Majority of the global stock markets closed in the green during the week, barring India and Brazil. The US reported mixed data on unemployment for July. The unemployment rate fell to 7.4% in July which is the lowest since December 2008. However, growth in non-farm payrolls was below expectations. The US GDP growth reported during the week stood at 1.7% for the April-June quarter. As per various sources, the Fed intends to narrow down its bond buying activity, after it gets more clarity on economic growth and unemployment rates going forward.
China too reported its non-manufacturing PMI (Purchasing Managers Index) data. As per the reported data, growth in China's non-manufacturing sector rose to 54.1% during July, from 53.9% in June 2013. However, inflation also increased during the same period. China's economic growth had staggered in the first half, as factory output and investments had slowed down. The Chinese government was expecting growth to accelerate in the second half. In the European markets, robust insurer earnings helped drive European share markets to a two-month high on Friday.
The Indian stock markets closed on a negative note. Various factors impacted the stock market performance. The rupee further depreciated against dollar and touched Rs 61.78 on Friday. This was due to increase in imports, which resulted into higher demand for the dollar. The weakness of the rupee was also fueled by better than expected US GDP growth, which had further strengthened the US dollar.
There was a spate of quarterly results announced by companies. While some companies reporting robust numbers, there were many companies which reported muted earnings growth during the week. This too hurt sentiments. On top of this, the RBI kept the key rates unchanged in its monetary policy and revised the GDP growth estimate lower to 5.5% for FY14.
Majority of the sectoral indices ended in the red with Realty (down 14.7%), Power (down 10.5%) and PSU (down 9.5%), witnessing the maximum losses. Only stocks from Consumer durables and IT sectors closed in the green.
Now let us discuss some of the economic developments of the week gone by.
Maintaining a cautious stance, the Reserve Bank of India (RBI) maintained status-quo in its latest monetary policy review. The key rates such as the repo rate (7.25%) and the cash reserve ratio (CRR) (4%) were left unchanged. This was in-line with market expectations. However, RBI has revised the GDP forecast for FY14 downwards to 5.5% from 5.7% earlier. The economy continues to remain vulnerable to various risks emanating from both domestic and global uncertainly.
On the other hand, there is the Indian Rupee which has been steadily falling. As a result, the job of the RBI has become even tougher. The RBI believes the onus for reversal in slowdown now lies on the government. The RBI has urged the government to take the necessary steps for reigning in the current account deficit. That and stabilization of the Rupee is on the radar of the Central Bank.
As per a survey conducted jointly by Federation of Indian Chambers of Commerce and Industry (FICCI) and audit firm PriceWaterhouse Coopers (PwC), the manufacturing sector has put its capital investments plans on the backburner in light of the gloomy economic climate in the country. The survey titled "India Manufacturing Barometer" says that nearly 50% of the manufacturing companies have indicated that they have no plans of major investments in FY14. However, the companies were optimistic about their growth prospects. More than 50% of the companies are anticipating revenue growth of over 10% and expect margins to improve in the next one year. The survey covered companies from auto ancillary, building and construction materials, capital goods, chemicals, engineering and metals sectors.
Colgate announced its results for the quarter ended June 2013. The company recorded a 14.7% YoY rise in sales led by 9% YoY volume growth. Its toothpaste sales grew by a strong 11% during the quarter. However, the company's operating margin contracted by 2.3% YoY to 19.2% due to a steep rise in other expenses that offset savings in input costs and wages (all as a proportion of sales). However, at the net level, net profits surged by 58% on the back of exceptional income of Rs 555 m from slump sale of Global Shared Services Organization to its foreign parent company's wholly-owned subsidiary. During the quarter, the company launched an innovative product 'Visible White' that prevents tooth surface stains for visibly white teeth.
Infrastructure Development and Finance Company Ltd (IDFC) announced its results for the first quarter of the financial year 2013-14 (FY14). The consolidated income from operations registered a growth of 25% year on year (YoY) for the quarter. The advances for the quarter grew by 13% YoY. However, the disbursements and approvals witnessed a decline mainly on account of slowdown in infrastructure activity and other macro concerns. The total assets under management (AUM) stood at Rs 486 bn at the end of June 2013. The net interest margins (NIMs) during the quarter declined marginally to 4.1%, as compared to 4.3% in the corresponding quarter last year. The net profits for the quarter grew by 47% YoY. This was mainly on account of lower provisioning during the quarter. The capital adequacy ratio at the end of the quarter stood at 23% while net NPAs came at 0.2%.
