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Major Asian markets ended the week on an encouraging note. Stock markets in Japan and HongKong ended the week higher by 9.2% and 5.3% respectively. Stock markets in Japan surged on hopes of more stimulus measures. Further, the stronger-than-expected election victory by the country's ruling coalition also lifted the markets.
Stock markets in Europe too ended the week on a positive note. Stock markets in Germany and France ended the week higher by 4.5% and 4.3% respectively.
Talking about UK, The Bank of England surprised investors by holding off on cutting interest rates despite the hit to the British economy from last month's vote to leave the European Union. Further, Theresa May was appointed as the new Prime Minister of UK. Stock markets in UK ended the week higher by 1.2%.
Stock markets in US ended the week higher by 2%. Dow Jones Industrial Average closed at an all- time new high during the week.
Back home, Indian indices too ended the week on a positive note. BSE Sensex ended the week trading higher by 2.6%. The ongoing earnings season will be a key trigger for the markets going forward.
Now let us discuss some key economic and industry developments during the week gone by.
India's factory output, termed as the Index of Industrial Production (IIP) grew by 1.2% in the month of May. This index had declined by 1.3% in the month of April.
The index grew on the back of a marginal pick-up in the manufacturing activity. Having said that, manufacturing activity still continues to remain weak and grew by 0.7% in May. While, electricity and mining grew by 4.7% and 1.3% in the same month.
Production of capital goods, an indicator of investment demand in the economy shrank by 12.4% YoY in May. This is the seventh consecutive month of contraction.
While IIP data has tended to be somewhat volatile in the past, what these numbers definitely point towards is the fact that the economy hardly seems to be growing at the kind of pace that the revised methodology of the GDP calculation portrays.
The inflation numbers were also released for the month of June. The Consumer Price Index (CPI) accelerated marginally to 5.77% in June from 5.76% a month ago.
The inflation continued to remain high on the back of higher food prices. Higher food inflation was driven by higher vegetable and sugar prices. However, experts believe that the inflation will see a sustainable downward moment beginning August on account of a normal monsoon.
The high inflation may dent the chances of a rate cut by the Reserve Bank of India (RBI) in its next monetary policy in August.
The debt in leveraged companies as a proportion of total debt has come down drastically and is the lowest in a decade.
Leveraged companies are companies have a negative net worth or having a debt equity ratio of 2 or above.
The above proportion stood at around 40% in FY15. This essentially implies that leveraged firms contributed to around 40% of the total debt in the economy. Now in FY16, this ratio has dropped to 9.42%. Almost a reduction of 75%. Now, that's a good sign for the economy in general as well as the banking sector.
The reduction has happened mainly on account of sale of non-core business and assets. Some companies were forced to do this. Reportedly, even the metals and real estate sectors showed an improvement in debt profile.
Having said that, a further improvement in this ratio will happen once the underlying demands in these sectors improve coupled with elimination of policy hurdles.
|Top Gainers During the Week (BSE Group A)|
|Top Losers During the Week (BSE A Group)|
Now let us move on to some of the key corporate developments in the week gone by.
Thermal coal prices have increased year-to-date. Reportedly, the price of FOB Kalimantan 4,200 kcal/kg GAR coal, a popular grade among Chinese and Indian buyers, has gained nearly 11% since the start of 2016.
The increase in the prices is on the back of supply tightness in Indonesia and strong demand from China. Higher global prices could well translate into better e-auction realizations for Coal India Ltd (CIL). During FY16, in the E-auctions Coal India's volumes reported a massive growth of 41% YoY. However, the realizations had declined by 24% YoY on account of lower global coal prices.
This trend could possibly reverse in this year, as coal prices are on an increasing trend, which could in-turn benefit the company immensely.
Sales of medium and heavy-duty trucks (M&HC) are moderating owing to slowdown in the demand. The growth in the commercial vehicles has fallen from a high of 21.5% in the month of April to 4% in the June month.
However, executive at truck firms believe that the sales will pick up in the month of September as the festive season nears coupled with the change in emission norms from April 2017.
Reportedly, an implementation of the stricter Bharat Stage IV norms of emission from April 2017 is set make trucks costlier by Rs 1.5-2 lakh. Hence, in order to beat this price rise, the truck operators would advance their purchases.
Freight rentals as demanded by truck operators has remained stagnant or even reduced in certain key freight corridors. Reportedly, freight rates on busy routes such as Delhi-Mumbai-Delhi fell by 1.5% on 1 July 2016. This is in-spite of two rounds of hikes in diesel prices.
