Backed by strong performance of Asian indices, global markets largely firmed up. However, the US markets were down by 0.8% on ongoing worries over geopolitical unrest after downing of the Malaysian Airlines passenger jet over Eastern Ukraine last week. Even the European indices particularly Germany and France ended on a weak note weighed down by fears of the impact of tougher sanctions against Russia. The sanctions may include closing Russia's access to European Union capital markets, embargo on arms sales to Russia and restrictions on supply of energy and dual-use technologies. But the UK markets were up by 0.6%.
The Asian stock markets were on a roll led by China and Hong Kong registering gains of over 3% each. Strong manufacturing data kept markets upbeat in China. The Indian stock markets after hitting all-time highs for straight two days retreated on profit-booking by FII's and domestic funds to log weekly gain of 1.9%. The Japanese markets were up by 1.6% even as the consumer price index eased to 1.3% in June hitting a six-year-high of 1.5% in April. The Bank of Japan has largely met its target of keeping interest rates low to fuel spending in the economy.
Majority of the sectoral indices in the Indian markets ended the week on a negative note. Power (down 3.4%), Realty (down 2.8%) and capital goods (down 2.2%) were the biggest losers. Defensives such as IT (up 4.1%), FMCG (up 3.6%) and pharma (up 2.6%) were among the few major gainers during the week.
Now let us discuss some of the economic developments of the week gone by.
With an aim to increase foreign investment, the cabinet has raised the investment limit for foreign companies in insurance sector from 26% to 49%. With Cabinet giving its approval, the matter will now be taken up in the parliament. A hike in limit would enable domestic companies to get the much needed capital from abroad. The move comes as a huge relief as the insurance sector had been asking to raise the limit since 2008.
RBI has relaxed norms for banks on loans against jewellery. The country's central bank has removed the Rs 1 lakh ceiling on loans against jewellery where borrower repays all dues with interest in one go at loan maturity i.e. a bullet repayment. In the latest circular, RBI has left it to banks to decide the ceiling and quantum of loans against pledged jewellery used for non-agricultural purpose. However, it the tenure for bullet repayments of such loan continues to be capped at 12 months. The apex bank has also kept the loan to value (LTV) ratio of such loans unchanged at 75% throughout the loan tenure which include current value of gold jewellery and accrued interest. The higher loan ceiling will help banks to enhance their gold jewellery loan portfolio which are generally of ticket size above Rs 1 lakh.
In order to raise funds for its ambitious railway expansion program, government is planning to offload its stake in certain rail infrastructure companies such as IRCTC, RailTel Corporation etc which are unlisted. The move will also provide a listing platform to these companies. While the government had already announced its move to towards the PPP route to overcome any financial constraints, this move will further boost its financial corpus.
The Delhi government is mulling over offering subsidy to car owners who want to switch to the electric mode using a specialized conversion kit. The retrofitted hybrid-electric kits can be used on vehicles not more than 2-3 years old. The amount of subsidy is still being worked out. This move comes in the backdrop of the Centre extending subsidy in this year's Budget under the National Mission on Electric Mobility program.
Now let us move on to some more developments in India Inc.
With improving economic outlook, a number of companies have announced fund raising plans. The Rs 10 bn rights issue of Indian Hotels Company Ltd (IHCL) is slated to open on 4th August and close on 20th August. The rights issue will offer around 182 m convertible debentures for Rs 55 per unit to existing shareholders. Every shareholder of IHCL holding 40 equity shares will be eligible for nine compulsorily convertible debentures of the company. As per the offer document, IHCL plans to utilize Rs 5.5 bn from funds raised to repay debt while Rs 1.3 bn will be used for renovation/refurbishment of existing hotels and Rs 700 m will be used to finance construction of Vivanta by Taj at Guwahati. The balance proceeds of Rs 2.4 bn will be used for general corporate purposes.
Another Tata Group company, Tata Steel plans to raise up to USD 3.2 bn for repayment of debt and to fund capital expenditure of its new plant in Odisha. For this, the company has started the process of raising foreign currency debt which would be a combination of bonds and loans. The company has to repay debt worth about Rs 37 bn in 2014 and Rs 297 bn in 2015. As of FY14, the company has net debt of Rs 705 bn with debt to equity ratio of 1.9 times. The company raised huge debt earlier to fund its acquisition in the midst of slowdown in its European business.
