for purchase of under-construction houses may start attracting the Goods and Services Tax (GST).

The sale of land and buildings will, however, be kept out of the purview of GST. Such transactions will continue to attract the stamp duty, according to the legislations Finance Minister Arun Jaitley introduced in the Lok Sabha for approval.

Service tax is currently levied on payments made for under-construction residential houses after providing abatement, which brings down the effective rate from 18% to around 6%.

However, the real estate sector is worried about the percentage of tax to be levied, which they fear would be kept at a minimum of 12%. At present, while service tax is levied on commercial space renting, for under-construction houses, service tax and value added tax (VAT) are both charged at around 9%. There are also fears that an increase in taxes on EMIs might further impact the residential sector.

The government resumed investigations into circumvention of anti-dumping duties after a stay order was vacated recently by court. The products originate from China, Korea, EU, South Africa, Taiwan, Thailand and the US.

The probe was initiated in February last year by the Directorate General of Anti-Dumping and Allied Duties (DGAD), under the Commerce Ministry, but it was stayed on April 27, 2016, by the Delhi High Court. The stay was vacated on March 8, 2017.

In December 2015, India had imposed anti-dumping duty of up to 57.4% on import of the products from China, Korea, the US and EU for five years to save the domestic industry from cheap shipments.

The government's proposal should protect domestic steel companies from cheaper imports. But in the meanwhile, the steel makers are chasing imports out by ramping up production.

But the bigger concern is weak consumption growth. The consumption data over the past few months clearly show that there are no takers for domestic steel. So, steel makers have been forced to export more, with overseas shipments up by 78% YoY in the fiscal till February.

In the last few months, as domestic steel demand failed to pick up, producers had to export the alloy in order to maintain margins and maintain the raised capacity utilisation. Average capacity utilisation of domestic steel industry has moved to 85% from 75% earlier.

Moving on to news about the economy. Industrial activity, as measured by the SBI composite index has registered growth in March, after three months of continuous decline.

The SBI Composite Index is an indicator for tracking primarily manufacturing activity in Indian economy. It uses various macroeconomic indicators such as Gross Domestic Product and Index of Industrial Production, along with various thematic indicators.

The index improved to 53.3 in March, from 49.2 in February, indicating a pick-up in manufacturing activity. The index had hit an all-time low of 45.5 in December 2016 primarily due to historically low credit growth, coupled with a reduction in consumer demand due to notebandi in India.

A composite index reading of 42 to 46 and 50 to 52 implies moderate decline and low growth, respectively, in manufacturing activity in the economy. While a 52-55 indicates moderate growth.

The current rating of 53.3 means that manufacturing activity in India grew at a moderate pace in March, as compared to low growth and moderate decline in the previous months.

According to the SBI report, manufacturing activity has picked up due to various measures taken by the government like anti-dumping duty, minimum support price in steel coupled with push in infrastructure that is railways, road, defense, port, power, smart cities.

The report also mentions that the infrastructure sector is now looking up after long periods of decline and no growth. This may indicate that companies are finally beginning to shrug off the notebandi induced slowdown.

The Reserve Bank of India (RBI) came out with a preliminary assessment of impact due to notebandi in India. The impact on Indian companies was a mixed one. There was a visible slowdown in sales growth for companies across industries.

Manufacturing companies outperformed industries and grew their sales at a robust pace of 4.9% YoY. The key thing to note is the profit margins for the companies across the board.

Movers and Shakers During the Week
Company24-Mar-1731-Mar-17Change52-wk High/Low
Top Gainers During the Week (BSE Group A)
Gujarat Fluoro634.2758.219.6%758/463
Torrent Pharma1,411.651,549.259.7%1,767/1,185
Corporation Bank48.1552.59.0%53/34
Future Enterprises28.130.27.5%156/14
Torrent Power Ltd216.6232.357.3%250/159
Top Losers During the Week (BSE Group A)
Hindustan Zinc322.85288.85-10.5%333/158
Idea Cellular90.8585.7-5.7%128/66
Lanco Infratech3.493.33-4.6%5.6/3.2
Hero Motocorp3,376.63,223.85-4.5%3,739/2,829
Mphasis Ltd603.2577.85-4.2%621/425

Some of the key corporate developments in the week gone by.

In news from stocks in the Auto sector. Bajaj Auto has been selling and providing after-sales services of Kawasaki bikes at its Probiking outlets since 2009. The company has now decided to focus on its partnership with Austrian firm KTM. It has been converting its Probiking outlets into KTM dealerships.

Reportedly, Kawasaki Motorcycles will be now sold in India through India Kawasaki Motors Pvt. Ltd., a wholly owned subsidiary of Kawasaki Heavy Industries Japan through its dealer network. This is also the time when Bajaj is steadily increasing focus on motorcycles.

