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French Presidential election and Oil Price Fall Impact Global Markets
Sat, 22 Apr RoundUp

Investors were cautious ahead of the first round of the French Presidential elections ending next week. Fall in crude oil prices amidst oversupply concerns also adversely affected Global markets this week. Crude prices fell by 6.4% this week on growing concerns over increasing U.S production affecting OPEC's attempts to reduce the global oil shortage.US Markets ended 0.5% higher this week.

UK markets ended lower by 2.6% this week after the Government's surprise call for a national election on Tuesday. Prime Minister Theresa May called for an early vote on June 8, causing equity markets to fall. Retail sales in UK on Friday showed the biggest quarterly fall in seven years as price rise suppressed demand amongst consumers.

Chinese investors have been nervous due to recent decline in steel and coal prices. The latest IMF report on China warned that excessive dependence on credit for economic growth could result in an economic imbalance in the future. The Chinese market ended lower by 3.1% as compared to last week.

Key World Markets During the Week

Back home, Indian stock markets closed lower by 0.3% over the last week. IT and Pharma stocks dragged the markets lower due to global factors currently affecting these two sectors. Recent protectionist policies hinted by US and other global leaders could see IT stocks remaining subdued in the near future.

Meanwhile, the World Bank in latest report has stated that India's GDP is expected to see uptick from 6.8% in 2016-2017 to 7.2% by current fiscal year and rise further to 7.5% in 2018-19 fiscal. It also forecasted that India's economic growth will rise slowly to 7.7% in 2019-2020 supported by a recovery in private investments.

BSE Indices During the Week

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

In news from the goods and services tax (GST) space, the government is now looking to bring variations in GST rates on the same types of products to a minimum.

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This is to ensure that the GST structure does not get any more complicated.

Presently, India has adopted a four-tier tax structure of 5%, 12%, 18% and 28% under the GST regime for various products and services.

The rate applicable on most products is decided at 18%. The highest rate has been pegged in the GST law at 40%. Since there is a huge gap between these two rates, many believe the GST structure will undermine the basic tenet of being simple. And the above initiative is aimed at resolving this issue.

How the above development pans out remains to be seen.

Moving on to news about the economy. According to data released by the Central Statistics Office, Wholesale price inflation (WPI) eased to 5.7% in March as compared to 6.6% in February this year.

However, WPI was in the negative zone, at -0.5% in March last year.

The fall in inflation can be attributed mostly to falling oil prices, with the inflation for fuel and power segment coming in at 18.2% in March as compared to 21% for the previous month.

The build up inflation rate in the financial year so far was 5.7% compared to a build up rate of -0.45% in the corresponding period of the previous year.

Since the start of financial year 2016-17, WPI has been rising consistently, so much so that in February it reached to a 4-year high due to rise in fuel inflation (21%) and lower base in the previous year's index.

Interestingly, core WPI, which has been increasing since July 2016, declined marginally to 2.4% in February 2017 - it was at 28-month high of 2.7% in previous month.

The decline was led by a marked fall in fuel and manufacturing products inflation. While this came as a welcome breather, the same is expected to rise as the cash crunch led by notebandi turns normal. So when consumer spending normalizes, we should all be on our guard for rising inflation.

However, the sharp correction in crude oil prices witnessed over the last week would aid in dousing minerals inflation in March 2017. Moreover, the continued appreciation of the Rupee relative to the US Dollar would dampen the landed cost of imports. In addition to this, the RBI has slowed down the pace of remonetisation in March, which will reduce spending over time.

Such trends are likely to keep the WPI below the 6% mark in the ongoing month.

Moving on to the IT Sector, US President Donald Trump is set to sign an executive order that would tighten the process of issuing the H-1B visas and seek a review of the system for creating an entirely new structure for awarding these visas, the most sought-after by Indian IT firms and professionals.

The US$ 115 billion software services sector in the country will possibly have to deal with fresh restrictions as Trump's latest order reinforce the US government's intention to prevent the abuse of the H1B work visa system and said the system should help US companies in hiring highly skilled foreign workers when there is a shortage of skilled employees in the country.

The order is an attempt by Trump to carry out his "America First" campaign pledges to reform US immigration policies and encourage purchases of American products.

The number of applications for H-1B visas fell to 199,000 this year from 236,000 in 2016, according US Citizenship and Immigration Services.

The executive order that could signed by President Trump would call for the strict enforcement of all laws governing entry into the United States of labour from abroad, for the stated purpose of creating higher wages and higher employment rates for workers in America.

The US opened the window to invite applications for 85,000 H1B visas it plans to issue for 2018.

