Equity markets across the world continue to witness pressure from escalating tensions between the West and Russia over the Ukraine crisis. The sharp drop in the US markets on Thursday, and fear of US Federal Reserve increasing interest rates kept investors cautious. However, the overall weakness was somewhat reduced by positive performance in some of the Asian indices.
The US markets were on a cautious footing throughout the week in anticipation of weak economic data. The benchmark index suffered weekly loss of 2.8%, largest weekly loss since June 1, 2012. While some positive economic data on Friday helped to add back the momentum in the indices, however, the gains could not offset the week's losses.
Majority of European markets remained depressed. The markets in Germany and France were among the leading losers for the week. Disappointing manufacturing data of Eurozone countries have added more pressure on the European Central Bank. Indicating that the bank now needs to take more measures for further stimulus as rising deflationary risks could hamper its efforts to spur growth.
Among the Asian markets, China and Hong Kong markets were the leading gainers registering gains of approx 2.8% and 1.3% each. Strong manufacturing data kept markets upbeat in China. Manufacturing activity in China and other Asian countries gathered pace during the month of July, hinting at a revival in global trade.
Even the Indian stock markets ended the week on a weak note. Selling activity took toll on back of discouraging global cues and thus indices were, down by 2.5% for the week.
Majority of the sectoral indices in the Indian markets ended the week on a negative note. Capital goods (down 7.9%), Metal (down 2.9%) and power (down 2.7%) were the biggest losers. Only stocks from Pharma sector closed on positive note and were up by 0.1%.
Now let us discuss some of the economic developments of the week gone by.
The manufacturing PMI for the month of July 2014 stood at 53 points vs 51.5 points in June 2014. Purchasing Managers Index (PMI) measures the state of economic activity. It is based on a survey of private sector firms. Any value above 50 indicates expansion in economic activity while a reading below 50 indicates contraction. The manufacturing PMI is highest in last 17 months. This indicates the pickup in the manufacturing sector and is a positive indicator. As per the survey, the orders have picked up indicating increase in demand.
The Tamil Nadu government has announced a series of measures covering the power sector among others. This encompasses efforts to ensure uninterrupted power supply and develop the infrastructure in the sector. As part of this, 60 sub stations and 2,500 km of high voltage power transmission corridor will be set up at a cost of Rs 52.84 bn in the current financial year itself. This will be a boost for power transmission to the industries in the state as also to southern India which has historically been one of the most electricity deficit regions of India.
As per a leading financial daily, the government plans to enforce stricter engine norms for manufacturers of buses and trucks that consume over 37% of total diesel sold in the country. The move aims to restrict usage of the scarce fuel and to reduce vehicular pollution. The enforcement of the norms is expected by January 2016. The new norms are likely to improve engine efficiency to get better mileage per litre of diesel. The government has formed a committee under the chairmanship of Oil Ministry's Additional Secretary Rajiv Kumar to ensure that the diesel conservation move is implemented in a time bound manner.
Now let us move on to some more developments in India Inc.
The Indian pharma companies continue to face challenges from USFDA. As per the financial daily, Cadila healthcare has received 483 from USFDA on one of its products manufactured at Moraiya facility in Gujarat. Reportedly, the company is in process of reviewing the documents of the product on which the 483 was issued. The company is assessing the filed ANDA before its approval and the observations are being responded accordingly. Further, it is also reported that there are no good manufacturing practices (GMP)-related issues and as such no business impact. USFDA issues the 483s to the firm's management at the conclusion of an inspection when an investigator had observed conditions that in their judgment might constitute violations of the Food Drug and Cosmetic (FD&C) Act and related Acts in the US. In approx a week's time Cadila is second company to receive 483 observations from USFDA. Few days back, even Ipca had received 483 letter from USFDA.
The stock prices of various oil marketing companies increased on back of, announcement about the decrease in the petrol prices. As per the leading financial daily, petrol prices in Delhi are set to be cheaper by Rs 1.09 per litre starting today as state-run oil market companies (OMCs) have lowered the price of the fuel. This is the first time since mid-April that OMCs have lowered petrol prices. The move has come on the back of drop in benchmark gasoline rates in the international market. However, the OMCs increased diesel prices by 56 paise in Delhi. This will help lower the gap between pump and market rates by about Rs 1.5 per litre. Also, diesel pricing could be deregulated in three months if the trend continues.
As per a leading business daily, NALCO has cleared one of its hurdles to kick start its much delayed coal mining project in Odisha. In the latest development, the state government has handed over the land parcel meant for rehabilitation and resettlement colony to NALCO. The company was allocated the mining block in 2004 to meet coal requirement for its captive power plant. However, there had been numerous bottlenecks. It failed to start operations as locals protested over the price of land acquisition and changes in the mining policy and clearances from center and state government. The company has stuck to its target of opening the mine by December 2014 although it is yet to receive forests and other clearances from the centre. The cost of energy for producing aluminium has gone up; as a result aluminium producers seek captive power supply with fuel resource.
