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Indian markets rally on NDA victory
Sat, 17 May RoundUp

Indian markets have outperformed all equity markets across the world in the week gone by. Most of the Asian indices except India and Hong Kong barely inched upwards. The weak sentiments in Asian markets were followed by cues from US markets on account of a weak US economic data. Industrial production, which measures the output of the U.S. manufacturers, utilities and mines dropped by 0.6% MoM in April. This was against expectations of a 0.1% drop. Manufacturing which is the biggest component of industrial production fell by 0.4%. In addition, US retail sales data earlier this week was also not very encouraging. The retail sales inched up just 0.1 % in April. This indicates that consumers are now adopting cautious approach after a substantial spending in the last two months. However, April data is riding on a strong base of March and therefore the second quarter for retails sales are expected to be better. European markets traded mixed as the 18-nation Eurozone's industrial output dropped 0.3 % MoM and 0.1% YoY. Also, in 28-member European Union, March industrial output dropped by 0.2 % MoM; however it was up by about 0.5% YoY.

Coming to domestic markets, the Sensex jumped 4.9% this week following the election euphoria in expectation of a stable NDA government. In fact on 16th May, the Sensex gained as much as 1,000 points in the early hours, only to retreat as the day progressed. Exit poll results earlier this week set the tone for record level jump in key indices. Investors lapped up stocks in bank, power, infrastructure and real estate sectors. The heavy buying in these sectors was on the premise that a would speed up economic reforms. The NDA government is expected to deal with sticky inflation and rising current account deficit more efficiently. Also, bottlenecks in disguise of policy paralysis that has stalled the economic growth since quite a few years are likely to be tackled now.

Key world markets during the week
Source: Yahoo Finance

Almost all the sectoral indices barring IT and Healthcare delivered stupendous gains in the week. Realty (up 13%) and Power (up 11.9%) were the biggest gainers.

BSE indices during the week
Source: BSE

Now let us discuss some of the economic developments of the week gone by...

The government released the Wholesale price inflation (WPI) data for the month of April 2014. As per the data released, inflation stood at 5.2%. As per various sources, this fall was largely attributable to a drop in food prices. Overall, the food segment eased to 8.64% during the month, from a high of 9.9% in March 2014. Further, the rate of price rise in the fuel and power segment was 8.93%, vs 11.22 % during March.

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 India Meteorological Department (IMD) forecasts' below normal monsoon for the year. IMD projects that there is a 60% probability of El Nino this year. A strong El Nino can cause drought-like conditions which can dampen the agriculture output in India. It is important to note here that while the share of agriculture has come down in GDP, it still is a key driver in the rural areas where 60% of India's population resides. This certainly is negative as - if monsoons are below average, the economy will face inflationary pressures and growth will suffer. In such a situation, even the monetary policies will not be able to do much in terms of reversing the trend.

The key macroeconomic data on consumer price inflation (CPI) has been released for the month of April 2014. As per the data, the CPI for the month stood at 8.59%, slightly higher than 8.31 % in the month of March 2014. The data for CPI is at a three month high with food inflation at 9.66% versus 9.1% in March. The rural inflation and urban inflation numbers came in at 9.25% and 7.69% respectively, as compared to 8.89% and 7.51% respectively in the month of March. The combined core inflation data for April stood at 7.8%, almost in line with the numbers in March. The index of industrial production data has also been released for the month of March 2014. The IIP number brought some relief as it shrunk at a slower pace of -0.5% as against -1.8% in February. The overall IIP data for FY14 came in at -0.1% versus 1.1% in FY13.

Movers and shakers during the week
Company9-May-1416-May-14Change52-wk High/Low
Top gainers during the week (BSE-A Group)
Sesa Sterlite18321517.3%219/119
Tata Power819112.5%93/66
Coal India31034611.7%365/238
Top losers during the week (BSE-A Group)
Dr. Reddy's Lab27162409-11.3%2940/2012
Sun Pharma624613-1.7%653/458
Source: Equitymaster

Now let us move on to some more developments in India Inc.

