While stock markets across the world largely remained steady for the week gone by, the Eurozone outshined this time around. The major European indices closed on a fairly firm note this week. The likelihood of the European Central Bank delivering monetary stimulus next week boosted the momentum in the European indices. All eyes now on the European Central bank policy meeting! The U.S. indices on the other hand closed almost flat but the expectations of a sharp economic rebound are quite rife.
Among Asian indices, Japan and China stood firm. Back home, the Indian markets consolidated towards the end of the week and closed on a negative note with the economy reporting yet again sub-5% GDP growth. Also, ahead of the RBI Monetary Policy review scheduled next week, i.e., 3rd June 2014, the investors have exercised caution.
Majority of the sectoral indices in India lost steam. Barring few such as Pharma (up 2.4%), FMCG (up 1.0%) and IT (up 0.2%), all other indices stood weak. Consumer durables (down 6.3%), oil & gas (down 6.0%) and power (down 5.3%) were the major losers on the bourses.
Now let us discuss some of the economic developments of the week gone by...
As reported by a leading business daily, the demand for diesel variants of vehicles has been diminishing and that of petrol variants are now being preferred again. In FY14, it is believed that 58% of the cars sold were petrol cars. In the same year, the demand for diesel vehicles declined by 14% YoY. The narrowing gap between the prices of the two fuels is one reason. It also seems that buyers are not willing to pay higher prices for diesel vehicles given the same. There are also expectations of the new government increasing diesel prices - especially at a time when the Rupee has strengthened against the Dollar thereby giving a good opportunity to pass on prices. The estimated fuel subsidy in FY15 is Rs 1.1 trillion as compared to Rs 1.4 trillion in FY14. The decline would largely be due to the stronger currency coupled with the fall in diesel consumption.
India's current account deficit (CAD) fell steeply to 0.2% of the Gross Domestic product (GDP) for the March 2014 quarter. The fall has come on account of sharp restrictions imposed on gold imports. As per data from Reserve bank of India (RBI), gold imports plunged to one-third at US$5.3 bn in March 2014 quarter from US$15.8 bn in March 2013 quarter. The CAD fell to 1.7% of the GDP (US$324 bn) in FY14 from 4.7% of the GDP (US$87.8 bn), in the previous year. Although the CAD has reduced, the net outflow due to payment of dividend, interest and profit repatriation grew to US$6.4 bn in FY14 from US$5.2 bn a year ago. This signals that the RBI will have to accumulate foreign exchange reserves in future to take care of the US dollar demand that is set to rise in future.
The Securities and Exchange Board of India (SEBI) has written to Finance Ministry proposing the minimum public shareholding (MPS) in public sector undertakings (PSUs) to be raised from 10% to 25 %. It is important to note here that 25% free float norm for private companies has already been successfully implemented. The rationale behind the same was to restrict stock price manipulation and to raise participation from investors. SEBI now wants the government to cut down its holdings in PSUs to below 75 %, to level the playing field. SEBI is likely to set a 3 year timeframe for PSUs to meet the requirement, to avoid crowding out. Currently, there are about 30 PSUs with government holdings of more than 75 %. At current market rates, this would imply offloading of around Rs 600 bn stake by the Government. As per the sources, the finance ministry would consult other ministries before accepting SEBI's proposal. As such, the final discussion on the matter may take some time.
A leading financial daily has reported Narendra Modi's list of top 10 priorities for the economy. Efficient governance, delivery and implementation of schemes and programmes have been cited as key focus areas for the new government. The 10-point vision fairly covers areas of prime concern such as boosting investments, completing infrastructure projects in time-bound manner and exploiting the natural resources to country's benefit. The biggest highlight of the program has been the finance ministry's urge to allow at least 49% foreign investment in all sectors. The issue over FDI in multi-brand retail is also expected to be settled by the new government. Simplification of key policies, addressing concerns relating to economy, bringing in transparency into governance and building confidence in bureaucracy are amongst the other areas that has been on the agenda of the new government in power.
Now let us move on to some more developments in India Inc.
Many public sector banks - which have been under pressure for not taking any action against the NPAs - have been increasingly selling assets of defaulters to asset reconstruction companies (ARCS). Just to give some examples, Indian Bank assigned assets worth about Rs 6.7 bn to ARCs in FY14. Bank of India sold Rs 10.7 bn worth of assets, while Canara Bank sold close to Rs 7 bn of bad loans during the year. It is believed that India's largest bank SBI sold nearly Rs 50 bn worth of poor assets. In total, assets of about Rs 500 bn have seemingly been offered by banks to ARCs. A year ago, this figure stood at Rs 120 bn. It is believed that banks have been taking such actions due to the RBI's pressure of taking early action to clean up their books. The increase in such volumes also seems to be on account of ARCs offering better prices as banks are willing to accept delayed payments. It may however be noted that the total value of bad loans in the PSU banking system stands at about Rs 2 trillion. As such, whether this trend will continue or not will depend on the collection rate of the ARCs.
Cairn India is seeking extension of its prolific Rajasthan oil fields from government and state own firm ONGC as current term of the block will end in 2020. In the absence of extension the fields may be returned to ONGC once cost is recovered, as per the Rajasthan production sharing contract (PSC). It may be noted that ONGC is licensee for the assets and pays royalty not just for its 30% stake but also for Cairn's 70% interest. The assets include three oil fields and a heated pipeline that carries crude from oil fields to refineries in Gujarat. Cairn earlier resorted to extension till 2040, the economic life of the assets, but later sought for 10 years till 2030. However, the Rajasthan PSC provides 5 years extension after 2020. As per the sources, ONGC might not agree to extension as it would than own 100% of the assets.
