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Geo-political tensions mar global indices
Sat, 28 Jun RoundUp

Geo-political tensions continued to weigh down the global indices. With heightened risks of supply disruption from Iraq, global crude oil prices have spiked to a nine-month high. This coupled with subdued economic data took a toll on the European indices for the week gone by. Most of the European indices, viz., UK, France, Germany ended the week in the negative territory. The investors' confidence has also been shaken because of subdued economic growth in the US. That's because the contraction in GDP has indicated that the US economic growth stands weak. The US markets, therefore, closed the week in the red (down by 0.6%).

Barring India, most of the Asian indices ended on an optimistic note. While China and Singapore were the leading indices for the week, Indian markets closed flat. The Indian investors are wary about the crude price spiral and a weak monsoon that could add to inflation woes.

Key world markets during the week
Source: Yahoo Finance

The sectoral indices in the Indian markets ended the week on a mixed note. FMCG (down 3.1%), oil and gas (down 1.1%) and metals (down 0.3%) witnessed the highest selling pressures during the week. Pharma (up 4.1%), Consumer durables (up 3.9%) and power (up 2.5%) were among the gainers for the week.

BSE indices during the week
Source: BSE

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

As per a leading business daily, the RBI has announced that non-deposit taking NBFCs (NBFC-ND) can function as business correspondents for banks. However, banks will need to ensure that the NBFC-ND must not get engaged in the practice of offering savings and remittances only to their own customers and bundling their services along with that of NBFC's customers. This will also make banks address any possible reputational risks arising out of the appointment and functioning of the business correspondents. This move will allow NBFC-NDs to offer limited services of banks in the unbanked areas that is mainly aimed at increasing the financial inclusion.

With rainfall in June being below average, monsoon deficit is likely to be a bigger headache for the Modi government as compared to managing the fiscal or current account deficits. While India gets maximum rainfall during July and August each year, the fact that 80% of India has received below average rainfall during the month of June indicates the kind of rainfall deficit the country could face. While rainfall has been good in southern parts of India, the central and western regions witnessed poor monsoons. If the situation does not improve over the next two months sowing will get impacted. This may stoke food inflation and test the administrative capabilities of the new government. Though steps like delisting fruits and veggies from agricultural produce market committee (APMC) act has helped curb food inflation to an extent, if the monsoon itself is deficient and harvest suffers, the government will be able to do very little about it.

As per a leading financial daily, the domestic pharma sector is likely to be offered a financing scheme by the Modi government for the upgradation of manufacturing facilities and meeting stringent standards of the world's leading export markets. It is important to note here that Indian pharma companies are facing a tough time on account of quality issues raised by US Food and Drug Administation (USFDA). One of the options being considered is an interest subsidy scheme for the upgradation of manufacturing facilities. Besides, the Government is also aiming to boost the active ingredients segment of the domestic industry, which has suffered from cheap Chinese imports.

As per a leading financial daily, the Cabinet Committee of Economic Affairs (CCEA) has postponed hike in domestic gas price by three months. As per the Petroleum Minister, all stakeholders will be consulted and people's interests will be kept in mind before a decision on gas price hike is arrived at. Under the new gas pricing guidelines, the price of gas was raised from US$ 4.2 m British thermal units (mBtu) to US$ 8.8 mBtu. Although the gas pricing guidelines were notified on 10th January 2014, its implementation had to be deferred due to the model code of conduct for the general elections.

In an unprecedented move the government is planning to set gas prices in Rupees instead of Dollars in order to eliminate the influence of exchange rate. This proposal has come a few days after government decided to delay the gas price hike for a period of 3 months. It may be noted that the Rangarajan formula, based on which the hike was conjectured, is complex in nature. And the new government needed some time to analyze the same, considering the issue is politically sensitive in nature. While it is difficult to comment on the extent of hike, the fact remains that India's oil & gas sector is facing dearth of investments. The reason is inappropriate returns due to controlled pricing regime and highly capital intensive nature of the industry. As such, we believe that government should take steps to promote investment in the industry and gradually de-control the prices in a staggered manner so that the common man is not burdened by sudden rise in prices.

Movers and shakers during the week
Company20-June-1427-June-14Change52-wk High/Low
Top gainers during the week (BSE-A Group)
Guj. State Petronet768916.9%95/47
Century Textiles52558311.0%602/195
Ashok Leyland333610.7%39/12
Lanco Infratech11129.7%15/5
Bosch Ltd11,87013,0249.7%13330/8000
Top losers during the week (BSE-A Group)
United Spirits2,6862,500-6.9%2941/1993
Kotak Mahindra Bank931868-6.7%972/588
Idea Cellular139131-5.9%188/125
ITC Ltd336320-4.8%387/285
Max (I) Ltd305291-4.7%346/151
Source: Equitymaster

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

The public sector lender Punjab National Bank (PNB) has given up its plans to enter the Canadian market since regulatory clearance was taking too long. It must be noted that the bank had been pursuing this for about 4-5 years. It was planning to start a subsidiary in Canada with a capital of Rs 1 bn to cater to the Indian diaspora as well as to finance bilateral trade and investments. PNB has overseas presence in 10 countries and has 4 overseas branches. At the end of March 2014, PNB's overseas business increased by 52% to Rs 734 bn from Rs 483 bn a year ago.

