Stock markets across the world largely remained upbeat in the week gone by. The positivity was fueled by positive economic data from both China and the US. As per survey, China's factory sector registered its best performance for the first five months of 2014. Even the US factory output during this period grew at the fastest pace since February 2011. The US housing market showed positive signs of recovery as home re-sales rose in April.
Among Asian indices, Japan was the biggest gainer registering a rise of 2.6% aided by a weak yen. The Indian markets continued to revel in the newfound optimism and hopes of a stable and reform-centric government at the centre. The Indian index shot up by 2.4%. Even Hong King recorded a strong gain of 1.1% but Singapore and China markets registered marginal gains of up to 0.5% each. The US markets were up by 0.7% for the week. In the European markets, Germany and France ended the week on a strong note. But UK market was down by 0.6%.
Majority of the sectoral indices in India clocked strong gains led by realty (up 23%), power (up 17%) and metal (up 13%). FMCG (down 2.4%), pharma (down 2.4%) and IT (down 2.3%) were the only losers on the bourses.
Now let us discuss some of the economic developments of the week gone by...
The jewellery industry heaved a sigh of relief as the Reserve Bank of India (RBI) has eased gold import norms. As per new norms, select trading houses, apart from already permitted banks, have been allowed to obtain the precious metal to boost exports. In July 2013, the RBI had imposed severe restrictions on gold imports to restrict rising current account deficit and rupee depreciation. RBI had also tied imports with exports and prescribed a 20:80 formula. However, only certain banks were allowed to procure the metal. As per a notification, star trading houses/premier trading houses (STH/PTH), which are registered as nominated agencies by the Director General of Foreign Trade (DGFT), are now allowed to import gold under 20:80 scheme. However, they will have to follow certain conditions.
The Indian drug pricing regulator is contemplating lowering the prices of various drugs in cancer and HIV therapies as well as drugs used for the treatment of diabetes, cardiovascular diseases, tuberculosis and malaria. The National Pharmaceutical Pricing Authority (NPPA) is considering benchmarking prices of the most expensive brands for the above categories to the average price of their respective categories. Last year, the government brought into force a new market price linked method and brought down the prices of 652 essential drug formulations. Both MNC and Indian pharma companies were impacted because of this pricing policy, as the companies had to bring down the price of the drugs covered in the national list of essential medicines (NLEM) at the price stated by government. MNC pharma companies got impacted more due to the pricing policy, as these companies have various top selling brands that are more expensive than the others.
Now let us move on to some more developments in India Inc.
With an aim to regain its lost leadership, Infosys plans to hire a non-founder CEO for the first time in its 33 years of history. It plans to match the CEO pay structure to rival players in the industry like TCS and Wipro. Until now, the top job at Infosys has always gone to its founding members. And because of that the company managed to compensate them at relatively lower rates than peers, as part of their remuneration was compensated through employee stock options. The outgoing founder CEO Shibulal, who expressed his resignation ahead of the planned retirement in March 2015, drew an annual salary Rs 1.6 m. However, he held stake in the company. The pay structures for rivals are about Rs 61 m per annum for Wipro's TK Kurien and Rs 18 m plus equity stake for TCS's N Chandrasekran. However, if a non founding member is recruited for the position, the role and power he might have is a point of concern. Therefore, it would be interesting to see how things shape up and the company abides by its transparent corporate governance practice.
In order to evolve into a global conglomerate, Kumar Mangalam Birla is set to make a direct purchase of 16% stake in Century Textiles. This company will be finally inherited by him from his grandfather Basant Kumar Birla (B K Birla). The purchase will be made though four private companies that will subscribe to 18.6 m preferential warrants of Century Textiles that will be converted into equity shares in 2015. After conversion, the four investment companies will hold 16.8% stake in Century Textiles. The amount of Rs 6 bn (at current six-month average price) raised will be used to trim debt. There will be no change of control of the company after the preferential allotment. Century Textiles, currently managed by B K Birla, earns 75% of its revenues from garments and cement and is synergistically related to Aditya Birla Group units Madura Garments and Ultra Tech. The promoters hold 40% stake in Century Textiles mainly through listed company Pilani Investments. Prior to this, Kumar Mangalam Birla has raised stake in Hindalco to more than 50% and acquired controlling stake in financial services company, Aditya Birla Nuvo.
As per Associated Chamber of Commerce & Industry (ASSOCHAM), the demand for residential and commercial air-conditioners failed to recover despite soaring mercury levels. During the first four months of 2014, the demand for residential and commercial air conditioners was down by 10% and 20%, respectively. The air conditioning industry had been witnessing falling demand in the past three seasons. The demand in the season this year has been sluggish due to price-hikes and high interest rates. Majority of the air conditioner manufacturers have raised prices by up to 20% due to mandatory requirement of star rating by the Bureau of Energy (BEE) that has led to higher costs for technological upgradation. The offtake of air conditioners fell by 15% during January-April 2014.
