The equity markets across the world displayed mixed performance for the week gone by. Barring India, most of the Asian indices witnessed selling pressures; thanks to the tense situation in Ukraine making investors adopt cautious stance. That said, the supportive comments coming from central bank of U.S. helped maintain the buoyancy in U.S. markets and the indices ended higher for the week. Moreover, the jobless claims data suggested that the labor market is improving. That helped lift the U.S. broader indices. Barring U.K., the European indices too remained buoyant. The European Central Bank has assured to act to stem slowing inflation and help boost the eurozone economy. While Asian indices remained weak, the softening of China inflation data did help in restricting the losses. Back home in India, ahead of the election results outcome next Friday, the benchmark indices scaled up to new all-time highs. This boosted the markets as they closed 2.6% higher for the week gone by.
Most of the sectoral indices ended in positive territory for the week with oil and gas (up 2.6%) and capital goods (up 5.5%) being the biggest gainers. IT (down 3.0%) and pharma (down 1.7%) were the only losers for the week.
BSE indices during the week
Now let us discuss some of the economic developments of the week gone by...
During the month of April 2014, foreign institutional investors (FIIs) invested a sum of Rs 96 bn or US$ 1.6 bn in Indian stocks. This made April the eight consecutive month of net inflows. In the month of August 2013, FIIs has sold Rs 59.2 bn. In the year till date, FIIs have invested Rs 323.7 bn or US$ 5.3bn in Indian stocks. The bullishness seems to be on account of the ongoing Lok Sabha elections with high expectations of a particular party coming into power. With the election results to be announced in less than two weeks from now, market participants can expect a significant amount of volatility as investors who feel the positive are all priced in may be looking to exit the markets. As such, we recommend investors to take a cautious approach in the short term.
As per Mr. C Rangrajan, Chairman, Prime Minister's Economic Advisory Council (PMEAC), with gold imports slowing down and inflation levels easing, the country's current account deficit (CAD) is expected to be around 2 % of the GDP in the coming few years. He has stated that the demand of gold should fall going ahead given that the gold prices are not rising. He further suggested that there are also other factors contributing to the improvement of exports. As such, the CAD should settle down at a level of 2% of GDP. In 2012-13, CAD stood at 4.7% of the GDP. As per Mr. P Chidambaram, in 2013-14, it should stand at 1.7%.
As per a leading business daily, India's steel production and consumption data for April 2014 has been released. Total finished steel consumption witnessed a growth of 3.4% YoY to 5.8 m tonnes in the month of April 2014 over April 2013. However, the consumption saw a sharp fall of about 13% over the preceding month of March 2014. Crude steel production grew by 2.7% YoY to 6.8 m tonnes in April 2014. Independent Steel Producers that includes SAIL, RINL, Tata Steel, Essar Steel, JSW, Jindal Steel & Power together produced 3.7 m tonnes for the month. The rest was produced by the small and medium producers. However, overall production was down by 5.6% when compared with March 2014. The total steel consumption in FY14 grew marginally by 0.6% YoY largely due to slowdown in the domestic economy along with decline in imports.
Property prices have fallen by as much as 20-30% in Indian metros over the past year. Apart from the seemingly inflated prices that have led to lower demand, the reasons for the price declines are working capital pressures for the developers, especially at a time when the buyers have disappeared. As per HDFC Chairman Deepak Parekh, secondary sales have slowed down and prices in the segment have come down. Not to mention the uncertainty over the economy and the run up to May 16, the date the elections results get announced. There have been reports that unsold inventory levels have risen from 650,000 apartments in the quarter through December to 700,000 at the end of March 2014.
The private sector output for India has declined for the second consecutive month in April. A survey from HSBC states that with moderate rise in manufacturing production, the service sector output has shrunk further. The HSBC India Composite Output Index that maps both services and manufacturing has been reported to have gone up to 49.5 in April from 48.9 in March. However, it continued to hover around below 50 levels for the second successive month. The economic downturn, incumbent elections and contraction in new orders have impacted the business activity hampering the services sector. Most of the private sector companies have reportedly garnered lower new business; while the workforce number has more or less remained unchanged.
