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Geopolitics drags down global indices
Sat, 9 Aug RoundUp

Global markets ended the week on a negative note as the United States military intervened in the ongoing crisis in Iraq. The escalation of tensions in the Middle East and Iraq has come in at the same time that the European Union imposed fresh sanctions on Russia concerning the ongoing crisis in the Ukraine. With the exception of the US and Chinese markets, most global indices ended the week in the red. The Japanese index (down 4.8%) fared the worst amid growing concerns that Abenomics i.e. the economic policies currently being followed by the government, has failed to revive the economy. European markets were also down for the week. The German Dax, British FTSE and French CAC indices were down 2.2%, 1.7% and 1.3% respectively.

Amid the geopolitics tensions, crude oil prices increased yet again this week (by 0.8%). The Indian markets were down 0.6% as Foreign Institutional Investors (FIIs) moved funds back to the relative safety of the US markets. The monetary policy was by and large a non-event for the markets as the Reserve Bank of India (RBI) did not change the benchmark repo rate but cut the Statutory Liquidity Ratio (SLR) by 0.5%.

Key world markets during the week
Source: Yahoo Finance

Most sectoral indices in the Indian markets ended the week on a negative note. The Metal (down 2.5%) and Banking (up 2.3%) indices witnessed the highest selling pressure during the week. On the other hand, Consumer Durables (up 2.9%) and IT stocks (up 1.4%), were the top gainers this week.

BSE indices during the week
Source: BSE

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

In the first quarter Monetary Policy review, the RBI kept the key lending rate (repo rate) unchanged. Even the cash reserve ratio stayed at 4%. However, in an effort to ease some liquidity the statutory liquidity ratio (SLR) was reduced from 22.5% to 22%. The RBI's move has come in anticipation of revival in economic activity, fall in consumer inflation and fiscal tightening. If the economic parameters fail to reach RBI's target the central bank may again review its liquidity stance. Meanwhile, it is unlikely that banks will want to bring down the deposit and lending rates too soon. Growth in credit in the near term will therefore largely depend on economic revival as against fall in interest rates.

In a step that would move India a step closer towards complete de-regulation, government is all set to exempt diesel from regulatory controls sometime later this year. After government brought in partial de-regulation by allowing companies to raise prices on monthly basis the under recoveries have reduced. The under-recovery in diesel currently stands at just Rs 1.33 per litre. Falling under recoveries is not just good news for Oil Marketing Companies (OMCs) but also for upstream players and government as their share of losses also go down. However, if international crude prices turn volatile, or Rupee suddenly loses ground thereby making imports costlier, governments plan for full deregulation may well take a backseat.

According to a survey conducted by Reserve Bank of India (RBI), the business outlook for the manufacturing sector has improved in the second quarter of FY15. The improvement has been spurred by recovery in the production, order book, capacity utilization and improvement in imports and exports. There also has been a reduction in the pessimism on cost of finance, cost of raw material and profit margins. The Business Expectation Index (BEI), a barometer for the manufacturing sector outlook, improved to 114.7 in the second quarter of FY15 from 111.1 in the previous quarter and 112.7 in the corresponding quarter last year. Even the Consumer Confidence Survey showed a significant improvement in Future Expectations Index from 114.9 in March 2014 quarter to 122.9 for the June 2014 quarter.

The RBI has tightened norms for the asset reconstruction companies (ARCs) in order to bring more transparency in purchase and sale of bad loans. Henceforth, ARCs planning to buy any bad loan will have to pay 15% upfront of the said restructured asset that is being proposed to be bought. Also, they will get more time to do due diligence before bidding for such loans. In addition to this, ARCs shall also get 6 months to plan recoveries from NPAs as against a year earlier. Such sweeping changes are likely to bring in more transparency and remove imperfections prevailing in the market.

As per the financial daily, Society of Indian Automobile Manufacturers (SIAM) has released data of automobile sales for the month of July. As per this data, the domestic passenger car sales grew by 5.04% YoY for the month July. The motorcycle sales were up by 6.17% YoY for the same period. The two-wheeler category witnessed growth of 13.73% YoY for the said month. The total sales of vehicles across the categories grew by 12% YoY during the month.

Movers and shakers during the week
Company1-Aug-148-Aug-14Change52-wk High/Low
Top gainers during the week (BSE-A Group)
Suzlon Energy212312.0%37/6
Cummins India6066619.0%706/365
Adani Enterprises4214547.8%585/126
Hexaware Technologies1381454.9%180/111
Top losers during the week (BSE-A Group)
Bhushan Steel395219-44.4%504/219
Syndicate Bank145128-11.6%179/61
Core Education1412-9.4%28/11
GMR Infra2926-9.4%38/12
UPL Ltd.332304-8.5%359/130
Source: Equitymaster

Now let us move on to some corporate developments in India Inc.

As per a leading business daily, Cairn India has been questioned by one its minority shareholders in relation to related party transaction that apparently has undermined minority interest. Life Insurance Corporation of India (LIC), the second largest shareholder in Cairn India (after the promoter Vedanta Group) with 9.09% stake, has sought more information from the company regarding US$ 1.25 bn loan given to parent company Sesa Sterlite for two years. As per LIC, the loan has been given at a time when Cairn itself needs money for its expansion plans. Further, the money has been disbursed at very attractive terms to its parent. When two year fixed deposit can fetch close to 9-9.5% interest p.a., the company will only receive interest at the rate of 3.5% p.a. LIC has sought explanation as to how the loan would benefit shareholders of Cairn India. The loan information details were revealed by the company in its June 2014 result, which led to concern among many institutional investors who sold their holding in the company. Cairn India stock has declined by about 9.5% since then.