Glenmark Pharma declared its June 2013 quarter results. Topline grew by 19% YoY during the quarter led by growth in both its specialty and generics businesses. The specialty segment increased by 21%, due to healthy growth in its domestic, Rest of the world and Latin America segments. However, Europe witnessed decline of 3% YoY for the said period. In the generic segment, growth was led by good performance in its API (Active Pharmaceuticals Ingredients) segment, which grew by 26.5%. The US segment grew by 13% YoY during the quarter. The operating margins were up by 4.1% leading to a 50.1% YoY growth in operating profits. Bottomline growth jumped 64.3% YoY during 1QFY14 with the net margins also improving by 2.9%.
Bharti Airtel announced June 2013 quarter results. The company reported a 9.3% YoY increase in total revenues. Mobile subscriber base in India grew by 2% YoY, while total count of subscribers stood at around 190.9 m at the end of June 2013. Total subscriber base on the network (including South Asia and African operations) grew by 5% YoY during the quarter. Operating margins improved by 2.7% YoY to 32.2%. The positive effect of operating margins was mitigated by the increase in interest costs as well as higher tax outflow. There was an exceptional gain on account of the merger between Bharti Infratel Ventures Ltd (BIVL) and Indus Towers. However, the effect of this too was negated by the increase in taxes and minority interest, which was again related to the same merger. As a result net profits declined by 9.6% YoY. Excluding the exceptional items, net profits declined by around 7% YoY.
Dr Reddy's has announced its results for the quarter ended June 2013. Net sales of the company grew by 12% YoY led by growth in export formulations. In the export formulations, North America witnessed a growth of 37% YoY on the back of low competition launches done during the quarter. However, the domestic segment and the PSAI (Pharmaceuticals service and active ingredients) segment witnessed flat and 6% YoY growth respectively during the quarter. Operating margins declined by 0.7% YoY to 19% due to increase in operating expenses. Bottom line grew by 7% YoY due to the surge in taxes. Taxes increased by 45% YoY during the quarter.
Now let us move to some other news from the corporate world.
Talks between PSU mining major Coal India's (CIL) workers and the government on disinvestment failed. The government was expecting to mop up Rs 200 bn through 10% disinvestment in CIL. The government had earlier also recommended that CIL uses its cash surplus effectively by paying more dividend or investing in other PSUs. CIL is open to improving the dividend payout ratio from the current level (50%) to effectively utilize the cash. It has, however, clearly stated that it is not in favour of investing its surplus cash in the other PSU companies. Also it will not be able to do a buyback as it will lead to violation in the minimum shareholding limit for listing. The company expects to sell 46-48 m tonnes of e-auction coal in FY14. But the key concern is the declining e-auction premium which has currently reduced to 35-36% as against the 39-40% achieved in FY13. The company does not expect to import coal in FY14 for fulfillment of its fuel supply agreements.
As per a financial daily, Maruti Suzuki's July sales increased by 1.3% to 83,299 units. While the domestic volumes rose by 6% YoY at 75,145 units, exports witnessed volume decline by 27% YoY to 8,154 units. The growth of 1.3% YoY was due to rebound in demand for its mini cars and compact DZire. Sales of mini cars increased by 16% YoY in July, and DZire sales were up by 34% YoY. On the other hand sales of UVs (Utility vehicles) declined by 38% YoY and other compact car versions namely Swift, Ritz and Estilo fell by 12% YoY. The demand for Sedan SX4 remained weak as the sales fell by more than half to 322 units. So far during the period April-July 2013, the company's total sales volume fell by 8% to around 3.5 lakh units.
As per a leading financial daily, pharmaceutical companies that are operating in the US are likely to be subjected to tighter drug approval norms. The US Food & Drug Administration (USFDA) has mandated companies to give data from January 2014 including on safety, efficacy and stability - for three batches of products, instead of one at present, while seeking drug approvals in that country. This may lead to a significant increase in the time and development cost of generic products from next year for companies like Sun Pharmaceuticals Ltd, Lupin, Dr Reddy's Laboratories, Ranbaxy Ltd etc. The move is likely to increase the cost, by up to three times in cases where ingredients used are expensive.
The global stock markets had a good week after the US reported better data. However Indian markets, remained weak due to above discussed reasons. Some more quarterly results are expected to be declared in the following week and this may have a bearing on the movement of the indices. Having said that, we believe that investors should not get too influenced by short term movements in the indices. The focus should instead be on investing in quality companies having a sound management, healthy financials and available at reasonable valuations.