Global markets were in a buoyant mood this week and most major indices ended the week at or near their all time highs. Indian markets led the way as expectations of a market friendly budget pushed the Indian indices higher by 3.4% in the week gone by.
The US markets buoyed by a positive jobs report shrugged off the news that GDP in Q1 had contracted by 1%. The benchmark Dow Jones Industrial Average (DJIA) closed the week above the 17,000 level for the first time.
European markets were driven by positive sentiment due to assurances by the European Central Bank (ECB) that its negative interest rate policy would continue for the foreseeable future. The British FTSE 100, the German DAX 30 and the French CAC 40 indices ended the week up 1.6%, 2% and 0.7% respectively.
All sectoral indices in the Indian markets ended the week on a positive note. Auto (up 5.9%) and Power (up 5.2%) witnessed the highest buying interest during the week. IT stocks (up 0.4%), were rather muted this week.
Now let us discuss some of the economic developments of the week gone by.
According to a leading daily, the upcoming budget is likely to state a clear roadmap for diesel price regulation. This will be a big step towards containing the humungous subsidy bill and will also help ensure healthy competition in fuel retailing sector. The Finance Minister is expected to abolish subsidies on auto fuels. The deregulation of diesel prices however is unlikely to result into a positive outcome for the consumer prices of the fuels. Besides, the Ministry is also ready with a roadmap for a phased reduction of subsidy on kitchen fuels - LPG (cooking gas) and kerosene. The details of which are expected to be out as part of Budget. Reviewing fuel subsidy and bringing down the subsidy bill is the prime agenda for the government.
As per the latest economic data, the fiscal deficit in the first two months of FY15 has already touched Rs 2.4 lakh crore. This comprises as much as 45.6% of the estimate provided by the previous finance minister P. Chidambaram for the entire 12-month period. The corresponding deficit in FY14 was 33.3% of Budget estimates. This presents a tough challenge for the current finance minister Mr Arun Jaitley. He will have to delicately balance the fiscal deficit and at the same time make sure that enough funds are allocated for social welfare schemes and huge infrastructure projects in the highways, ports and power sectors.
In a big boost for market sentiment, the international rating agency Fitch has upgraded its GDP growth estimates for the Indian economy. From its earlier estimate of 5% and 6% for FY15 and FY16 respectively, the agency now believes that GDP growth could be higher by 0.5%. Thus it has forecast growth of 5.5% and 6.5% for FY15 and FY16 respectively. The upgrade is largely due to the positive announcements made by the new government regarding reforms. However, Fitch has warned that a lot needs to be done for these estimates to be achieved. Also, the poor monsoon could derail the positive sentiment in the economy. It is interesting to note that the same agency had threatened to downgrade India's sovereign rating to junk status two years ago.
As per research firm Gartner, global IT spending is likely to rise to US$ 3.7 trillion in 2014, which would be higher by 2.1% on a YoY basis. This growth rate is lower than earlier projections (of 3.2%) due to reduction in growth expectations for devices, data centre systems and IT services. However, as per the research firm, the spending is likely to pick up in 2015 (by 3.7%) on the back of pricing and purchasing styles reaching new equilibrium. Further, it is expected that spending on devices (such as PCs, mobile phones, tablets and printers) is expected to grow by 1.2% in 2014 to US$ 685 bn, while spending on data centre systems and enterprise software is expected to grow 0.4% and 6.9%, to sizes of US$ 140 bn and US$ 321 bn respectively. It is expected that IT services will see a growth of 3.8% in the year to touch levels of US$ 967 bn. Further, spending on <>telecom services is expected to grow by 0.7% to US$ 1.6 trillion during the period. Given this outlook, it would be a positive for the major IT players given that US, the biggest market for them, is the largest spender. And from what it seems, the outlook is likely to improve a year from now.