As per a leading financial daily, India's third largest software firm Wipro has won a multi-million dollar software contract. The contract is from a UK based firm, Xoserve and will be of seven year duration. Xoserve is a leading information and data service provider to the UK gas market. Under the contract, Wipro will replace Xoserve's two decade old legacy software system with the latest enterprise application software. The enterprise applications business is a key growth driver for Wipro as it contributes nearly 35% of the company's revenues.

As per a leading financial daily, Power Grid Corporation of India (PGCIL) has received an approval for four investment proposals worth around Rs 18 bn. The first investment approval is for Eastern Region Strengthening Scheme-XII (ERSS-XII) at an estimated cost of Rs 5.2 bn. The commissioning schedule for ERSS -XII is 30 months from the date of investment approval. The second approval is for Eastern Region Strengthening Scheme-XIII (ERSS-XIII) at an estimated cost of Rs 1.2 bn, with commissioning schedule of 30 months from the date of investment approval. Besides, the third proposal is for Static VAR Compensators (SVCs) in Northern Region at an estimated cost of Rs 8.3 bn, with commissioning schedule of 27 months from the date of investment approval. The final approval is for installation of Bus Reactor and ICT in Western Region at an estimated cost of Rs 3 bn, with commissioning schedule of 26 months progressively from the date of investment approval.

The cabinet committee on economic affairs (CCEA) has ratified a decision to sell 5% stake in power equipment maker BHEL. It may be noted that in March the government had divested about 5% in the company to LIC. Following the stake sale in March the government's stake came down to 63%. If the current stake decision also fructifies, government stake would further go down to 58%. A gradual divestment in the PSU will not only help the government fund its fiscal deficit but it shall also increase institutional/individual shareholding and thus increase the float. On this development the stock has rallied quite a bit in the last 2-3 days.

As per a financial daily, two major PSUs viz Nalco and Steel authority of India (SAIL) have to agreed to go for an out-of-court settlement on outstanding electricity and water dues with the Odisha government. This step was taken after the issue was raised in the meeting attended by Union steel secretary A K Pujari and various other heads. It was decided to form a committee to resolve the issues. The outstanding electricity dues of Nalco are approx. Rs 10 bn, and pending water dues of Rs 3 bn. The outstanding electricity dues for SAIL's Rourkela plant are Rs 612 m. Both the PSUs had gone to the court contesting the claim. The authorities will be working towards amicable settlement of dispute with both the PSUs. Thus after some agreement with both the PSUs, it will be decided as to how much and in what time frame both will pay towards the outstanding. The mandate by the committee is expected in next two months.

As per a press release on BSE, Larsen and Toubro (L&T) has received orders worth Rs 11.4 bn in various business segments during April-May 2014. According to the company, orders bagged by power transmission & distribution (T&D) and building & factories segments are worth Rs 10.7 bn; while additional orders have been received from various ongoing projects. Orders worth Rs 7.5 bn in the power T&D business are from Saudi Arabia and Oman. It has also received an order from Vizag Transmission, a subsidiary of Power Grid Corporation of India (PGCIL), in Andhra Pradesh. Order inflows for the company for 9MFY14 grew by 23% YoY to Rs 674 bn. Despite a good growth; L&T has revised its order inflow guidance from 20% YoY growth to 15-20% YoY growth for FY14 as it expects muted order inflow growth in 4QFY14. The current order book of the company provides revenue visibility of more than 2 years.

As per data released by Telecom Regulatory Authority of India (TRAI), the telecom industry saw an addition of over one million subscribers in March to reach a subscriber base of 933 million. Rural India was the growth driver with the mobile services subscriber base increasing by 2.8 m to reach 377.7 m in March. However, subscriber base in urban India declined by 1 m to 555.3 m for the month of March.

