During the week gone by, global markets continued their upward momentum led by markets in Brazil, Japan and Hong Kong. US stocks had yet another good week, after non-farm payroll data for the month of March showed a continued pick up. The number came in at 192,000 after recording 197,000 in February. The US unemployment number also came in at 6.7% which was unchanged from the last month. The bad weather that had affected the US economy in the last few months seems to have passed.
European indices were buoyant this week amid increasing speculation that the poor economic situation in the continent would prompt the European Central Bank (ECB) to launch further stimulus measures. Factory orders from Germany also came in above expectations which added to the positive sentiment. The French CAC, the British FTSE and the German DAX indices registered gains of 1.7%, 1.2% and 1.1% respectively.
Back home, Indian markets closed the week on a flat note. There were no major triggers this week after the Reserve Bank of India (RBI) kept all key interest rates unchanged in its bi-monthly monetary policy. BSE 30 index gained 19.5 points while the NSE-Nifty index fell 1.5 points. Investors clearly booked profits after the indices hit record highs.
Many of the sectoral indices this week moved in opposite directions, giving mixed signals. The realty (up 6.9%), consumer durables (up 5.7%) and metals (up 4.4%) indices were the biggest gainers. FMCG (down 2.1%) and banking (down 1.5%) sectors were the biggest losers during the week.
BSE indices during the week
Now let us discuss some of the economic developments of the week gone by
The Reserve Bank of India (RBI), in its first bi-monthly monetary policy on 1st April, left all key interest rates unchanged. The benchmark repo rate, at which the RBI lends to banks, remains at 8% while the reverse repo rate remains at 7%. The cash reserve ratio (CRR) was maintained at 4%. Consequently, the marginal standing facility (MSF) rate and the bank rate, both remain unchanged at 9% each. The RBI will henceforth announce its monetary policy every two months.
The International Monetary Fund (IMF) has once again stressed that internal factors have played a much larger role in slowing down India's growth than external factors. While the global macro environment has been weak on account of the sluggish growth in the US and Europe and the slowdown in China, as per IMF, India's GDP slowdown has rather been a product of problems back home. High fiscal deficit, lack of reforms, poor infrastructure, inflation, sluggish industrial activity among others has put the brakes on growth. India's economy grew over 9% in each of the three years preceding the global financial crisis of 2008-09. While growth came down to 6.7% in 2008-09, it recovered in the following two years and moderated a year after that. In FY13, growth considerably slowed down to 4.5% and for FY15 GDP growth has been pegged at 4.9%. Political uncertainty has also played a big role in dampening growth and it is hoped that post the general elections concluding in May, the new government will get down to serious business in terms of ramping up reforms and thereby the pace of growth.
According to the HSBC Purchasing Managers' Index (PMI), the expansion in the manufacturing sector moderated in March, after a year-high growth in the previous month. The PMI manufacturing dipped to 51.3 points in March from 52.7 points in February. A PMI reading above 50 shows expansion in the sector. This data comes a day after official estimates showed that the eight infrastructure sectors grew at a five month high of 4.5% in February against 1.6% in the previous month.
The Reserve Bank of India (RBI) has given in-principle approvals to just two entities - the infrastructure financier IDFC and Bandhan Financial Services Pvt Ltd to start new banks. As per the RBI release, the two chosen companies were suitable for "in-principle" approvals based on the clearance given by the high-level advisory committee (HLAC) under former RBI Governor Bimal Jalan. The approvals will be valid for a period of 18 months during which these two will have to fulfill the RBI's guidelines to offer banking services. Until a regular license is issued, the applicants will not be allowed to do banking business. With this, the number of banks in India will go up to 90. The RBI has promised that the entities that have not qualified in the current round will be allowed to apply in future rounds or they could apply for differentiated licenses under the proposed framework.
Now let us move on to some more developments in India Inc.
State-run Oil and Natural Gas Corporation (ONGC) has told the government that gas production from some of its deep-sea fields would be viable only at prices of up to nearly US$13 per unit. It is important to note here that the price suggested by ONGC is much higher than US$8.4 per unit that Reliance Industries would have charged from April 1 2014 if the gas price hike was not vetoed by poll authorities. As per the company executive, ONGC may put its plan to develop these discoveries on hold till gas prices are raised between US$11 and US$13 per unit.
Engineering major L&T is likely to write off about 10% of its Rs 1,700 bn order book in FY14. For instance, the company plans to cut about Rs 150 bn worth of orders that lack approvals or are facing issues with government. The write off is expected primarily in the roads, minerals and metals industries. Majority of orders are expected to be curtailed mainly in the construction business, the company's largest business segment. The management confirmed it would remove orders worth Rs 90 bn from the construction business. These includes 5 orders from GVK Infra, GMR Industries and from its own subsidiary L&T IDPL. This is second year in a row that the company has proactively written off delayed orders. Last year, L&T had written off Rs 170 bn worth of orders. Notably, the unmoving orders are not accruing to the P&L, so it won't impact the company topline.
Food major Nestle, that has been battling slowdown pressures for the past three years, has spelt out focus on health & wellness and noodles, segments in which new launches would be made. The company also wants to enter water and pet foods segment in future. The company has been facing slowdown pangs across product segments. In a bid to improve profitability, Nestle has been trimming low-margin products in chocolate and beverage segments that make up 24% of its overall revenues. In 2013, Nestle reported subdued volume growths of 3.8% and 3% in prepared dishes and beverages, respectively. On the other hand, offtake of milk foods & nutrition and chocolates and confectionary fell by 3.5% and 2.2% respectively pulling down overall volume growth to a mere 0.6% during the year. Nestle has seen a dramatic slide in its performance with volume growth slipping from 17% in 2010 to 6.8% in 2011 and further shrinking to 0.8% in 2012.
Leading Indian drug maker Sun Pharmaceuticals Ltd is planning to buy Standard Chartered Bank's Goregaon property on the suburban fringes of Mumbai city. The purchase will be subject to a successful due diligence, among other things. As per media reports, the purchase cost of this property will be about Rs 2.8 bn. The company has clarified that the purchase of any property for official purposes would not affect the company's earnings. Also, the amount shelled out for the property would be a minor percentage of its net worth/asset base.
India's largest software firm Tata Consultancy Services (TCS) is set to invest more in developing automation based software platforms. It is looking for setting up automation platforms for up to 40% to 50% of tasks. It also plans to eliminate the age old business processes that are no longer relevant at current times. As per the company management, it would first eliminate processes that are redundant and then from the balance processes it would opt for opportunity to automate routine and customized tasks by up to 40%-50% levels. The development would lead to improvement in the company's revenue earned per employee. For instance, TCS has already started investing and creating intellectual property across the board for robotic automation. The automation based model would perform tasks at costs of one-fourth the billing rates and at a fraction of time than it would take for a human engineer.
In the week ahead, the markets will keep a close eye on political developments as the general elections will begin. Also the markets will factor in expectations of the fourth quarter results. Thus some volatility can be expected going forward. However, investors should not be swayed by short term movements in the markets and must keep their long term focus intact.