The government has asked ONGC, Gas Authority of India Ltd (GAIL) and Oil India Ltd (OIL) to provide US$ 11.4 bn subsidy for FY14 to help cover losses of oil marketing companies that sell fuels at cheaper rates. The subsidy amount is about 48% of the US$ 23.8 bn revenue losses of the retailers in FY14. As compared to last fiscal; the subsidy amount has increased substantially by 12%. The government shall also provide a cash subsidy of Rs 703 bn for this fiscal. The government regulates retail prices of liquefied petroleum gas, kerosene and diesel to keep the prices under control. This entails revenue losses to retailers like IOC, Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL).
The export market of Bajaj Auto is likely receive a leg-up with the lifting of a three month old ban by Egypt on imports of two-wheelers and two-wheelers. The company is the biggest exporter of three-wheelers to Egypt, which is its second biggest export market, after Sri Lanka. Of the 250,000-260,000 units of three-wheelers exported in the last financial year (FY14), Egypt's contributed to around 25% to company's overall volumes. The company is the market leader in the three-wheeler space in Egypt, and accounts for around 90% of total volumes. Also, Egypt is one of the growing markets for motorcycle sales for the company. The company has received an order for around 5,500 units of three-wheelers and 3,500 units of two-wheelers for the month of June. The management expects an incremental volume of 25,000 units of three-wheelers and 20,000 units of motorcycles in FY15 from the Egypt market.
Hero MotoCorp will be ramping up production of some of the variants of the 'Splendor' range of motorcycles by more than two times to meet the high domestic and export demand. Through this move, the company also wants to grab back the position of the top-selling model that it lost to its former partner Honda's Activa scooter a few months ago. The company is doubling the production of Splendor iSmart to 20,000 units per month. The production of the other brands in Spendor will be ramped from June onwards when the company's Neemrana plant with 7.5 lakh units capacity goes onstream. It has three other plants in Gurgaon, Dhrauhera and Haridwar. While Bajaj Auto has been struggling to grow volumes, Hero MotoCorp has been witnessing strong demand. Hero Motocorp is trading up by 1.1%.
Let us now have a look at the results announced by companies
Ashok Leyland has announced results for the quarter ended 2014. The company posted a decline of 17.5% YoY in revenues during the quarter. The net profit for the quarter was up by 142% YoY, mainly on account of exceptional income from selling of non-core assets. As per the management, the company has restructured itself to face the challenges in a tough year and to reduce overall fixed cost. In FY14, the company was able to retain market share in a highly competitive medium and heavy commercial vehicle market that witnessed a decline of over 25% second year in a row. The debt to equity ratio at the end of March 2014 stood at 1.14:1. The company aims to reduce it to 1:1 by end of March 2014.
Novartis India reported a 5.7% YoY fall in revenues for the quarter ended March 2014. This was mainly due to reduction in selling prices of some key products arising out of the notification of the new Drug Prices Control Order. The company saw a 2.2% YoY decline in the net profit during the quarter. Rupee depreciation made things even worse for the company.
Another pharma company Cadila Healthcare clocked a growth of 22.4%YoY in the consolidated net sales during the quarter. The operating profit for the quarter was up 26.2% YoY. However, the net profits for the quarter declined by 8.7% YoY on account of higher taxation and exceptional items. The company provided around Rs 348 m for taxation as against tax credit of Rs 590 m in the corresponding last period. Further, exceptional items in the quarter amounted to Rs 137 m. The board of directors has recommended equity dividend of 180% for the year 2013-14. For the full year ended March 2014, the consolidated net sales increased by 14.7 % YoY and net profit moved up by 23% YoY.
For the quarter ended March 2014, ZEE Entertainment's total income grew by 20.2% YoY to Rs 11.6 bn and net profit by 20.1% YoY to Rs 2.2 bn. The advertising revenues grew by 21.5% YoY and there was a sharp increase in other revenues. But the company's ad inventory fell about 12% in the quarter following the implementation of 12-minute ad cap in October 2013. The sales growth, thus, was largely on account of higher ad rates as Zee continued to gain viewership share across its various channels.
The outcome of the elections in Ukraine and the European Union will set the future course for the global stock markets. In the domestic markets, the focus will now shift towards cabinet appointments particularly the finance portfolio and the budget after the Modi government is formed. While the reform focused sectors such as capital goods and infrastructure may continue to gain on positive sentiment, we would advise investors to keep an eye on fundamentals and not be swayed by rising valuations of companies alone.