The major global stock markets ended the week in the red barring Brazil (up 2.9%) and China (up 1.1%). Among the key ones, the stock markets in US registered 1.5% losses over the week as investors are worried about Federal Reserve tapering down the stimulus programme. The Fed officials have indicated a cut down in the bond purchase programme if the US economy progresses as expected. During the week, the dollar rebounded from seven week low.
It was a mixed week for Asian stock markets. The stock markets in China gained 1.1% over the week. The stock market performance was boosted by positive economic data as China reported a 9.7% year on year (YoY) growth in the factory output and 13.2% YoY growth in the retail sales. Also, the inflation remained steady and the data on exports was positive. However, the stock markets in Japan led the losses (down 5.9%) over the week. While the stimulus programme in Japan seemed to be working well so far, the investors are worried if the comeback is sustainable. The fears of US Fed winding down the stimulus programme also led to the weakness in Japan's stock markets.
It was a mixed week for European stock markets as well. The stock markets in France were up by 0.8% over the week. This was despite subdued data on industrial production. The positive data flow on Chinese economy boosted the sentiments in European stock markets. However, Germany and UK lost 0.8% and 1.0% respectively over the week.
The Indian equity markets were the second biggest losers with BSE Sensex losing 2.0% over the week. The fall was on account of various reasons like winding up of the QE , the country's record current account deficit and rupee touching new lows against the dollar. The rupee now stands at 60.86 against the dollar.
There was a spate of quarterly results announced by companies. While some companies reported robust numbers, there were many companies which reported muted earnings growth for the June 2013 quarter. This too hurt investor sentiments.
The sectoral indices ended the week on a mixed note with stocks in the capital goods (down 6.1%) and consumer durables (down 4.8%) leading the losses. However, the stocks in the metal (up 5.3%) and realty (up 3.0%) space led the gains.
Now let us discuss some of the economic developments of the week gone by.
Dr. Raghuram Rajan has been appointed as the next governor of the Reserve Bank of India (RBI) for a period of three years. Mr. Rajan is known predicting the financial crisis in 2005 that hit the developed world three years later. Mr. Rajan is currently the chief economic advisor. He will take over from D Subbarao on September 4. He is the youngest governor of India's central bank since Sir CD Deshmukh, the first Indian governor who served in this capacity from August 1943 to June 1949. Mr. Rajan is expected to push forward some of the reforms he suggested in his 2008 report on financial sector reforms and pull back the economy out of current state of weak growth and a depreciating currency.
India's private sector activity contracted for the first time in over four years in July amid evidence of falling new business and a difficult economic climate. The HSBC India Composite Output Index, which maps both services and manufacturing activity, fell to 48.4 in July, down from 50.9 in June, indicating an overall contraction. The contraction in business activity across the Indian private sector is the first since April 2009. Meanwhile, the services sector, witnessed even a sharper fall. The services PMI contracted first time in 20 months to 47.9 points in July from 51.7 points in the previous month. A reading above 50 points indicates growth, while that below 50 signifies a contraction in the sector.
In another important economic development, a parliamentary panel has given approval to Goods and Services Tax (GST) bill while suggesting amendments to provisions relating to tax structure and dispute resolution mechanism among others. This has been done to speed up the implementation of the bill. The new bill is likely to replace multiple indirect taxes levied by states and the centre with just one tax. Under the GST regime, both the centre and states will have powers to tax supply of goods and services from primary stage to final consumption. The new GST system is expected to help all stakeholders by preventing leakage, cascading of taxes and lowering the incidence of tax.
Bharat Heavy electrical Ltd (BHEL) has announced results for the first quarter ending June 2013 (1QFY14). The company has reported around 24% year on year (YoY) decline in the net sales. On a quarter on quarter (QoQ) basis, the net sales have declined by around 66%. The slowdown has mainly been account of sluggish prospects in the domestic power sector. Besides, cheap imports of power equipment have adversely impacted the company. BHEL's order book at the end of the quarter stood at around Rs 1,086 bn, down 19% YoY (down by around 6% QoQ). The net profit for the quarter declined by 50% YoY. This was despite a decline in the 16.5% YoY decline in the total expenses.