Special utility vehicle (SUV) major Mahindra & Mahindra Limited (M&M) is expected to tie up with France automobile major Peugeot. The tie up is expected to cover technology sourcing, mutual sharing of production capacity at both locations (India and France), as well as significant investments. As per industry sources, talks are underway between the companies and once finalized it could be a big deal in the automobiles industry. It will enable facility swap across the two continents for the auto majors. M&M will allow Peugeot to use its facility for the former's Indian debut. Similarly, M&M will use one of Peugeot's Europe plant to establish local production presence. The deal will also help M&M to source engine technology mainly diesel engine and diesel hybrid technology, where M&M already has a long standing relationship with Peugeot.

Tata Steel is ramping up its capacity in England in order to meet rising customer demand. Currently, its nominal capacity is 170,000 tonnes per year from the English plant where it is planning expansion. Teeside facility at Redcar is where the company is planning to undertake expansion. Tata Steel has already invested GBP 8.5 m in this facility. With the installation of new equipment at the plant the production is likely to get a boost. The facility manufactures products that serve wide variety of construction and infrastructure projects. The company has also opened another warehouse there and installed various equipments that shall reduce handling time and costs and thereby improve efficiency.

Mumbai-based pharma major Lupin has signed a marketing pact with South Korea's LG Life Sciences to launch its anti-diabetes drug in India. According to the agreement, Lupin will launch and will be responsible for the marketing and sales of LG Life Sciences' Insulin Glargine, a novel insulin analogue, under the brand name BasugineTM. It must be noted that Insulin Glargine is indicated for the treatment of adult patients with type 1 diabetes mellitus or in type 2 diabetes mellitus. This deal will help Lupin further strengthen its diabetes portfolio. As per IMS MAT data reported in the daily, the overall diabetes market size within the Indian pharmaceutical Market (IPM) stands at Rs 60.32 bn and is growing at 18% year-on-year.

As per a leading business daily, the coal ministry is considering the report on restructuring of Coal India. The report has been submitted by consultant Deloitte for suggesting possible restructuring of Coal India. The company at present produces about 80% of domestic coal production and has failed to meet its production target numerous times. There has been rapidly increasing demand for coal. Earlier, the ministry has said it won't be splitting the company, but will smoothen it to improve the performance. In FY14, the company produced 462 m tonnes of coal as compared to set target of 482 m tonnes.

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

FMCG major Nestle India has announced its financial results for the quarter ended June 2014. During the quarter, the company reported 9.3% YoY growth in the topline, with net sales standing at Rs 24,189.1 m. Operating profit remained almost flat at Rs 4,908.6 m during the quarter as higher expenditure led operating margins to contract from 21.9% in 1QFY14 to 20.2% in 1QFY15. Other income rose substantially by 50.1% YoY to Rs 231.2 m. Depreciation and interest expenses declined by 5.1% YoY and 55.7% YoY respectively. At the bottomline level, net profit increased by 6.1% YoY to Rs 2,878.6 m. Net profit margin contracted from 12.2% in 1QFY14 to 11.8% in 1QFY15.

India's leading two-wheeler maker Hero MotoCorp has announced its results for the quarter ended June 2014. During the quarter, the company's net sales stood at Rs 69,994 m, higher by 14.2% YoY. Operating income grew by 3.5% YoY to Rs 9,472 m as operating margins dropped from 14.9% in 1QFY14 to 13.5% in 1QFY15. At the bottomline level, net profit grew marginally by 2.6% YoY to Rs 5,627.6 m. Net profit margin contracted from 8.9% in 1QFY14 to 8% in 1QFY15.

Titan has announced its results for 1QFY15. The company's net sales fell by 7.6% YoY during the quarter. Segment wise, jewellery revenue fell by 10.1% YoY; Watches segment grew by 10.4% YoY. The seemingly poor performance in the jewellery segment was due to the high base effect of the same quarter in the previous financial year wherein the segment had witnessed a 47% growth in sales when gold prices had fallen sharply. 'Others' segment which includes precision engineering, eyewear and accessories grew by a marginal 3.8% YoY. Total raw material cost as a percentage of sales this quarter have decreased from 78.4% in 1QFY14 to 75.7% in 1QFY15. This has led to decrease in operating expenditure by 8.6%, which is more than the fall in sales. Due to lower operating expenditure, operating profit has increased by 5.1% YoY despite a fall in top line. As a result, EBITDA margin has increased to 8.3% YoY in 1QFY15 from 7.3% in the corresponding quarter of previous year. While deprecation cost grew by 66.6% YoY, Interest cost grew by 105.3% YoY during the quarter. Impacted by substantial increases in depreciation and interest costs, profit after tax fell by 2.9% YoY during the quarter..

Pidilite Industries announced its results for 1QFY15 as well. The company reported a 20% YoY growth in revenues while profits grew by 5% YoY. Growth in revenues was led by its consumer bazaar business (revenues up 21% YoY; 83% of sales), while its industrial products division grew by 16% YoY. However, the company's margins took a hit, falling to 17.9% from 20.3% earlier largely due to higher input costs. As highlighted by the company's management earlier, the sharp spike in the key input costs (vinyl acetate monomer) was the key reason for the rise in input costs. The effect of the same was however expected to cool down over time as the company was looking at taking certain measures such as price hikes, amongst others, to curb the effect of the same. Further, profit growth would have been higher had it not been for the voluntary retirement scheme payment during the quarter.

In the week to come, the earnings season will draw to a close. Markets will continue to be influenced by geopolitical concerns as well as the US fed's QE taper. However, investors will do well to ignore short term fluctuations in the markets and remain invested in fundamentally sound companies with good long term prospects.

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