The latest development comes at a time when there is already an air of protectionism in the global markets. Singapore and the UK are both cutting down on visas to Indians in the IT sector, while also increasingly protecting high-paying computer engineering jobs for locals.

For many Indian companies, Singapore acts as a base for Southeast Asia, while the UK is a regional base in Europe.

An overall protectionism trend is expected to hit the Indian IT firms' bottom line. Especially in the US which accounts for more than 50% of revenues of India's IT majors.

Moving on to the Banking Sector, the Indian banking system reported the worst NPA levels among Asian economies in 2015. Vivek Kaul has written extensively about the mess in public sector banks in his Diaries.

While most corporates blame the economic slowdown for the poor asset quality of banks, Vivek offers an alternative perspective. As per him, the real story behind the bad loans of Indian banks is about the diversion of funds and willful defaults...

  • "As on December 31, 2014, the top 30 defaulters accounted for nearly one third of the bad loans of close to $47.3 billion, which is clearly worrying. Also, many high value loans have gone bad. And they keep piling up. In fact, in a survey carried out by the EY Fraud Investigation & Dispute Services found that 87% of the respondents that included bankers stated that diversion of funds to unrelated business through fraudulent means is one of the root causes for the NPA crisis."

However, given the scale of the bad loan problem, the bankers may remain cautious in granting new loans and approving new projects. This may delay India's investment cycle.

Movers and Shakers During the Week
Company13-Apr-1721-Apr-17Change52-wk High/Low
Top Gainers During the Week (BSE Group A)
Adani Enterpr.116.65145.7524.9%161/58
Sun TV781.9594020.2%940/334
Bhushan Steel67.47714.2%82/35
DLF Ltd.159.7182.2514.1%187/101
GMR Infra15.5517.6513.5%18/10
     
Top Losers During the Week (BSE Group A)
Jindal Steel & Power122.3111.85-8.5%135/58
Sun Pharma692.3638.5-7.8%855/572
Nalco72.566.95-7.7%80/40
Multi Commodity1,208.41,125-6.9%1,420/840
Bajaj Finserv4,607.154,290-6.9%4,697/1,725

Source : Equitymaster

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

In news from stocks in the Telecom sector. Idea Cellular, in a joint venture with Aditya Birla Nuvo Ltd (ABNL) is set to launch the Aditya Birla Idea Payments Bank in June this year.

The telecom giant has set itself a June target to launch operations and is signing up retailers who sell its telecom services to also double up as banking touch points to allow customers to carry out transactions.

The company plans to tap into its telecom customer base of over 200 million and plans to sign a majority of them initially for the services, giving it a large base to keep off competition from digital wallet players and others set to enter the segment.

The company plans to convert its 2 million strong retailer base across the country into banking touch points to take financial services to the rural areas.

The payments bank JV will also acquire customers online, leveraging on Aditya Birla Group's nearly 45 million digital customers.

Aditya Birla Idea Payments Bank is a 51:49 joint venture between ABNL and telecom major Idea Cellular, respectively

Moving on to the news from stocks in pharma sector. As per an article in a leading financial daily, Cipla said that its joint venture pact with Iranian firm Ahran Tejarat Company has been terminated.

Cipla had announced in December 2016, that Cipla Holding BV had entered into a JV agreement with Ahran Tejarat Company As part of the pact, Cipla Netherlands was to hold a 75% stake in JV firm in Iran while the JV partner was to hold the remaining 25%.

The JV agreement had lapsed as the condition was not met and has been terminated by the mutual consent of the parties. The JV undertook manufacturing and marketing of the pharmaceutical products in Iran.

However, foreign pharmaceutical companies are aggressively targeting opportunities to acquire both businesses and new products, including medicines at different stages in the developmental pipeline.

As the M&A activity has been heating up globally, the M&A activity in the Indian pharma space has been on the rise in recent times. At the end of the day, whether the company is able to derive value from the acquisitions and augment the overall performance will be the key thing to watch out for going forward.

Meanwhile, Dr. Reddy's laboratories share price surged during the week after it was reported that, US drug regulator has completed the audit of active pharmaceutical ingredients (APIs) manufacturing plant at Srikakulam special economic zone in Andhra Pradesh with no observations.

The USFDA has recently issued Form 483 with two observations to DRL's another API facility at Srikakulam. The facility is used for filing new products and is also earmarked for transferring manufacturing of certain existing products.

In another development, Sun pharma share price fell during the week after the US FDA issued 11 observations as part of audit to its Dadra unit, the biggest unit after Halol for the company for US supplies.