The Reserve Bank of India (RBI) has restored the norms for overseas investment by corporates which had been changed last year. The RBI has increased the borrowing limit subject to certain conditions. Corporates will once again be able to engage in any financial commitment up to 400% of net worth. This limit was reduced to 100% of net worth last year. However, any financial commitment exceeding US$ 1 bn or its equivalent in a financial year would require prior approval of the RBI. The RBI had in August 2013 reduced the borrowing limit to stem the fall in the rupee.
Now let us move on to some more developments in India Inc.
Oil and Natural Gas Commission (ONGC) has plans to invest over Rs 57 bn in redevelopment of its giant Mumbai High (North) oil and gas field off the west coast. This includes foreign exchange component of Rs 44 bn. The project is likely to increase production by 6.997 million tonnes for crude oil and 5.253 billion cubic meters for gas by 2030. The project cost includes around Rs 26 bn in creation of surface facilities, around Rs 20 bn in new oil and gas wells and the rest in sidetracking of existing wells. The facility parts under the project are scheduled to be installed by April 2016, while drilling of wells and the overall project completion is scheduled for May 2017.
The country's largest car maker by volumes, Maruti Suzuki has reported its June sales numbers. Its overall sales increased by 33.5% YoY in the month of June 2014. The company sold a total of 112,773 vehicles during the month. Of these, the company's sales in the domestic market grew by 31% YoY to 100,964 units. Its export segment grew at a higher rate of 58.4% YoY. At 11,800 units exports form a mere 10% of overall sales. Maruti's largest selling mini segment cars sales grew by 52.1% YoY to 47,618 units. This segment includes Maruti 800, Alto, A-Star and WagonR.
As per the senior management of State Bank of India (SBI), the distressed loan situation seems to be improving given the improving market conditions. With sentiment in the capital markets improving, it is expected that companies will be able to raise more capital, which would help towards curbing the debt levels. As reported by the Business Standard, the bank is working on varied solutions to curb the problem of bad loans. As of March 2014, SBI's bad loans stood at 4.95% of total advances as compared to 4.75% in the year before. In absolute terms, the figure stood at Rs 616 bn as compared to Rs 512 bn in FY13. Speaking on the outlook of interest rates, the bank's management expects the situation to remain stable. On discussing the bank's fund raising plans, it seems that there are none in the short term and will depend on the credit growth a few months down the line. It may be noted that at the end of FY14, the bank's capital adequacy ratio stood at 12.5%.
The shareholders of Tata Motors have turned down the proposal to increase the remuneration of its top management that include the late managing director, Karl Slym and other executive directors. Consequently, the salaries of these management personnel will remain unchanged. The refusal to approve the remuneration proposals for the company's top management signals growing concerns of shareholders with respect to the company's performance. Tata Motors reported a revenue growth of 23% YoY for FY14. The growth was mainly driven by JLR while the standalone entity posted a decline of 23% YoY. For the standalone entity (Indian operations), the sales volumes (including exports) in both commercial and passenger segment considerably declined during the year.
FMCG major Hindustan Unilever (HUL) will be focusing on increasing sales at its existing stores rather than going in for a wider distribution as per the management. One way to do so is by pruning the non-performing SKUs or stock keeping units. The company would also be focusing on high margin as well as low penetration product categories such as packaged food, skincare and male grooming. It believes that the possibility of increasing sales from these categories is higher as compared to the traditional segments of soaps and detergents. In addition to this, HUL is also looking to sell products in various packages so as to boost volumes - largely in the ice cream and butter & margarine categories. As reported by a leading business daily, the company over the past few years has been aggressive in terms of increasing its coverage and now the focus seems to shift in increasing margins. During FY14, the company's revenues and operating profits increased by 9% YoY and 12% YoY respectively. Profits were up by 2% YoY.
In the week to come, the markets will wait for big reform announcements from the union budget on 10th July. There could be considerable volatility on the bourses in the run up to the same. Also the earnings season will kick off next week. However, investors should not be swayed by short term moves in the markets and must remain invested in fundamentally strong companies for the long term.