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Indian indices outpace the global markets
Fri, 18 Jul RoundUp

Barring France and few European markets that stood almost flat, all the other global indices ended the week in the positive territory. However, markets across globe extended losses towards the week-end post the news of the Malaysian jet fall. The US and the Asian markets were the ones highly impacted by the incident. Geopolitical tensions also loom over the global indices paving way for uncertainties going forward.

The US market closed 0.2% up for the week; however uncertainties across US indices persist. Hence, to avoid risks, investors have been pouring money into safe-haven assets such as gold and US government bonds. This is especially post the comments coming from the US Fed that valuations in some parts of the US stock market look stretched.

European equity markets closed only marginally higher for the week gone by. The UK banks continue to face investigations with respect to their small business lending.

Asian stock markets closed higher with Indian indices outpacing all the major global counterparts. Thanks to the lower retail inflation data and the positive sentiments ruling the Indian markets in hopes of expeditious reforms process by the Modi government. The Indian markets got a boost with few technology blue chip companies having declared strong first quarter FY15 earnings. The corporate earnings performance that had set a positive tone in the markets was later offset by the weak global cues towards the week-end. Asian investors too were found rushing for defensive assets for the week gone by.

Key world markets during the week
Source: Yahoo Finance

Barring FMCG, all the sectoral indices in the Indian markets ended the week on a strong note. While FMCG closed weak (down 0.1%), Capital goods (up 6.6%) and Metals (up 6.5%) witnessed the highest buying interest during the week.

BSE indices during the week
Source: BSE

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

According to a leading daily, the Wholesale Price Index (WPI) data for the month of June has come in lower than expected at 5.43% as against 6.01% in May. This data also happens to be at a four-month low on the back of lower food inflation. However, the core inflation for the month of June is seen higher at 3.9% as against 3.8% month-on-month basis. Therefore, a rate cut from the Reserve Bank of India may not be likely. Additionally, the nation is also facing a drought-like situation thanks to the deficient monsoons. In its maiden Union Budget 2014-15, Finance Ministry Arun Jaitley had allocated additional funds to battle out inflationary pressures. Therefore, it remains to be seen how the government fights its way out.

After a two year back to back decline in volumes, sales of heavy commercial vehicles (HCVs) rose by 11% during the quarter ended June 2014. HCV volumes fell by 6% YoY, 25% YoY and 15% YoY in the quarters ended December 2013, September 2013 and June 2013 respectively. As can be seen from this, there seems to be a bottoming out trend. Given that HCVs are considered to be the barometer of economic health, this does point towards improvement. However, amongst the many factors that led to higher volumes has been the 12% to 15% increase in freight rates over the past six months as well as the extension in excise concessions. To add to this is the expected increase in infra and mining activities, which would firm up the demand going forward.

The state run oil marketing companies have cut the price of bulk diesel which is sold to industrial consumers such as state transport companies and railways by Re 1 per litre. In Delhi, the revised price for bulk diesel would be Rs 59.32 a litre. In Chennai, the price has been cut by Rs 1.18 a litre to Rs 63.53. In Mumbai, price would go down by Rs 1.20 a litre to Rs 67.90 and Kolkata would see a cut of Rs 1.14 a litre to Rs 64.39. The move follows a moderation in diesel's price at regional trading hubs such as Singapore and the strengthening rupee. It is likely to bring down railway fares that are linked to fuel prices. It would also help bring down fuel bills for state transport utilities.

The export data for the month of June 2014 was released today. And as per the data, it seems that the trade deficit expanded to US$ 11.76 bn in the month, the highest level in about a year. Growing at 10.2%, merchandise exports were up during the month. Merchandise imports on the other hand increased by 8.3% YoY to US$ 38.2 bn. It is believed that imports grew for the first time in a year. Oil imports were up by 10.9% YoY (US$ 13.3 bn) while non-oil imports were up by 7% YoY to 24.9 bn. As reported by Reuters, gold imports jumped by 65%. The same is believed to have played a big role in widening the deficit level. But whether the RBI reacts to this in the next monetary policy remains to be seen.

The gold imports for the month of June have jumped 65.1% to US$ 3.12 bn from US$ 1.9 bn in the corresponding month a year ago. However, this pushed the trade deficit to 11-month high of US$ 11.76 bn last month. While exports have also grown, gold imports spoilt the show. In the budget, the Finance Minister had left the import duty on gold and silver unchanged at 10%, surprising all. The huge rise in gold imports indicates that the curbs would stay in place for some time. That's because the overall import bill is already expected to spike on the back of an improvement in investment and consumption activity adding to the trade shortfall.