One must note that KTM bike sales have been growing at a 48% compounded annual rate to 37,000 in 2016-17. Moreover, Bajaj Auto International Holdings BV, a subsidiary of Bajaj Auto based in the Netherlands, has invested Rs 12.2 billion in Austrian firm KTM.

In news from the banking sector, Kotak Mahindra Bank was in the news this week with its plans to sell shares worth as much as US$ 825 million at the current market price to pursue acquisitions and grow other businesses.

The fundraising is aimed at augmenting the bank's capital base to pursue mergers and acquisitions, acquire stressed banking assets, grow subsidiaries, and expand its digital banking and international lending operations.

Kotak will also focus on building its stressed asset resolution and turnaround business in the coming years. The Indian banking system currently has about Rs 14 trillion worth stressed assets parked as non-performing loans and in various stressed asset resolution schemes.

While stressed assets are a key focus, Kotak Mahindra Bank is also aiming to double its 8 million-strong customer base in 18 months by launching the paperless zero-balance savings account, called 811.

SBI announced plans to dilute 10% of its stake in the life insurance venture SBI Life, through a public offer.

The Executive Committee of Central Board in its meeting held on Friday accorded in-principle approval for initial public offer (IPO), SBI said in a regulatory filing to stock exchanges.

The bank also said it will raise US$ 1.5 billion from overseas bonds in one or more tranches to fund business expansion.

Meanwhile, SBI's impending merger with associate banks is on its track to proceed smoothly as the bank expects to have full data integration within six weeks.

According to the management, although system integration would take place immediately the bank would be restoring historical data of customer transactions on its own servers and the whole process would be completed in six weeks.

SBI has made investments in IT hardware to take over database of new customers. The merger will see the bank adding 200 million new customers into its fold. The new IT capacity will go a long way in ensuring optimal performance.

While this merger will catapult SBI into the world's top 50 banks, the PSU major with around US$ 450 billion in assets would still be fourth after Japan Postbank (US$ 2,022 billion) - the smallest of top 10 banks globally. But the scale of the merger is in the number of branches, where SBI ranks number two globally, second only after China's ICBC bank.

Due to the rising menace of bad debts, Reserve Bank of India is mulling tough measures against willful defaulters. Gross NPAs have risen at an alarming rate over the past 1 year. While RBI's proactive measure to tighten NPAs is proactive, banks need to take their share of blame.

In our recent The 5 Minute WrapUp edition, we had highlighted how the banks return ratios had deteriorated due to its profits written off on account of NPA provisions.

Moving on to the news from stocks in pharma sector. As per an article in a leading financial daily, Lupin has launched generic Abacavir and Lamivudine tablets used for the treatment of human immunodeficiency infection in the American market.

Reportedly, the company had earlier received approval from the United States Food and Drug Administration (USFDA) for tablets in the strengths of 600 mg/300 mg. Lupin's tablets are generic versions of ViiV Healthcare Company's Epzicom tablets, in the same strength.

The product is indicated in combination with other antiretroviral agents for the treatment of HIV-1 infection. As per IMS MAT December 2016 data, Epzicom tablets had US sales of US$388.1 million.

With this, the company's cumulative filings with the USFDA now stand at 349, with 213 products already approved. The US continues to be the principal growth engine for the company. Lupin's US business has grown at CAGR of 24% (Subscription Required) over the last five years.

Meanwhile in the Infra sector, L&T reported that the company has won new orders worth Rs 40 billion from the hydrocarbon sector. Separately, L&T also bagged orders worth Rs 17.25 billion for construction jobs, which included one in the transport infrastructure space and another for a heavy civil infrastructure construction.

As per an article in The Economic Times, L&T announced a string of orders in the past week by its different divisions, but the market was upbeat about the hydrocarbon orders, given the slowdown in capex in the sector.

L&T Hydrocarbon Engineering, a subsidiary of the company, won all the Rs 40 billion orders in the international market, primarily in the Middle East and Africa.

In January, the company slashed its FY17 growth guidance for order inflow and revenue after reporting dismal growth on both accounts in the third quarter of the financial year. The company reduced FY17 growth guidance for revenue to 10% from 12-15% earlier, and for order inflows to 10% from 15% earlier.

And here's an update from our friends at Daily Profit Hunter...

The Nifty 50 Index traded on a positive note during the week. On Monday, the index opened the session gap down and slipped 63 points to re-test the 9,000 support level. It recovered strongly the very next day to erase the early weekly losses. It gradually traded upwards during the rest of the week. The index closed its weekly session at its life high with 0.72% gains. The 8,950-9,000 level remains a strong support zone for the index.

The Nifty also ended its March series expiry. It gained 2.62% with good open interest addition but lower than average rollovers. This indicates most of the long positions in the index that built up in the March expiry did not roll into the April series. You can read the detailed market update here...

Nifty 50 Index at Lifetime High
Nifty 50 Index at Lifetime High

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