Moving on to the news from stocks in Mining sector. According to an article in a leading financial daily, the national coal quality watchdog has downgraded 177 of Coal India Ltd's (CIL) 413 mines, potentially impairing the monopoly miner's profitability, starting from the current year. The downgrades took effect 1 April.

Owing to this, thermal power companies would be paying less for their coal requirement this month onwards. While the financial impact of this major exercise, both on CIL as well as its customers, is still being worked out, there could be significant monetary loss to CIL and an equivalent gain to its consumers as downgrade of quality means prices would be revised downward.

After years of bickering between power producers and Coal India over grades and quality slippages, the union government agreed to start a process of independent inspection of coal for quality.

From the financial year 2017-18 onwards, the sampling and analysis for the grades of all the seams of the mines will be done by outsourcing mode through government organisations and academic institutions by taking dispatch samples only in presence of Coal Controller officials, the reports noted.

Moving on to news from IT sector. TCS has received its shareholders' approval for Rs 160 billion share buyback plan. The buyback program, which was passed through a special resolution, saw 99.81% of the total number of valid votes being cast in favor of the proposal.

The proposed shares under the buyback represent 2.85% of the total paid up equity share capital at Rs 2850 per equity share. In February, the board of TCS had approved the proposal to buy back up to 56.1 million equity shares for an aggregate amount not exceeding Rs 160 billion.

Last week, Infosys announced its capital allocation policy to return up to Rs 130 billion this financial year through dividend and/or buyback.

Earlier this year, Cognizant announced a US$3.4 billion share buyback, bowing to pressure from activist investor Elliott Management Corp.

Moving on to the news from stocks in FMCG sector. As per an article in a leading financial daily, ITC Limited is ready to take aggressive steps to surpass its peers, Nestle and Britannia and become one of the leading players in the FMCG industry (subscription required).

The company aims to become the leading player in India's packaged foods industry in next two to three years. To achieve this aim, the company needs to add new products and new product categories into its food business segment.

ITC plans to introduce about 40 new food products in the next year and sell premium chocolates and coffee through retail chains and online stores. These 40 new differentiated products will not only be variants, but also new products. For instance, ITC is evaluating staples and edible oil, health foods, and value-added dairy products as categories it might enter.

ITC's foods business is expected to be the majority contributor to its goal of achieving a turnover of Rs 1 trillion from its non-cigarette FMCG businesses by 2030. The company is expecting Rs 600 billion to Rs 650 billion will be generated from the foods business by then.

A strategic push toward foods and other daily needs began around the beginning of the new millennium, reflecting ITC's evolution into a diversified conglomerate. The company is now the third-largest player in the packaged foods market, with Rs 70.97 billion sales in 2015-16.

Recently, the company had planned to increase its market share in fruit juice market. After Dabur, ITC is the third largest in the fruit juice market. It can be seen that the company is trying to change itself from the largest tobacco player to the largest diversified company in the country.

Moving on to the news from stocks in paints sector. As per an article in a leading financial daily, Berger Paints India is planning to foray into new product categories, especially in the industrial segment. The company is aiming an entry into auto refinish and marine paints through joint ventures that are likely to be finalised by the end of this fiscal.

The company will formalise joint ventures with Japanese majors Rock Paints and Chugoku for entry into the Rs 20 billion auto refinish and the Rs 2.5 billion marine paints and coatings markets, respectively.

The company is also exploring opportunities to set up a facility for making insulation coating for constructing temperature-controlled buildings. This would be through its subsidiary Bolix, S A, Poland. These JVs are likely to be formed before 2017-18, the reports noted.

Meanwhile, according to Indian Paint Association, the paint industry is expected to grow at 12.4% over FY16-20E to reach the mark of Rs 708.75 billion. The uptick in demand of automobile and industrial sector is expected to contribute majorly in the growth of industrial paints, which is expected to grow at 7.4% over FY16-20E to reach Rs 177.19 billion.

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

The Nifty 50 Index traded on a volatile note during the week. On Monday, it opened lower but traded in a narrow range. The index opened gap up the next day and rallied 80 points in the first half of the session. As geopolitical tensions loomed, the index slipped more than 100 points in the second half of the session. The selling pressure continued until Wednesday close but did not last long as the index recovered 33 points in the next session. Finally, On Friday, the index opened 43 points gap up but gave up the gains towards the end of the session. The Nifty ended its weekly session 0.35% down. The 8,950-9,000 level remains a strong support zone for the index. You can read the detailed market update here...

Nifty 50 Index Ends in the Red
 Nifty 50 Index Ends in the Red 

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