An article in leading financial daily highlighted the top 15 selling cars in India. As per this article, Tata Motors has shown a strong performance. Maruti Suzuki, however, did not have any of the models in this list. Reportedly, most of the car users look for the models which are fuel efficient. Even the companies too made huge investments to develop fuel efficient models. It is critical as it helps in better uptake of its models. Honda's diesel-powered City currently holds the top position in this list. Tata Motors, however, had ten models as part of the list. Some models of Toyota and Hyundai were also part of this list. In view of the current fuel prices in India, it is would be essential for auto manufacturers to offer more fuel efficient models. Thus, those companies who are fulfilling such needs of customers will be more successful in long term.

Gas Authority of India Ltd (GAIL) is expanding its downstream distribution network in India's biggest state Uttar Pradesh. GAIL's wholly owned subsidiary, GAIL Gas Ltd, has signed memorandum of understanding (MoU) with the UP government in this regard. This MoU clears the way for building up natural gas infrastructure in UP, setting up CNG stations along the highway corridor in the state and the distribution of gas to various industrial clusters and parks. GAIL will invest about Rs 1.4 bn in this project.

Power Finance Corporation (PFC) is planning to tap funds from the overseas debt market in light of the revival in interest in the country's power sector. PFC is one of the biggest lenders in the domestic power industry and is planning to raise funds to the tune of US$ 250 m through external commercial borrowings (ECBs). Lenders prefer to raise funds through ECBs as interest rates are attractive even after hedging. The company had ECB borrowings of US$ 500 m in FY13.

Lupin Ltd is looking to expand its presence in various markets. The company is scouting for various options in Japan, India and emerging markets like Russia, China, Brazil, Turkey and Korea. Lupin already has good presence in Japan and India. It also sees good opportunity in Latin American market. It is imperative to note that Lupin is among the few successful companies to have established good presence in the Japanese market. Lupin too has robust portfolio in the domestic market. It would be interesting to see which countries Lupin enters or is able to penetrate further. As competition in the pharma space intensifies, Lupin is looking at various options to fuel its future growth.

As per the telecom industry body Cellular Operators Association of India (COAI), the country's largest telecom operator by subscriber's base Bharti Airtel has added 1.43 m rural subscribers in the month of May. This resulted in a growth of 1.53% month on month (MoM). As of March 2014 its total subscribers count stood around 205.5 m users. The second largest player, Vodafone added 0.64 m subscriber, registering a growth of 0.7% MoM in the month of May, while Idea Cellular's rural subscribers grew by 1.04% MoM at 0.79 m users. The overall industry's rural base grew by 1.2% with addition of 3.5 m to reach 300.63 m subscribers at the end of May 2014. Given the penetration level in the metros and tier I cities has already peaked, the telecom players are focusing on their presence in the rural areas where majority of the country's population resides.

As per a leading business daily, leading automobiles manufacturers have shutdown their factories in the month of June as part of their regular machine maintenance procedure and inventory maintenance. The move is incidental to sluggish conditions in the domestic car market. The sales of many companies like Tata Motors, Toyota, Mahindra & Mahindra, Volkswagen have nosedived in FY14, resulting in the overall decline in industry's sales by 6% YoY during the financial year.

Maruti Suzuki, having capacity of 1.5 m cars per annum, has shut its six plants across Gurgaon and Manesar for 8 days which is stated as a bi-annual closure to adjust the inventories due to weak market condition. Tata Motors has also shut all its commercial vehicle plants in Jamshedpur and Lucknow due to inventory pile up and maintenance. The company has also shut down temporarily, its Nano production factory at Sanand, Gujarat. In a big relief to the automobile industry, the government has extended the excise duty concessions for manufacturers until December 2014.

Dr Reddy's has launched generic version of Cymbalta in the US market. The said drug was approved by the United states Food and Drug Administration (USFDA) in December 2013. The branded market size of the drug is US$ 5.04 bn per annum. Cymbalta is generically known as duloxetine delayed released capsules and is indicated for depressive disorder, general anxiety disorder and fibromyalgia. Other than Dr Reddy's, various other companies hold approval for the said drug. It may be noted that there are already many players in the market as companies have already launched the drug since December 2013. Indian companies like Sun Pharma, Lupin, Alembic Ltd have already launched the drug and have sufficient market share, Thus the upside for Dr Reddy for this drug will seemingly be limited.

While the geo-political risks continue to haunt the global indices, the upcoming week may mirror similar trends. With crude oil price spiral gathering momentum, markets across continents are expected to remain weak. Moreover, lack of encouraging key macro economic variables from the US and UK economies would imply continued selling pressure across global markets. Back home, the story is no different. Deficient monsoons, heightened inflationary risks, widening current account deficit and of course the weak global cues are expected to keep the Indian indices under pressure. However, the forthcoming Union Budget scheduled for July 10, 2014 would prove to be a game changer for the Indian economy and the markets alike in light of the change in guard at the Centre and the resultant expected reformist measures.

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