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Global Markets Remains Volatile
Sat, 14 May RoundUp

Crude prices witnessed a surge of around 4% during the week. Oil output from producers outside the Organisation of Petroleum Exporting Countries (Opec) is falling faster than expected, helping the market to rebalance.

Barring Japan, major Asian markets ended the week on a negative note. The stock markets in China and Hong Kong ended the week lower by 2.9% and 1.9% respectively. China released its trade data during the week. Both exports and imports fell for the month of April. While exports fell 1.8% YoY, imports sank 10.9% YoY during the month. This was re the 18th consecutive monthly decline.

Major markets in the Europe ended the week on a flat note. Everyone is now looking ahead to the Brexit referendum that David Cameron will call on 23 June 2016.

Back home, BSE Sensex ended the week higher by 1%. The weak industrial data for the month of March dragged down the indices. India's factory output barely grew in March. The Index of Industrial Production (IIP) rose 0.1% in the month of March, against a 2% increase in February.

The weak growth in factory output was on account of a 0.1% contraction in mining and a 1.2% decline in manufacturing output. However, the electricity generation grew by 11.3%.

Key World Markets During the Week

Key World Markets During the Week

Major sectoral indices ended the week on a positive note. Stocks from banking sector witnessed the maximum buying interest. Whereas, stocks from metal sector witnessed selling pressure.

BSE Indices During the Week

BSE Indices During the Week

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

A few days ago, Rajya Sabha passed the much awaited 'The Insolvency and Bankruptcy Code, 2015'. If experts are to be believed, this bankruptcy code will lead to speedy winding up of insolvent companies. Not only this, the proposed bill will also help the banks to curb their massive non-performing asset (NPA) problems.

The crisis of Kingfisher Airlines is one example. The company went bankrupt in 2012. Its 2016. And banks are still struggling to recover their dues. A slow process indeed!

A part of this delay is attributable to multiplicity of laws dealing with insolvency of companies. These laws includes the likes of Sick Industrial Companies Act, the Recovery of Debt Due to Banks and Financial Institutions Act, and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI). However, the proposed bill seeks to consolidate all these existing laws.

Consolidation of all these laws will also lead to lesser time in resolving the issue. Moreover, the bill specifies a timeframe of 180 days to solve the matter, once the process initiates. The data provided bythe World Bank states that it take more than four years to resolve an insolvency matter in India. In developed nations, it takes a year or less to resolve such matters. The proposed bill will considerably reduce this time gap and will also help India move up the Ease of Doing Business rankings.

Last but not the least it will provide huge relief to banks. Marred by NPAs, Indian banks are in a sorry state. According to central bank data, stressed assets (which include gross bad loans, advances whose term has been restructured and written-off accounts) rose to 14.5% of the banking sector loans as of December 2015. The bill will enhance the banks' ability to recover the loans in a timely manner. This will free up the locked capital and will lower their NPA levels.

India has gained the right to tax capital gains arising in Mauritius and Singapore from sale of shares acquired on or after 1 April 2017.

Under the earlier bilateral agreement between India and Mauritius, capital gains from sale of securities have been taxable only in Mauritius. Moreover, the levy in Mauritius was close to zero. The benefit of this treaty induced many foreign investors to route their money to India through Mauritius. The foreign investors used to set up dummy entities in Mauritius and then route their money to India.

On account of this clause, majority of the foreign direct investment used to come to India through Mauritius and Singapore. 50% of the foreign direct investments in the country between 2000 and 2015 came in from Mauritius and Singapore.

The capital inflows in India are expected to take a considerable hit on account of the new treaty. However, one big positive is that the government will not impose capital gains on any retrospective investment made till 1 April 2017.

The Index of Industrial Production (IIP) rose 0.1% in the month of March, against a 2% increase in February.

The weak growth in factory output was on account of a 0.1% contraction in mining and a 1.2% decline in manufacturing output in March. However, the electricity generation grew by 11.3%. Capital goods production, considered to be one of the key measure of investment activity in India contracted sharply by 15.4% YoY in the month of March.