As per the government's stern direction, Gas Authority of India Ltd (GAIL), which had earlier resisted plying Indian made LNG importing vessels, has agreed to allow indigenously made vessels in its 20 years LNG importing plan worth USD 7.5 bn. The earlier resistance was mainly due to the India lacking experience and technical competence in building highly specialized vessels. Also in case of delay in the delivery of ships would have resulted in GAIL having to pay billion dollars of penalty and liabilities to the seller in the US as well as gas buyers back home. The company has issued tender offer to hire nine newly build LNG ships in a lot of three ships each. And in each lot, one ship will be built in India which will get delivery time of 6 years as compared to 3 years for foreign shipbuilders. This move is likely to boost the Indian shipping industry.
To meet strong demand arising from dedicated freight corridors and 100 "smart cities" announced in the Budget, cement companies have planned major capacity expansion in north India. As per a report by Barclays Research, north India is expected to witness capacity addition of about 23 mt from FY14 to FY17. The companies that are planning expansion in the region include Ambuja Cements, Ultra Tech Cement, Shree Cement, Mangalam Cement, Jaypee Cement, J K Cement, India Cements and Birla corporation. Holcim Group firm Ambuja Cements has planned capacity expansion of 4.5 million tonnes (mt) at a total cost of Rs 35 bn. Its greenfield projects will be set up in Rajasthan, Uttar Pradesh and Madhya Pradesh. It must be noted that owing to limited limestone reserves in north India, cement players may look at acquiring existing assets to increase capacity.
Let's talk about few earnings results released during the week.
Axis Bank has announced results for the quarter ended June 2015. The bank's Net Interest Income (NII) grew 15.5% YoY while the net profit grew by 18.3% YoY. Despite a 45.7% YoY fall in provisions, the bottomline growth was muted due to higher operating costs as well as lower non-interest income. Non-interest income was down 5% YoY, while operating expenses were up by 16.8% YoY. The asset quality numbers were slightly below par. In absolute terms, gross non-performing assets (NPAs) rose 39% YoY and net NPAs rose 41% YoY.
HDFC Bank has announced its financial results for the first quarter of the financial year 2014-15 (1QFY15). During the quarter, the bank reported interest income of Rs 112,200.8 m, higher by 16.1% YoY. Other income declined by 3.9% YoY to Rs 18,505.7. Operating profit before provisions and contingencies stood at Rs 38,437.7 m, growing in line with the topline growth. Provisions and contingencies declined by 8.4% YoY to Rs 4,827.8 m. The bank's bottomline expanded by 21.1% YoY to Rs 22,330.4 m. The bank has reported the slowest quarterly earnings growth in more than a decade. However, the net profit margin improved from 19.1% in 1QFY14 to 19.9% in 1QFY15.
Hindustan Zinc declared its financial results for the June 2014 quarter. During the quarter, the company's topline reported a marginal growth of 0.8% YoY. Operating profits declined by 10% YoY owing to higher expenditure. Operating profit margin contracted from 50.4% in 1QFY14 to 45% in 1QFY15. Other income increased by 15.7% YoY. The company's net profit declined by 2.6% YoY to Rs 16,176.7 m. Net profit margin contracted from 55.6% in 1QFY14 to 53.8% in 1QFY15.
Another company, Cairn India has reported lower profits for the quarter ended June 2014. During the quarter, the company's consolidated net sales increased by 10.3% YoY to Rs 44,828.5 m. Operating profit increased by 4.9% YoY to Rs 30,524.1 m. While depreciation costs increased by 38.6% YoY to Rs 7197.9 m, interest expenses declined sharply from Rs 104.5 m in 1QFY14 to 16.5 m in 1QFY15. Net profit before exceptional items stood at Rs 27202.9 m, lower by 13% YoY. There was an exceptional loss of Rs 16,273.9 m during the quarter arising due to additional depreciation charges on account of change in method of depreciation on of its oil and gas assets from 'straight line method' to 'unit of production'.
Going ahead, geo-political tensions in Russia and Middle East will continue to fuel uncertainty across the world. In India, corporate earnings will drive the course of market indices but domestic factors such as weak monsoon, high inflation and interest rates can act as dampeners. Even firm crude prices on growing uncertainty can further exert pressure on the country's economic recovery adversely impacting fund flows in the markets. Notwithstanding, the country's long term fundamentals are strong and investors should focus on stock with sound financials and robust economic moat.