According to a leading business daily; Tata Power is focusing on overseas opportunities in South East Asia and SAARC regions. Tata Power aims to have 18,000 MW generation capacity by 2022 as well as additional 4,000 MW of distribution networks. The company currently has an installed generation capacity of 8,560 MW and have projects having capacity of nearly 850 MW under execution. Tata Power is developing wind and hydro projects in Africa, Bhutan and Georgia, among others. The company has deployed resources in the above mentioned regional geographies to understand the market dynamics and tap the potential opportunities. Tata Power is trading 3% up today.
India's third largest software firm Wipro has decided to be more aggressive in bidding for deals in the Energy and Utilities industry. Currently this vertical contributes about 16% of Wipro's revenue. The company sees this as a recession proof industry. Thus the management would prefer that contributes a higher percentage of revenue. Demand for IT services from this industry is high in the developed world where end consumers are free to choose their electricity provider. Demand from this vertical had held up relatively well in the last recession. In this industry, Wipro competes with <>Tata Consultancy Services (TCS), Accenture, IBM and Capgemini globally.
As per a leading financial daily, India's second largest software firm Infosys has seen yet another exit from its senior management. Infosys co-president and board member B.G Srinivas has resigned from the company. This is the 10th exit that the senior management of Infosys has seen in the last one year. B.G Srinivas was tipped to be the frontrunner for the post of CEO. Infosys has completed its internal evaluation of candidates for the post of CEO two days ago and it appears that the individual in question may not have made the cut. It is now becoming increasingly likely that that the company may bring in a new CEO from outside the firm.
Let us now have a look at the results announced by companies.
The country's largest producer Coal India has reported an 18% fall in its net profit in 4QFY14 on account of higher tax expenses. The revenues have stood flat on YoY basis during the quarter. While the net profits were recorded at Rs 44.34 bn, the revenues stood at Rs 199.1 bn. As mentioned, the tax expenses burgeoned and were up by 35.8% YoY. The overhang of Government's Follow on Public Offer (FPO), the Presidential directive to sign FSAs with power producers and lower market linked prices have resulted in Coal India underperforming the indices over the last one year.
Bharat Heavy Electricals Ltd has announced results for the quarter ended March 2014. The company has reported a 22% year on year (YoY) decline in the revenues. The management has attributed poor performance to the decline in new orders, slow execution of existing projects and large dues from customers. The net profit for the quarter declined by 43% YoY. For FY14, the revenues and net profits declined by 19% YoY and 48% YoY respectively. The company's merger with Bharat Heavy Plates & Vessels with effect from August 30, 2013 has also impacted profit for the quarter by Rs 210 m and the annual profit by Rs 1.9 bn. Further, the profit was impacted due to low volumes and issues in the power sector such as funding, coal linkages, land acquisition and clearances.
Container Corporation of India Ltd., the market leader in container rail transportation announced results for the quarter ended March 2014 .The net income from operations were up 5% year on year (YoY) during the quarter. Segmentwise, the income from 'Export-Import' segment registered a flattish growth, while the 'Domestic' segment grew by 26% YoY. The net profit for the quarter was up 9% YoY. For FY14, the growth in the revenues and net profit stood at 13.1% YoY and 5% YoY respectively. On a consolidated basis, the net profit for fiscal year (post minority interest) grew by 2% YoY. The board has recommended a final dividend of Rs.5.3 per equity share for FY14.
Steel major Steel Authority of India (SAIL) also announced its results this week. The company reported an income growth of 10% YoY while profits grew by 1.5% only. These are figures for the quarter ended March 2014. While the company did well on operating front - as margins expanded on a YoY basis leading to profit growth of 39% YoY, net profits were impacted by lower other income coupled with higher finance charges. The stock of SAIL tumbled post results.
ONGC has announced results for the quarter ended March 2014. The gross revenues for the quarter declined 2.3% YoY. The realizations for the quarter stood at all time low of US$ 32.78 per barrel for the quarter, down from US$ 50.85 in the corresponding quarter last year. However, the forex gains and lower write-offs helped ONGC post a 44% YoY increase in net profit. The gross revenues and net profit for FY14 grew by 1.1% YoY and 5.6% YoY respectively. The profit was boosted by rupee's depreciation against the dollar. The subsidy for the quarter stood at Rs 162 bn versus Rs 123 bn in the corresponding quarter last year. In FY14, the subsidy burden came at Rs 564 bn.
The global markets stood steady with positive expectations of a favorable economic data from U.S. and the higher expectations from the European Central Bank. In the domestic markets, the focus will now shift to the much awaited reforms post the formation of a stable government. Moreover, the expectations of status-quo monetary policy are rife. The GDP growth at sub-5% levels and the stubbornly high inflation rate will be the key monitorables for the Central bank and the government. Also, the upcoming Union Budget from the new government is something to keenly watch out for as the new government endeavors to lift the subdued economy. Meanwhile, investors should keep an eye on fundamentals and look for value picks rather than getting carried away with short-term gyrations.