While IIP data has tended to be somewhat volatile in the past, what these numbers definitely point towards is the fact that the economy hardly seems to be growing at the kind of pace that the revised methodology of GDP calculation portrays.

Movers and Shakers During the Week
Company 6-May-16 13-May-16 Change 52-wk High/Low
Top Gainers During the Week (BSE A Group)
Aditya Birla Nuvo 845 960 13.6% 2364/685
Zee Entertainment 403 449 11.4% 454/300
Sun TV 351 391 11.4% 436/256
Muthoot Finance 193 211 9.8% 237/152
Nestle 5,631 6,129 8.8% 7,327/4,990
Top Losers During the Week (BSE A Group)
Unitech 5 4 -10.2% 15/3
Jaypee Infratech 7 6 -7.6% 18/6
Jaiprakash Associates 7 6 -7.4% 20/6
UCO Bank 36 34 -6.3% 65/28
Eicher Motors 20,217 18,996 -6.0% 21,618/14,818
Source: Equitymaster

Let's have a look at some quarterly results announced by companies this week

Hindustan Unilever Ltd reported its results for the quarter ended March 2016. The company's net sales grew by 3.4% YoY during the quarter to Rs 78 billion.

The sales grew marginally on account of slowdown from rural areas. Reportedly, 35%-40% of the company's sales come from rural areas. Two successive years of deficit rainfall have impacted the rural consumption and thus their volumes. The sales volume reported a marginal growth of 4% during the quarter. The management stated that rural markets are growing at a slower pace as compared to urban markets. This trend was exactly opposite few years back. It was the rural markets which was driving the growth for the company.

Further, the operating margins expanded by 1.3% YoY to 18.5%. The operating profits too witnessed a growth of 11.3% YoY during the quarter. The margins expanded on account of lower raw material cost coupled with price increase in some of the premium offerings.

The net profits grew by 7% YoY to Rs 10.9 billion during the quarter. Increasing competition from Patanjali too has hampered the volumes. A normal monsoon coupled with increasing competition will be the key things to assess for the company going forward.

Kotak Mahindra Bank Ltd reported its results for the quarter ended March 2016. The company's net profit grew by 32% YoY during the quarter to Rs 6.9 billion. As reported in Mint, the healthy growth was on account of higher net interest income and largely stable asset quality. However, the results for the quarter cannot be compared with previous period because of the merger of ING Vysya Bank on 1 April 2015.

Net Interest Income (NII), considered to be the core income of bank grew by 65% YoY to Rs 18.6 billion. NII is the difference between interest earned on loans and the interest paid on deposits. Reportedly, this increase was mainly on account of the merger with the ING Vysya Bank. Further, net interest margins dipped by 0.4% YoY to 4.35% during the quarter. While, on a sequential basis the NIM declined marginally by 0.05%.

The management has guided for a 20% growth in advances for the current fiscal year and hopes to grow both its corporate as well as retail loan books. The total advances grew by 79% YoY to Rs 1.2 trillion. On a sequential basis, the total advances grew by 3%.

The bank's asset quality improved by 0.06% QoQ to 2.36%. Provisions for bad loans fell by 13% on a sequential basis to Rs 2 billion.

Despite a comfortable capital base, the bank is not targeting aggressive growth in loan book or fee income. Having said that, the bank is very well poised to grow and reap the benefits of the merger with ING in the long term.

Nestle India Ltd reported its results for the quarter ended March 2016. The net sales declined by 8.4% YoY to Rs 22.9 billion during the quarter.

The decline was mainly on account of Maggi Noodles. Inspite of being back on the shop shelves for six months now, Maggi hasn't quite recouped its lost market share. The food regulator had banned the noodle brand after some samples were found to contain monosodium glutamate and excess lead.

Reportedly, the market share of Maggi noodles increased from 42% in December quarter to 48% during the March quarter. However, that's still far below the 80.2% market share it commanded in the quarter ended March 2015. Further, increasing competition from ITCs Yippee noodles and CG Foods Wai Wai noodles has also eaten into the market share of Maggi.

