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Financial markets received a boost earlier in the week by news that centrist Emmanuel Macron had triumphed over far-right candidate Marine Le Pen in the first round of France's presidential election. Macron, a pro-European Union ex-banker and economy minister who founded his own party only a year ago, was projected to get 24% by the pollster Harris and 23.7% by Elabe. Market participants saw the above development as market-friendly as many anticipate Macron's presidency to reduce the risk of Brexit-like shock. French Markets ended 4.2% higher this week.
UK markets ended higher by 1.7% this week. Britain's attempt to exit from the European Union (Brexit), just took a new twist. Britain's prime minister, Theresa May, has decided to capitalize on her party's 18% lead in the opinion polls. This week, she called for a snap general election on June 8. This could stymie a real Brexit.
Back home, Indian stock markets closed higher by 1.9% over the last week. The markets saw a record closing high during the week but profit booking later in the week trimmed weekly gains. Auto stocks were in major focus during the week ahead of their April sales data due next week. Auto sector gained 3.9% during the week.
Meanwhile, US President Donald Trump is proposing corporate tax rate cuts and steep tax breaks for multinational businesses on overseas profits brought into the United States. The promise of a massive tax rate cut has been at the center of the post-election rally, driving US markets to record highs. Also, Earnings were back in the spotlight on back of Trump's announcement. Overall profits of S&P companies are estimated to have risen 12.4 percent this quarter, the most since 2011. US Markets ended 4.2% higher this week.
Now let us discuss some key economic and industry developments during the week gone by.
In news from the Indian economy. After projecting India's growth to rebound to 7.2% in 2017 and 7.7% in 2018, in its recent report, International Monetary Fund (IMF) sees signs of recovery in the country's economy post demonetization and has said that the impact of demonetization has abated and about 75% of the cash has been replaced in the economy, it pointed that indicators such as index of industrial production (IIP) and the purchasing managers' index (PMI) have also shown a nice recovery.
However, the global multilateral agency expressed the need of quick replacement of the defunct currency in order to restore missing transactions and support the peoples' spending capacity, as cash is an important element in the Indian economy. It further stated that in general it supports the Indian government's efforts to combat the illicit financial flows, and to produce the share of the informal economy.
IMF in their forecast, reflecting the temporary dislocation associated with the notebandi scheme had lowered the growth target by almost a full percentage point compared to October, owing about a half a per cent for growth this year and half a percent for growth next year.
In another development, Niti Aayog vice chairman Arvind Panagariya has expressed his confidence that the size of the Indian economy will see over three-fold expansion at US$ 7.25 trillion by 2030 and clock an average growth rate of 8% in rupee and 10% in dollar terms, over the next 15 years. He also noted that in 2015-16 the country's GDP stood at US$ 2.11 trillion.
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Moving on to news from the Pharma sector. According to a report by The Hindu Business Line, in spite of the prevailing challenges, the Indian pharma sector is expected to grow up to 45% by 2025 and 58,000 additional employment opportunities are likely to be created in the industry amid the job crisis in India.
Despite the capping of prices, notebandi and GST implementation, all of which are perceived to impact the pharma sector adversely, the industry will continue to grow. In fact, by 2020, the pharma market will be touching US$ 55 billion, with a CAGR of about 15.9%.
Moving on to the defence sector. The defence sector in India is a sunrise sector. India was among the top ten spenders on military expenditure in 2015, ahead of countries such as France, Japan and Germany. The total expenditure of $ 51.3 billion during the year constituted 3% of the global military expenditure.
However, a significant share of the country's defence requirement is still imported. To encourage domestic production of defence equipment, as part of the initiative to boost manufacturing, the government has implemented a number of measures.
Moving to the Banking sector. Reiterating that the problem of bad loans in the banking system is not "insurmountable" for India, Finance Minister Arun Jaitley has said that a large economy like India can deal with this problem, as it is not a problem spread over hundreds or thousands of accounts but is confined to only 20 to 30 big accounts. However, he stated that the problem of Non-performing assets (NPAs) has just persisted too long and is certainly adversely impacting the banking system.
Jaitley stressed that at present, the resolution of NPAs is a top priority for the government as it will encourage private investments and to resolve the problem, some precipitative action must be taken and this may involve some cuts by the banks, which would be a bona fide commercial consideration. He also added that the defaulting companies must find partners and go in for either change of management or search of investors.
The Finance Minister blamed the anti-corruption laws of pre-liberalisation era as one of the constraints because of which banks are not able to take bold decisions.
In news from stocks in the IT sector. IT industry body Nasscom hit back against the US administration's allegations of cheating by TCS and Infosys in gaming the lottery system for H-1B visas. The industry body said that the two companies together received only 8.8% of the H-1B visas approved in FY 2015.
Nasscom said the White House statement that Indian companies had secured the lion's share of H-1B visas was factually incorrect as only six of the top 20 H-1B recipients were Indian companies in 2015.
The US administration has been pushing for a change in rules for H-1B visas on the grounds that it was being misused by IT firms to bring cheap workers to replace American jobs.
The IT industry body said that all Indian IT companies cumulatively account for less than 20% of the total approved H-1B visas; however, Indian nationals get 71% the H-1B visas. Exemplifying the high skill levels of Indian nationals rather than adoption of unfair means by Indian IT majors.
A Nasscom survey also found that the average wage for visa holders is over $82,000 apart from a fixed cost of about $15,000 incurred for each visa issued which includes visa cost and related expenses. This is over 35% higher than the minimum prescribed exempt wage of $60,000.
Meanwhile, the US has said that it greatly values investments by Indian companies and wants to see bilateral business ties remain strong, days after Finance Minister Arun Jaitley raised the issue of tightening of the H-1B visa regime.