According to one of the financial daily, Tata Global Beverages (TGBV) and Pepsico joint venture NourishCo will launch sparkling water variant of its brand Himalayan next month. This is the first extension in the Himalayan brand after it was acquired in 2007 from Mount Everest Mineral Water Company. The equal joint-venture with Pepsico was set up by TGBV in 2010 to market products on the health and wellness platform. Apart from Himalayan, the joint venture has fortified water product, Tata Water Plus and glucose drink, Tata Gluco Plus. The launch of Sparkling Himalyan is expected to provide TGBV access to the premium end of the bottled water market valued at Rs 80 bn, largely dominated by imported brands such as Nestle's Perrier and Italian brand San Pellegrino. Reportedly, premium bottled water accounts for only 5-8% of the overall bottled water market. The Sparkling Himlayan brand will be competitively priced at Rs 90 per litre as compared to imported brands costing around Rs 200-300 for 330 ml. TGBV's Himalayan Natural Mineral Water is positioned at the mid-end of the bottled water market and is priced at Rs 50 a litre. TGBV will be utilizing Pepsico's distribution network to push Sparkling Himalayan in both modern and traditional trade channels.
As per a leading financial daily, one of the five associate banks of the country's largest lender State Bank of India (SBI) is set to merge with the parent this fiscal. State Bank of Patiala is the most likely of the associates to get merged. The public sector bank SBI has five associates -- State Bank of Bikaner and Jaipur, State Bank of Travancore, State Bank of Patiala, State Bank of Mysore and State Bank of Hyderabad. While gradually all the five associate banks are expected to merge with the parent, one would come up this year followed by the other next year. To ensure smooth transition, the government is expected to opt for one bank at a time. The total employee staff of the five associate banks of SBI put together stands around 75,000. With each having different work culture, the merger is not an easy task.
As per the financial daily, competition commission of India (CCI) has raised concerns over Sun Pharma's acquisition of Ranbaxy Ltd. CCI has ordered for public investigation, as the deal is expected to increase market domination by one company. This in turn will impact the prices of essential drugs in the domestic market. Reportedly, this is among the very rare action taken by CCI to ask hard questions of a merger-in-the-making. Few weeks back even some minority shareholders had filed a litigation in the high court. This litigation was recently cleared and even stock exchanges had given green signal for the merger. However, the approval from SEBI and CCI was still pending.
Let's talk about few earnings results released during the week.
Maruti Suzuki has reported its sales number for the month of July 2014. In domestic market, the company sold a total of 90,093 cars for the month, which was 20% higher over the corresponding same month of previous year. At 11,287 units, exports in July were higher by 38.4% YoY. However, sales from small cars namely Alto, A-Star and WagonR declined 14.4% YoY and mid-range SX4 witnessed decline of 27% YoY during the month. However, growth was witnessed in compact cars segment like Swift, Estilo, Ritz and Celerio which together rose by 81% YoY to 25,500 units. Its compact sedan Dzire, one of the top selling cars, rose 22% YoY to 18,000 units.
Thermax has announced its first quarter (1QFY15) results. During 1QFY15, both its topline and bottomline saw a decline. Net sales declined by 2.4% YoY during 1QFY15. The energy segment managed to see a marginal increase in revenues of 1.7% YoY. However, environmental segment revenues decreased 10.4% YoY. Operating profits declined by 29.6% YoY during 1QFY15. Margins thus fell by 2.3% from 8.2% to 5.9%. The fall in margin was due to an increase in material cost as a percentage of sales, which increased from 56.8% of sales in 1QFY14 to 59.6% in the quarter gone by. Staff costs too added to the margin deterioration with a 0.7% increase over the previous year's quarter. Profit after tax declined 17.6% YoY due to decline in operating profit and higher depreciation and interest costs. The consolidated order back log of the company stood at Rs 59.48 bn at the end of 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.
Dr Reddy's has declared its June quarter results for the financial year ending 2015 (1QFY15). The company posted robust topline growth of 24% YoY during the quarter. The large part of growth was led by robust performance in the US and RoW markets. However company's PSAI segment witnessed some pressure and subsequently posted negative growth for the quarter at -6% YoY. The company witnessed good improvement in the gross margins due to a better product mix. Subsequently, the operating margins also improved by 500 bps to 25% in 1QFY15. This was in spite of a sharp surge in R&D expenses which were up by 59% YoY for the quarter. On the back of good performance in the topline, the net profits too increased by 52% YoY during the quarter.
Hindustan Unilever Ltd (HUL) declared its results for the quarter ended June 2014. Revenues grew by 13% YoY on underlying volume growth of 6%. Each of the Home & Personal Care and Food businesses grew by 13% each during the quarter. The operating margin expanded by 1.1% backed by lower ad-spends and staff costs (both as a proportion of sales). Net profits, however, grew by a muted 4% YoY on account of lower extraordinary income earned from the sale of properties as compared to the year-ago quarter. Even the tax incidence in June 2014 quarter was high at 30% as compared to 23% in the year-ago quarter resulting in tepid rise in profits.
The geo-political tensions in Russia and Middle East are expected to fuel uncertainty across the world. In India, corporate earnings are mixed bag so far. Over and above, the other domestic factors such as weak monsoon, high inflation and interest rates can act as dampeners. Investors should not be swayed by short term moves in the markets and must remain invested in fundamentally strong companies for the long term.