Weak rentals could possibly fade truck operator's enthusiasm to purchase new trucks. Post monsoon trends in sales coupled with freight rates will be the key things to watch out for going forward.
The government has invited merchant bankers to help it sell minority stakes in 51 companies.
These companies include the likes of Reliance Industries Ltd, ICICI Bank, Axis Bank, Larsen & Toubro, ITC Ltd, Hindustan Unilever Ltd. The government holds a stake in these companies through The Specified Undertaking of the Unit Trust of India (SUUTI).
Reported, SUUTIs holding on behalf of the government is pegged at around Rs 600 billion. Now the interesting fact is that the government has asked Life Insurance Corporation to buy securities worth Rs 300 billion from SUUTIs holdings. That is almost half of SUUTIs holding.
Once again, the government has asked LIC to rescue it to meet its ambitious divestment target. Here is our very own Vivek Kaul's take on LIC coming to the rescue of the government:
Indian Hotels Co Ltd (IHCL), that runs the Taj chain of hotels, has sold one of its premium hotels in Boston named Taj Boston. The deal is pegged at a valuation of US$ 125 million (about Rs 8.2 billion).
The ownership has been transferred to a consortium of US based real estate developers. However, IHCL will continue to manage this 273 room hotel. The new owners has struck a long term management service agreement with IHCL for the latter to manage the property.
The deal is in line with the company's future strategy to pursue an asset-light model and is working on the expansion strategy to increase its footprint in India and overseas markets. Further, the company is in the process of exiting non-profitable properties across geographies.
This restructuring process will help the company to improve its operating profitability. Further, the strategy will also help in cost rationalization.
Going forward, increase in tourism and economic activity will be the key things to watch out for in order to assess an improvement in the hotel industry.
At least four Chinese automobile makers are in talks with the Indian government to set up manufacturing plants in India. The talks are in advanced stages with the government of Andhra Pradesh, Gujarat and Maharashtra.
Reportedly, of these at-least a couple are expected to make an announcement of their India plants over the next six months. The Chinese automobile market has slowed down considerably. Resultantly, these companies are looking for new markets which could compensate for the slower growth at home.
Indian people are increasingly buying utility vehicles, which is evident in the passenger vehicle sales for the month of June. Utility vehicle sales reported a growth of 35% YoY in the month of June. Chinese automakers have a strong portfolio of sports utility vehicles and are looking to explore the opportunity in India.
Having said that, it will be interesting to see how these brands establish their presence in India considering the intense competition in the Indian market.
Tata Consultancy Services Ltd reported its results for the quarter ended June 2016. The company's sales grew by 3.7% QoQ to US$ 4.36 billion. Reportedly, the revenue grew at the fastest pace in the last six quarters. In rupee terms, the company's revenue grew by 3% to Rs 293 billion.
The sales grew on the back of good performance from United Kingdom (UK) and Europe geography. Reportedly, both these geographies grew by 3.8% QoQ and 4.6% QoQ respectively. Together, the two geographies account for 26.3% of the company's revenue. While, US which accounts for more than half of company's revenues grew by 2.5% QoQ.
Further, the operating margins declined by 0.98% QoQ to 25.1%. The decline was mainly on account of the wage hikes.
The net profits marginally inched up by 0.3% QoQ to US$ 940 million. In rupee terms, the company's net profits declined by 0.4% QoQ to Rs 63.1 billion.
Traction from the digital technology space and growth from other geographies such as Latin America, Japan will be the key things to watch out for going forward.
We have put up a detailed result update after the conference call with the management along with our current view on the stock. Click here (subscription required) to access it.
Despite of the recent rally, we believe global markets are likely to remain under pressure going forward. None of the concerns of global investors are likely to go away anytime soon. Indian markets too will continue to experience the fallout of this turmoil. However, long term investors need not be too concerned. Times like these could offer good opportunities to enter good quality stocks at reasonable valuations. Further, the ongoing earnings season will be a key trigger for the markets going forward.
The Nifty opened on Monday with a gap up of 90 points and added some more gains by days end. Much of the weekly gains were registered on Monday while the markets traded in range for rest of the days. Now it seems the index could face resistance near the upper edge of the channel as it is moving to and fro those levels just as it did in April and June. So one will have to wait and watch for further trend developments You can read the detailed market update here...
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