Now let us move on to some more developments in India Inc.
As per the proposed Mandatory Vehicle Recall Policy, government is considering penalties on auto manufacturers based on vehicles recalled. Penalty will be proportional to the number of vehicles recalled. So, larger the number of vehicles recalled, larger the amount of penalty. Currently, there is no specific recall policy and automobile manufacturers recall vehicles based on the manufacturing defects. The move comes as the incidence of recalls is rising in the industry and government plans to formulate a policy that would act as a deterrent against erring manufacturers. Besides, the number of vehicles recalled, safety is another important aspect that would determine the penalty imposed. However, industry has criticised the policy citing that vehicle recalls are global practices so as to correct any faulty parts. And the penalty could be proposed for companies that deliberately hide such manufacturing defects and concede the defect when found by authorities. However, distinction between the two is difficult.
As reported by a leading business daily, IT major HCL Technologies won a contract worth US$ 400 m (Rs 24 bn) from DNB Bank ASA, a bank based in Norway. The scope of work would be to manage the bank's IT infrastructure services and application operations on a global scale. As per the company, it will migrate and transform the bank's infrastructure from its existing IT partner and will create two new data centres in Norway. This deal will provide a fillip to the company's infrastructure management and enterprise application system divisions, areas which grew by 4.1% and 2.6% on a quarter on quarter basis i.e. in comparison to the preceding quarter ended December 2013.
ITC is in an advanced stage of negotiations with Bangalore-based Balan Natural Foods to acquire its juice brand B Natural. This acquisition shall mark the group's entry into the beverage market. The acquisition is expected to cost less than Rs 800 m for ITC. It is believed that ITC's entry into the Rs 12 bn packaged-juice market can stir up a stiff competition with leaders like Dabur India and PepsiCo. ITC with its strong brand equity in the past has challenged companies like Nestle in the instant noodles segment. Balan is expected to act as the manufacturing partner for ITC and the latter will only acquire the brand. Balan's estimated annual sales are around Rs 400 m and its main market is in the South.
As per a leading financial daily, the Coal Ministry has categorically stated that companies which have been allocated mines for a specified purpose shall not have the right to market, sell or export the fuel to any third party. This development comes in the light of complaints of misuse by owners of captive mines. It has been alleged that Jindal Steel and Power Ltd (JSPL) has been selling coal from its captive mines in Chattisgarh. In February, the Coal Ministry had put three mines, two in Jharkhand and one in West Bengal, on auction after being pulled up by the Comptroller & Auditor General for delaying the auction process. As per the government auditor, allotment of 57 mines to private companies without an auction caused a notional loss of Rs 1.8 trillion to the exchequer. The Ministry has an estimated 500 million tonnes of reserves for captive use of steel, cement and sponge iron firms.
Oil & natural Gas Corporation (ONGC) is planning the third phase of drilling redevelopment of its prime Mumbai High oil & gas fields. This is in order to revitalize its ageing oil & gas in the Arabian Sea. The third phase of drilling is estimated to cost about US$ 1.1 bn which will start during FY15 and continue over 3 to 4 years. ONGC is targeting a production of about 132 - 147 m barrels of incremental crude oil through the investment. The company will also integrate its smaller reservoirs to the main reservoir to improve economies of scale in the production and development process. Earlier in the phase I of the redevelopment that completed in 2007, the company spent US$ 1.5 bn that led to 57 m tonnes of additional crude and 16 bn cubic meter of gas. The second phase is proposed to produce 36 m tonnes of incremental crude oil and 6 bn cubic meters of gas.
According to a survey by JD Power; an American market research firm, the Indian tractor market is going to grow at a compounded annual growth rate of 8-9% for the next five years. As per the research, lower penetration levels will be the main catalysts for growth. Also, the growth will lead to increase in demand for foreign tractors. A key finding of the survey is that at least 80% of the farmers conveyed that they will consider buying a different brand of tractor than they currently owned. This will boost sales of foreign manufacturers such as Kubota Case New Holland, AGCO and John Deere. In turn, it may also pose stiff competition to domestic manufacturers such as Mahindra & Mahindra, Escorts Ltd and Tata Motors.