Having said that, the company is making efforts to reduce the dependence on the Maggi noodles. The company recently launched Kitkat duo chocolate, Nestle a+Grekyo and Nescafe Sunrise Insta-Filter coffee. Further, the company is looking to increase penetration for all its business including milk and nutrition, chocolate and confectionary, and coffee and beverages.

The net profits declined by 19.1% YoY to Rs 2.6 billion during the quarter. Market share of Maggi coupled with traction from the newly launched products will be the key things to watch out for the company going forward.

Now let us move on to some of the key corporate developments in the week gone by.

As per an article in leading financial daily, Maruti Suzuki India reported sales of over one lakh vehicles with auto gear-shift (AGS) technology. This is a technology wherein the driver does not have to put his feet on the clutch pedal in order to shift the gear as an electrically operated system deploys the clutch automatically when the gear is changed.

Maruti introduced the AGS technology first in the hatchback model of Celerio. Reportedly, models with AGS technology now account for over 60% of the total sales of Celerio. Looking at this success, the company has loaded this technology in more models.

Currently, Alto K10, Wagon R, Swift Dzire are also equipped with the AGS technology. The company has sold 18,000 units of Alto K-10, 12,000 units of Wagon R, about 66,000 units of Celerio, 200 units of Dzire and has also exported around 3,100 units with AGS technology.

User-friendly cars and automation are expected to be the key drivers to boost the growth going forward in the automobile industry. The stock of Maruti Suzuki ended the day higher by 1.2%.

Speaking about cars, Vivek Kaul has written an interesting article correlating car sales to black money. Click here to read this interesting piece.

Western style quick service restaurants (QSRs) and coffee chains have shut down more than 80 stores over the past 12-18 months. This is on account of lower same-store growth coupled with lower discretionary spends.

Reportedly, Jubilant Foodworks' Domino's Pizza and various other popular quick service restaurants (QSRs) such as Pizza Hut, Costa Coffee, KFC, Barista and McDonald's have all downsized operations.

This is happening as the increasing usage of delivery based apps such as Zomato and Swiggy is eating into their share of the pie. These apps provide a large variety of options for the customer to order from and at significant discounts. There has been an increasing trend to order food from these apps and it is growing at a fast pace.

However, these new delivery based apps are burning cash and are not yet profitable. Soon they will have to go slow on their discounting strategy. Going forward, it will be interesting to see how things pan out in this space.

Tata Motor newly launched hatchback named Tiago has garnered nearly 100,000 enquiries. The company's disruptive pricing might have played a big role in drawing the customer attention. The entry level petrol version of the car costs around Rs 3.2 lakh.

Reportedly, the pricing pushes it to the Maruti Alto K10 bracket, but it has features to take on Maruti Celerio or a Hyundai i10. Dealers claim that there is a wait period for the car, which may run into four weeks. This seems to be a positive development for the company especially after the failure of Bolt and Zest model.

The company has slipped in the fifth position in the Indian passenger car market, with an overall share of 5.6%. The traction from Tiago will provide the much needed thrust to the company who has been continuously losing market share in the Indian market.

Telecom operators (telcos) heaved a sigh of relief as Supreme Court struck down a compensation policy for call drops levied by Telecom Regulatory Authority of India (TRAI).

In October, TRAIi ordered operators to pay Re 1 for every call drop to the user, with a maximum of three per day. The regulation was to come into effect from January 1 2016.

During the hearing, telcos contended that there were various reasons for call drops beyond their control and that it was impossible to find the exact reason for each such call drop. Further, telcos stated that the sector was under huge debt and they would have to pay a big price for spectrum. Therefore, zero tolerance on call drops should not be imposed.

The order will come as a huge relief to the telcos, who are already facing huge debt on account of the recent spectrum purchases.

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

The index ended the week with gains of a percent at 7,813. But we doubt whether bulls would be rejoicing as the index traded with extremely high volatility and choppiness during the week. This left both the bulls as well as the bears perplexed as none of the camps could get a clear sense of the direction. The picture isn't clear as of now. The index is likely to trade in a range of 7,700 and 8,000 until the tug of war is resolved. You can read the detailed market update here...

Indian Indices Book 1% Gains

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