In the wake of renewed concerns over violence in Iraq and oil disruptions that continued to push up global crude prices, stock markets across the world maintained a cautious stance. Barring markets in developed economies such as Japan, US, UK and Germany that ended in the positive territory, all the other stock markets have fallen for the week. US markets ended higher on reassurances from the Federal Reserve that interest rates would remain low as the US economy continues to recover. Even though the Federal Reserve in its policy statement cut its monthly bond-buying program from $45 m to $35 m, it left its benchmark interest rates unchanged.
All the Asian stock markets, except Japan, ended on a negative note. The Japanese market, up by 1.7%, was the biggest gainer among stock markets around the world. Indian markets remained lacklustre over the week due to sharp rise in crude prices that will make rejuvenation efforts by the government all the more challenging. Stock markets in China and Singapore recorded fall of 2% and 1%, respectively for the week.
Majority of the sectoral indices in the Indian markets ended the week in the negative territory. Oil and gas (down 2.2%), auto (down 2.1%) and capital goods (down 1.6%) witnessed the highest selling during the week. Consumer durable (up 4.4%), IT (up 2.8%) and realty (up 0.6%) were among the few gainers for the week.
BSE indices during the week
Now let us discuss some of the economic developments of the week gone by.
With an aim to protect interests of consuming industries such as power and fertilizers, the petroleum ministry has hiked gas price only for incremental production over and above the current levels. This is expected to benefit Reliance Industries as they plan to hike production. But Oil and Natural Gas Corporation Ltd. (ONGC) and Oil India are expected to benefit only in the long-term when the unviable wells become operational. Also, the PSUs may not be able to increase their production substantially in a short period of time. As per BP Statistical Review of World Energy 2014, India registered the largest volumetric decline in natural gas production and consumption in 2013. Natural gas production declined by 16.3% YoY to 33.7 billion cubic meters (bcm) in 2013. Natural gas consumption in the country declined to 51.4 bcm in 2013 as against 58.8 bcm in the previous year, recording a 12.2% YoY decline.
Indian rupee has slumped to its lowest level in last two months due to the geo-political risks emerging from Iraq. Moreover, the outrage in the key oil producing nations, i.e. Iraq will only push brent crude oil prices higher and even impact the markets back home. But RBI is more confident and opines that India stands in a better position today as against last year. Given the sufficiency in reserves and the narrowing down of current account deficit, RBI believes that the economy stands firm on the external front.
The government has hiked the import tariff value on gold and silver as escalating turmoil in Iraq has led to global bullion prices firming up. The import tariff value is the base price at which the customs duty is determined to prevent under-invoicing and is revised on a fortnightly basis. The tariff value on imported gold has been increased from $408 to $411 per 10 gms whereas in case of silver the tariff value has been raised from $617 per kg to $632 per kg.
Now let us move on to some more developments in India Inc.
Reliance Industries has announced in its Annual General Meeting that it plans to implement projects with an investment of Rs 1.8 trillion in the next three years. The investments should yield results from FY17 onwards. The company's new initiatives include the launch of broadband services in a phased manner in 2015. The investment for this is pegged at Rs 700 bn. The company is also planning to expand its retail business where it sees huge potential for growth. For these investments, the company plans to raise loans which would take its net debt level to Rs 600 bn over the next couple of years, a huge jump from a net debt level of Rs 17.8 bn as of March 2014. However, the company expects to be debt-free by the end of financial year 2017-18.
The smart turnaround in market sentiments has seen companies jumping the bandwagon on raising funds. Tata Steel is planning to raise funds to the tune of Rs 140 bn through issue of privately placed debt in the domestic and international markets. The company will take shareholders approval for the issuance of debt securities that will be converted to equity. With respect to borrowings, it will seek shareholder's approval for creation of charges on its movable and immovable properties. The company will also seek nod to increase its borrowing limit from Rs 500 bn to Rs 700 bn or the sum of its paid-up capital and free reserves, whichever is higher. The borrowings are most likely for refinancing of existing debt. Tata Steel is also raising its standalone debt limit as it has earmarked capex of Rs 160 - 170 bn for its Kalinganagar plant in FY15.
Seven state-run banks plan to raise funds to the tune of Rs 175 bn through share sale. Banking stocks are attracting investor attention on perceptions such as no further rise in bad loans, stalled projects being cleared and new projects being unveiled. Banks such as Bank of India and IDBI Bank have committed to raise funds of Rs 40 bn at the current market prices. Reportedly bad loans in the banking sector surged by 50% to 1.38 trillion in 2013 whereas restructured loans jumped 7.5 folds to Rs 2.42 trillion for the year. However with economy showing signs of recovery coupled with changes in loan recovery rules, the sentiment surrounding banking stocks has improved. This in turn has provided banks greater flexibility to raise equity.
Cairn India has received environmental clearance for raising crude oil production from Rajasthan fields. It can raise the production by 50% to 300,000 barrels per day or 15 m tonnes a year. The company had made 31 oil and gas discoveries in the Rajasthan block, of which four - Mangala, Bhagyam and Aishwariya (together known as MBA fields) and Raageshwari have been put on production. These contribute to about 30% of India's domestic crude oil production. The company has also set up a gas processing plant at its existing Raageshwari gas terminal for processing 100 to 300 m cubic feet of gas per day. As part of Rajasthan gas development project, the company also plans to lay pipelines to transport gas to the nearest grid.
Hero MotoCorp has plans to set up its sixth plant in South India that will increase its annual capacity to about 12 million units. This plant will be used to cater to the domestic market, particularly in South India. The company has three facilities at Gurgaon and Daruhera in Haryana and Haridwar in Uttarakhand with an annual capacity of 6.9 m units. It is set to commission its fourth facility at Neemarana in Rajasthan that will increase its capacity to over 7.7 million units. The company is also in the process of setting up a 1.8 million units plant in Halol, Gujarat that will go on-stream by FY16. On the export front, Hero MotoCorp is planning to launch bikes in the US market in 2015. The company wants to operate in niche segment in the US market and avoid bigger motorcycles that have a larger share in the US. The company will target smaller cities and inter-city commuting and it is expected to market its product through Erik Buell Racing (EBR). Hero MotoCorp holds 49.2% stake in EBR that specializes in high performance sports bike. After the split with Honda Motors in 2011, the company has expanded its global presence across 18 countries. The company targets to achieve 10% annual sales (about 1 m units) from export markets by 2017.