Let us now have a look at the results announced by companies

Corporation Bank has announced results for the quarter ending March 2014. The total income during the quarter was up 8.6% year on year (YoY). However, the net profit during the quarter declined 88.3% YoY on account of higher provisioning and increase in bad loans. The bank made provisioning towards bad loans to the tune of Rs 8.2 bn during the quarter. This was significantly higher than Rs 4.6 bn reserved a year ago. The net non-performing assets (NPAs) or bad loans jumped to 2.32 % in the quarter from 1.19 % a year earlier.

Ranbaxy has declared results for the quarter ending March 2014 and for 15 months period, as the company has changed its accounting year from December end to March end. Net sales declined by 1% YoY during the quarter, due to lower sales in most of its segments. Large part of growth was impacted due to decline in API sales on back of shut down of operations in its API facility at Toansa and Dewas. Toansa plant had received import alert from the USFDA regulators some time back. However the company has voluntarily withdrew the production at Toansa and Dewas both as it wanted to take judicious steps to remove all inefficiencies in these plants. The operating margins marginally declined by 30 basis points during the quarter. The company reports a loss of Rs 736 m in for the quarter against profit of Rs 1.25 bn during March 2013 quarter. The company has incurred some write offs due to import bans at its API facility, this too impacted the bottom line.

Dr. Reddy's declared its results for quarter and year ended March 2014 recently. During 4QFY14, the company's sales witnessed poor growth of 4% YoY on the back of decline in sales of its active pharmaceutical segment. For the full year, revenues were up by 14% YoY. The formulations segment witnessed healthy growth of 27% YoY for FY14 and 21% YoY for 4QFY14. For full year, the Indian formulations were just up by 8% YoY; 18% YoY for 4QFY14. The Active pharmaceutical segment posted meek growth of 1% YoY for the year and for the quarter, the growth declined by 35% YoY. The operating margins of the company stood at 25% and 23% for the full year and the quarter ended March 2014 respectively. Net profits were up by 28% YoY for the year. However, net profits for the quarter were down by 16% YoY due higher taxes and depreciation.

Castrol India Ltd has announced results for the quarter ending March 2014. The company's revenues for the quarter registered a growth of 4.1% on a year on year (YoY) basis. The operating profits declined by 14.9% YoY during the quarter (with margins at 17.9% as compared to 21.9% in the 1QCY13). The decline was on account of stagnated volumes, higher base oil prices, rupee depreciation and higher staff and advertising expenses. The net profits for the quarter declined by 19.4% YoY with net profit margins at 12.3% versus a net profit margin of 15.8% in 1QCY13.

Nestle India Ltd has announced results for the quarter ending March 2014. The company reported a net sales growth of 2.9% year on year (YoY) during the quarter. The net sales from the domestic market grew by 3.4% YoY, while net sales from exports declined by 4.4% YoY during the quarter under review. The operating margins were adversely impacted by high price of milk solids. The net profits for the quarter declined 7.1% YoY. As per the management, the tax expenses during the quarter were not fully comparable with the corresponding quarter. The Board of Directors has declared an interim dividend for 2014 of Rs 12.50 per equity share of Rs 10 each.

Tata Steel announced the fourth quarter results of financial year 2013-2014 (4QFY14) recently. On a consolidated basis, the company's revenues grew by 22.4% YoY. Large part of Tata steel's business comes from India and European geographies. The company reported good growth in the domestic business while the European business displayed a meek performance. The company reported a volume growth of 20% YoY. Consolidated operating profits increased 14.7% YoY, on the back of a healthy top line growth. However, margins declined to 11.8% in 4QFY14 as compared to 12.6% in 4QFY13. The company reported a profit of Rs 10.3 bn as compared to a loss of Rs 65.2 bn in same quarter last year.

In the next week , the standoff between Russia and Ukraine will continue to impact the markets. Also, the European Central Bank may take up issuance of stimulus package to the next level. This shall provide some support to the European markets. The domestic markets are likely to revel in the favorable outcome of the general elections. However, after delivering substantial gains this week, it may retreat to a certain extent on account of profit booking. We recommend investors to always weigh fundamentals of the stocks before investing and maintain a diversified portfolio.

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