Movers and shakers during the week
Company10-Jul-1418-Jul-14Change52-wk High/Low
Top gainers during the week (BSE-A Group)
Jaypee Infratech323717.9%42/14
Bharat Forge63470711.6%721/186
Multi Commodity70578611.5%803/238
Financial Tech24126710.9%702/102
Crompton Greaves19121110.3%219/75
Top gainers during the week (BSE-A Group)
Rural Electrification368314-14.8%383/146
The Indian Hotels10893-13.3%112/38
Power Finance Corporation302270-10.6%344/97
Core Education1615-8.8%32/11
Piramal Enterprises699640-8.5%791/483
Source: Equitymaster

The State Bank of India have cut rates on short-term fixed deposits up to 179 days by 0.5% to 7%. Further, interest rates on term deposits (of Rs 1 crore and above) have been reduced by 0.25% to 6.25% (for term deposits between 7 to 60 days) and to 7% for deposits in excess of 61 days but less than one year. Given the uncertain macros and the bleak likelihood of a rate cut despite fall in CPI, margin pressures stand imminent for SBI going forward. Moreover asset-liability mismatch concerns loom too. Hence, a deposit rate reduction stands justified. We believe the other banks might follow suit.

The private power player Tata Power is looking to spend Rs 18.8 bn over the next five years to strengthen its network in Mumbai. This spending is with the aim to increase its reach to south Mumbai as well as suburban Mumbai. The recent ruling by the Supreme Court and the Maharashtra Electricity Regulatory Commission (MERC) have allowed the company to provide power to low end customers having monthly consumption of 300 units or below and cater to eleven clusters situated in Mumbai suburbs respectively. While BEST, the current power supplier in the city, has opposed MERC's decision, it is believed that the company has fear of Tata Power poaching its customers as was reported by a leading business daily a few days ago. Being long term projects, the benefits of this capex will take time to come in, especially considering that setting up infra in a congested city such a Mumbai would be challenging.

With the development of three gas finds in Reliance Industries' KG-D6 block held up due to a technical dispute, the petroleum ministry is seeking Cabinet approval to relax timelines to allow the company retain and produce from the discoveries worth US$ 1.45 bn. In 2007, the company had notified the Dhirubhai-29, 30 and 31 and submitted a formal application for declaring them commercial in 2010. It was well within the timelines set in the production sharing contract. However, the ministry's technical arm Directorate General of Hydrocarbons (DGH) refused to recognize them in absence of prescribed confirmatory test. Finally when the firm agreed to do the drill stem test (DST), DGH declared that the contractual time period for development of the finds was over. The Petroleum ministry feels that taking these discoveries away where estimated reserves are 345 billion cubic feet and rebidding them may lead to a delay in the development. On the other hand, RIL can quickly put on production the three discoveries by using its existing infrastructure. Further, in case if RIL goes for arbitration, it may cause further delay in production and extra legal cost.

India's fifth largest software firm Tech Mahindra, has signed a software services deal with a US based university. The deal with Wichita State University (WSU) will help Tech Mahindra improve its domain knowledge in the aerospace segment as WSU has the largest civilian academic aviation R&D institution in the US. The Indian IT firm will work with the institution in the areas of aerospace engineering, certification, IT and automotive testing. The financial details of the transaction were not disclosed.

HDFC and HDFC Bank might merge into one entity as the RBI is looking to liberalize norms for infrastructure lending. Both the financial institutions were looking to merge since more than a decade now. However, tough regulations had been barrier to their merger so far. Reportedly, as the new regulations have scraped the reserve requirement for infrastructure funding and affordable home loans through long-term bonds, this seems to have paved the way for the merger of the entities. Further, this issue was discussed by the top executives of both the organization in past but there was no final proposal stated. In fact the issue in the past has also been dropped due to high costs of the merger. While the things are still at a nascent stage, one should wait for more developments on this front.

Let's talk about few earnings results released during the week.

The India's second largest two-wheeler manufacturer Bajaj Auto has declared its first quarter FY15 earnings results. The net profit has gone up 0.31% and the total income has witnessed an increase of 7.6% during 1QFY15 on YoY basis. The first quarter also marks the beginning of a demand recovery. Bajaj Auto also has some launches lined up that are expected to bolster volumes going forward. As far as three wheelers are concerned, the company remains positive on the back of new product launches and release of new permits. These will push up the volumes too. While auto industry was considerably impacted during the year on account of the economic slowdown, once economic growth picks up, its positive impact will be rubbed off on the auto industry as well.

Leading Indian software services exporter TCS has announced its financial results for the quarter ended June 2014 (1QFY15). During the quarter, the company's consolidated revenue stood at Rs 221,110.3 m, higher by 2.6% on a quarter-on-quarter basis. The operating profit was lower by 5% QoQ on account of higher expenditure. Operating profit margin declined from 31% in 4QFY14 to 28.7% in 1QFY15. At the bottomline level, consolidated net profit increased by 3.9% QoQ to Rs 55,676.8 m. Net profit margin improved marginally from 24.9% in 4QFY14 to 25.2% in 1QFY15. The company's board of directors has declared an interim dividend of Rs 45 per equity share of Rs 1 each. This includes a special dividend of Rs 40 per equity share. The interim dividend will be paid to the shareholders on August 08, 2014.

In the week to come, tensions between the US and Russia will continue to haunt the global markets and uncertainties across world indices will continue to persist. Back home, the earnings season will take the centre stage; albeit weak global cues are likely to weigh heavy on the Indian indices too. We believe investors should not get swayed by short term gyrations in the markets and should remain selective in picking fundamentally strong companies from a long term perspective.

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