Mixed week for global markets

Sat, 23 May RoundUp

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Major stock markets around the world ended the week on a mixed note after comments by US Fed Chair Janet Yellen caused uncertainty among traders. The US markets ended flat for the week after Yellen's comments that stock prices were on the higher side. Also the US Fed's position to raise interest rates in September this year seems to be intact as of now. However, economic data from the US surrounding housing and consumer sentiment continues to remain mixed.

The Chinese markets were the top gainer this week riding on the monetary stimulus measures of the Chinese central bank. Economic data from China remains weak. A temporary deal between the Euro and Greece resulted in the European markets ending higher for the week. However the negations are ongoing and the result of the same would be anyone's guess. The Indian markets had a volatile week but ended higher by 2.3% largely due to the return of foreign institutional investors (FIIs).

Source: Yahoo Finance

Source: BSE

The government has released the draft guidelines for the Gold deposit scheme announced in the Union Budget. It seeks to mobilize the massive amounts of privately held gold held in the country estimated to be around 20,000 tonnes. As per the proposed scheme can get their gold tested for purity and deposit the same in banks for a fee in ‘Gold Savings Accounts'. The interest earned will be in gold and not in Rupees. Banks are free to decide the interest rate and can use the gold as part of their CRR and SLR requirements. The deposited gold can be lent out to jewelers to reduce India's dependence on imports.

The Reserve Bank of India (RBI) governor Raghuram Rajan has stated that India is better prepared for volatility compared to 2013. He stated that the country has three layers of defense namely a much improved macroeconomic environment, record high forex reserves as well as highest economic growth compared to all other large economies.

According to a leading financial daily, Bharti Airtel announced that it has received financing commitment of up to US$ 2.5 bn from two Chinese banks to primarily diversify its global portfolio and invest in the growth of data networks across its operations that now span to 20 countries. Reportedly, Bharti Airtel can draw the funds from China Development Bank and Industrial and Commercial Bank of China over a long term, depending on its financing requirements subject to final agreements and requisite approvals. This is the single largest bilateral commitment by China Development Bank to any telecom firm globally and the largest bilateral commitment to a private Indian company. Bharti Airtel also has network equipment sourcing agreements with ZTE and Huawei.

Suzuki Motor Corporation, parent of the country's largest carmaker Maruti Suzuki, plans to push ahead with its plan to set up a wholly owned manufacturing plant in Gujarat as amendments to the Companies Act have made it easier to get share holder approval. Reportedly, Suzuki would operate the plant and all cars made there would be sold to Maruti at cost plus some profit. The move was bitterly opposed by several minority shareholders in Maruti Suzuki, including institutional investors, mutual funds and insurance companies. Suzuki Motor had already laid the foundation stone of the new facility in Mehsana district in Gujarat and started construction. The factory, which would be SMC's first fully owned plant in India, will have an initial capacity of 100,000 units a year by 2017. An investment of Rs 8.5 bn has been assigned for the facility for the current fiscal.

Tata Power Renewable Energy, a subsidiary of Tata Power Ltd is set to expand its wind power generation capacity by 150 MW this fiscal. This will take the company's installed capacity to more than 700 MW. The company is looking to acquire wind and solar power assets in the country. Reportedly, the company is ready to buy both completed projects and those with all clearances and set to be executed. Tata Power has a total installed capacity of 8,750 MW, of which 1,383 MW belongs to clean and renewable energy. The company's wind and solar portfolio stands at 566 MW. The company had earlier acquired a 40 MW wind power asset from AES power.

According to a leading financial daily, Tata Steel is in talks to buy Visa Steel's 180,000 tpa Ferro chrome unit at Kalinganagar, Odisha, for Rs 10 bn to safeguard its chrome mining reserves by buying value adding facility. Reportedly, Visa Steel is planning to demerge its company into three verticals - coke, Ferro chrome and special steel. Ferro chrome unit will then be sold to Tata Steel. Tata Steel is also in advanced talks to buy Electro-steel Steel for an enterprise value of about Rs 80 bn.

Auto major Mahindra and Mahindra (M&M) announced that it would be buying a 33% voting stake in the agricultural machinery-making unit of Mitsubishi Heavy Industries Ltd for US$25 million. Reportedly, the investments are being made through the issue of common shares and class A non-voting shares of Japan's Mitsubishi Agricultural Machinery Co Ltd, and the deal is expected to close by October 1. Mitsubishi Agricultural makes farm equipment such as tractors, power tillers, rice planters and combines harvesters for sale globally. It brought in about US$ 408 m in revenue for the fiscal year 2015. It is to be noted that Mahindra is the world's largest maker of tractors by volume and the deal would help both companies cut cost and improve their supply chain.

Let us take a look at the quarterly results of some of the companies.

Nestle India has reported 8.4% YoY growth in sales at Rs 25 bn for the March 2015 quarter. While it was reported that this was the company's lowest sales growth over the past four quarters and was 3.6% short of the Bloomberg consensus estimate of Rs 26 bn. The margin of the company in the quarter has improved due to a sharp fall in input costs and price hikes. Interest costs of the company fell by 66.8% to Rs 30 mn as the company fully paid off its outstanding external commercial borrowing. This led to an increase in net profit by 23.7% YoY, which is reported at Rs 3.2 bn.

Asian Paints India's largest paint company, has reported weak domestic volume growth in its March 2015 quarterly results. Notably, domestic volume growth has fallen from 10-12% between March 2014 and September 2014 to 3-4% in the past two quarters. Consolidated net sales of the company for the March quarter grew 6.9% YoY to Rs 34.9 bn. On the other hand, a sharp 720 basis point YoY fall in input costs to 49.8% of sales fuelled the margin expansion in the quarter while rise in other income by 36.4% YoY further aided bottom line.

Tata Power swung into profits for the March 2015 quarter. The company reported a better than expected consolidated net profit of Rs 1.6 bn in the fourth quarter ended March 31, 2015 as against a net loss of Rs 1.4 bn in the corresponding quarter last year. This rise was mainly due to lower depreciation and reduced coal prices. The company reported 28% YoY (year-on-year) growth in operating profit at Rs 14 bn for the quarter under review.

Tata Steel reported a consolidated loss of Rs 56.7 bn for the March 2015 quarter. The loss was mainly due to a sharp fall in revenue and also because of a non-cash impairment of Rs 49.5 bn it booked, mostly in Europe's long products division. Domestic steel realizations of the company also fell sharply during the second half of 2014-15 because of cheap imports and sluggish demand which led to a nearly 60% YoY (year-on-year) drop in domestic gross profit. Consolidated sales for the quarter was 21% lower over the year ago period and stood at 333.3 bn.

Going forward, the Indian stock markets will continue remain vulnerable to FII sentiments regarding the US economy and the US Fed's interest rate hike as well as negotiations between Greece and the Eurozone. The domestic earnings season has been largely disappointing and will wind down next week. Reform measures taken by the government post the disappointing end to the budget session of parliament will also be important. While all these factors may influence the markets in the short term, it will be in the best interest of investors to focus on company fundamentals while investing in the stock markets.