During his US visit, Jaitley had raised the H-1B visa issue with Treasury Secretary Mnuchin and highlighted the contribution Indian companies and professionals were making to the US economy.
President Donald Trump had signed an executive order earlier this month for tightening the rules of the H-1B visa programme to stop its abuse, a decision that would impact India's US$ 150 billion IT industry.
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.
However, we believe that it is unlikely that the companies will substantially bring down their focus on the US. Instead companies may look out for other means to reduce costs or protect margins.
|Top Gainers During the Week (BSE Group A)|
|Bank of India||151.7||185.4||22.2%||189/79|
|Top Losers During the Week (BSE Group A)|
Some of the key corporate developments in the week gone by.
As per an article in a leading financial daily, L&T Finance has decided to sell off its mutual fund L&T Mutual Fund, and is now looking for buyers to take over the asset management company.
L&T Finance is said to be seeking a valuation of close to Rs 20 billion for the mutual fund arm, in which it had initially sought to divest a minority stake.
One must note that, L&T Mutual Fund had Rs 393 billion of assets under management as of 31 March 2017. The mutual fund industry managed assets worth Rs 18.3 trillion.
Earlier, L&T Finance had planned to sell 26% or 49% in the mutual fund as part of its restructuring plans. However, it could not attract buyers for the minority stake, leading to L&T now considering sale of the entire business, the reports noted.
In the meanwhile, L&T has also signed a deal with South Korea's Hanwha Techwin to supply artillery guns to the Indian army. The deal is estimated to be Rs 4.5 billion (US$696.38 million).
As per the agreement, the first 10 guns will be imported from South Korea and the rest would be manufactured by L&T in India. This is the second major deal for artillery guns concluded by the Army recently. Last year India signed a deal for 145 Ultra-Light Howitzers with the US under the Foreign Military Sales program.
The company will put its blocks in the Krishna Godavari basin (KG-DWN-98/2) and Ratna and R-Series oilfields in Mumbai offshore into production by 2019. The coal bed methane (CBM) blocks in Jharkhand will begin production by 2020, while the Daman offshore fields, which have been pressed into production this month, will be ramped up next year.
In another development, GAIL's subsidiary GAIL Gas has signed a Business Transfer Agreement (BTA) with Rajasthan State Gas. This could be a significant step towards setting up of retail gas infrastructure in Rajasthan and opening CNG corridors connecting key cities.
The BTA is a momentous occasion, which will pave the way for transforming Kota to a smart city by providing clean energy to boost up industrialization and setting up CNG corridor between Kota & Jaipur and Kota - Baran - Jhalawar besides providing green energy to the industrial clusters at Baran - Jhalawar adjoining areas of Kota. RSGL is also carrying out necessary activities to provide clean energy solution for the proposed smart cities Kota, Ajmer, Udaipur and Jaipur.
Provisions soared 76% to Rs 12.6 billion from Rs 7.2 billion a quarter ago, though net bad loans remained meagre at 0.33%, up from 0.28% a year ago.
The bank posted an 18% rise in March quarter earnings boosted by fee income even as it cut staff for the second straight quarter and slowed branch expansion as it exploits digital technology to reach out to customers.
Its staff strength has fallen by 6,096, or 7%, to 84,325 in the quarter ended March 2017 from 90,421 in December 2016. This reduction is the highest in a quarter and at least 33% more than the 4,581 people the bank lost in the quarter ended December 2016.
HDFC Bank is trying to improve productivity by cutting costs and optimizing its processes through automation. These benefits will come to the bank in the next two quarters but after that the base effect will kick in. Meaning that the benefits will remain only for the short term. Ultimately the bank will have to invest to grow for which it will have to incur costs.
In news from telecom sector. Bharti Airtel is set to enter home automation and smart home segment soon. The new segment will be driven by Internet of Things (IoT) and machine-to-machine solutions which enables users to control house-hold utility such as heating, air conditioning, music, lighting and security systems through smartphones.
Reportedly, the home automation market in India is expected to reach Rs 88 billion by 2017. The key growth drivers for this demand are increasing consumer awareness and financial ability, product innovations (like smart phone apps), builders' requirement for market differentiation and an increase in the preference for energy efficient systems.
Also, electronics major LG is looking for partners among telecom operators in India to bring up its smart appliances connected with IoT technology.
Moving on to news from stocks in engineering sector. According to a leading financial daily, BHEL has bagged its largest ever export order worth Rs 100 billion, for setting up 1,320 MW (2x660 MW) Maitree super thermal power project in Bangladesh. The project has taken-off, following the issuance of the Notice to Proceed by the developer.
Significantly, won against stiff international competitive bidding, this is the company's largest power project order in the international market. The order has been secured from Bangladesh India Friendship Power Company (BIFPCL), a 50:50 JV company of NTPC. India and BPDB, Bangladesh. BHEL has arranged debt financing for the project from the EXIM Bank of India for which the loan agreement between EXIM Bank of India and BIFPCL has been signed in March, 2017.
Yesterday, the Indian stock market ended the April futures and option series. Let us see how the markets performed during the expiry.
The Nifty 50 Index traded on a positive note during the expiry. It rallied 90 points during the first few sessions of the expiry. The index then corrected 190 points to hit a low of 9,075 in the third week. But during the last week of the expiry, it rallied strongly to hit a new life high of 9,367. Finally, the Nifty ended the April series with 1.84% gains.
Nifty rollover for the expiry stood at 65% and the put call ratio (PCR) stood at 1.07. The highest calls stood at 9,500 strike (resistance) and highest put stood at 9,000 strike (support). The rollover data for the expiry were a bit discouraging. Find the full rollover note released by the DPH team here.
As you can see in the chart below, 9,000 level acted as a strong support for the previous two expiries and it is expected to act as a strong support going forward as well. You can read the detailed market update here...
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