Let us now have a look at the results announced by companies
ABB India has declared its first quarter results of 2014. ABB's sales declined 8% to Rs 18.1 bn as compared to Rs 19.64 bn in the corresponding quarter last year. However, the decline in revenues was restricted by the execution of one large order from renewable energy sector. The company reported 20.9% rise in net profit at Rs 520 m for the current quarter as compared to Rs 430 m in the corresponding period of last year. The profit growth was on account of better execution and continuous cost optimization during the quarter. Order inflow grew by 28.7% YoY to Rs 19.82 bn. During the quarter the company received large orders for transformers, substations as well as medium voltage drives and traction converters. The order book at the quarter end stands at Rs.78.7 bn.
Housing Development Finance Corporation (HDFC) has announced its results for the fourth quarter (4QFY14) and financial year 2013-14 results. The institution has reported a 16.8% YoY growth in net interest income while net profits have grown by 10.8% YoY during 4QFY14. For full year FY14, the profits grew by 12.2% YoY. The net interest income was largely driven by 26% YoY growth in retail loan book and 15.9% YoY growth in total loan book. The other income has gone up by 33.1% YoY in 4QFY14 on the back of higher gains booked on sale of investments. Strong income performance has boosted the profitability for the quarter for HDFC. The net interest margins (NIMs) have fallen by meager 0.1% to 4.1% in FY14 from 4.2% in FY13. The capital adequacy and gross NPAs have stood at 17.9% and 0.7% respectively as at the end of March 2014. The institution has declared dividend of Rs 14.0 per share for FY14 (dividend yield 1.6%).
Titan Industries Ltd has announced results for the quarter ending March 2014. The company has reported an increase of 7.5% year on year (YoY) in the net sales during the quarter. Overall expenses during the quarter grew by 7% YoY. As per the management, 2013-14 was a challenging year on account of a weak economic environment. The regulatory changes during the year also had an adverse impact on the company's jewellery business. The net profits for the quarter grew 11.6% YoY. The management has said that the company will continue to invest in strategic initiatives taking into account its long term growth plans.
Lupin Ltd has announced results for the quarter ending March 2014. The company has reported a growth of 20.7% YoY in the consolidated revenues during the quarter. The operating profit for the quarter was up 33.2% YoY during the quarter with operating margins at 28.7% , as compared to a margin of 26% in 4QFY13.The operating margin improved due to 3.5% decline in the raw material cost (as a % of sales), slightly offset by 1.6% (as a % of net sales) increase in the manufacturing and other expenses. The net profits for the quarter grew 35.5% YoY. For FY14, the Indian market contributed 22% of the company's overall revenues.
As per a leading financial daily, state-owned lender Union Bank of India has reported a 27% decline in profitability for 4QFY14. For the full year FY14, the net profits have declined by 21.4% YoY. Higher provisioning costs and weak interest income have dragged the profits for FY14. The net interest income (NII) has grown by mere 3.7% YoY in 4QFY14, on the back of 10.1% YoY growth in advances. Even FY14 has reported meager 4.5% YoY growth in net interest income. Also, the provisioning costs for the quarter have shot up by 40.4% YoY during 4QFY14. The asset quality concerns have marred the profitability for the bank. The Net NPAs have moved upwards from 1.6% in FY13 to 2.3% in FY14. Gross NPAs too have stood on the higher side at 4.1% levels. The capital adequacy ratio for the bank stood at 10.1% at the end of 31st March 2014 as per Basel III norms. The company has declared a dividend of Rs 4 per share (dividend yield: 2.9%).
Going ahead, the tense situations in Ukraine will continue to decide the fate of emerging markets. That said, the positive comments coming from both the central banks of U.S. and Eurozone will help boost sentiments in western markets and the European region. Back home, the euphoria in the Indian markets will sustain with the anticipation of positive outcome of the general elections. However, the possibility of volatility in Indian indices cannot be ruled out. However, investors should invest in stocks with strong fundamentals for the long term keeping aside these short term considerations.