Mining major Coal India Ltd has announced results for the first quarter ending June 2013 (1QFY14). The net sales for the quarter were almost flat at Rs 165 bn. The company produced around 102.89 million tonnes (MT) of coal in the quarter (versus 102.47 MT in 1QFY13). While shipments grew by 2.05% YoY, they were below the target. For the first time in five quarters, the company reported a decline in the quarterly net profit. The net profits for the quarter declined by 16.5% YoY. This was mainly on account of lower e-auction realisations, higher wages and costlier diesel. The growth for the company has slowed down for years due to delays in environmental and regulatory approvals for mining projects. The management expects to achieve production targets of 5.8% YoY for the year and benefit in the near future from a price hike in end May 2013. As of now, the company is not contemplating a price hike.
Gujarat Gas announced its results for the quarter and half year ended June 2013 recently. The net sales for the quarter were down 2.5% on a year on year basis (YoY). The operating profit for the quarter witnessed impressive growth of 86.1% YoY with margins at 20.7% as compared to 10.8% in 2QCY12. The net profits for the group were up by 92.8% YoY during the quarter, with margins at 13.4% as compared to 6.7% in 2QCY12. Margin expansion came in mainly due to improvement in realizations, lower share of high cost spot LNG and softening of RLNG costs. Further, higher other income propped up the profit all the more during the quarter.
Now let us move to some other news from the corporate world.
Hero Motocorp , India's largest motorcycle maker plans to launch 12 variants in the current fiscal and also planned to expand in 10 more international markets. The company has aimed to double its vehicle sales to 100 million by 2020. Further, it plans to have 20 manufacturing plants worldwide by that year. Post splitting from the partner Honda Motor Co in 2011, Hero has been compelled to invest heavily into export operations and technology tie-ups, even as domestic sales have remained subdued. The company continues to focus on bolstering volumes amidst increasing competition including that from its erstwhile partner. However, given the uncertain outlook with respect to product launches post 2014 (Hero has a technology arrangement with Honda until 2014), likely increase in wage costs and increasing competition, Hero may have a tough path to tread ahead.
Ranbaxy has signed an agreement to set up a greenfield manufacturing facility in Malaysia. This will be Ranbaxy's second manufacturing plant in Malaysia and will entail a cost of US$ 35 m. Ranbaxy forayed into the Malaysian market three decades ago where it has been selling generic medicines. In addition to servicing the domestic market, the facility will also export products to the Association of Southeast Asian Nations (ASEAN), Middle East, Europe, Sri Lanka, China and other nations. The new facility in Malaysia would manufacture dosage forms including tablets and capsules primarily in the cardiovascular, anti-diabetic, anti-infective and gastrointestinal segments. After the commissioning of the plant, Ranbaxy's total output in Malaysia will increase from 1 bn doses/annum to 3 bn doses/annum.
In a key development in the steel sector, the government has relaxed norms for steel imports by major industrial project developers. The Directorate General of Foreign Trade (DGFT) in a notification has said that major infrastructure/ industrial projects having size of more than Rs 10 bn can import steel and steel products without quality certification. However the imported products should have quality certification from the recognized Quality Certifying Body of the country of origin. The exemption will be valid for two years and will be applicable to projects in the infrastructure, petroleum, manufactured products involving high-end technologies, nuclear reactors, defence, chemicals, petro-chemicals and fertilizer sectors. The easing import regulations have come in the backdrop of the domestic steel companies demanding a hike in the import duty to prevent steel dumping in the country. Reportedly, steel imports surged by 69% to 1.5 m tonnes in the first two months of FY14.
According to a business daily, the Planning Commission of India has directed the power ministry to provide a report on the difficulties being faced by Indian project developers due to poor performance of Chinese equipments. This directive has come soon after the Central Electricity Authority (CEA) reported to the power ministry that new power plants, which have been built on Chinese equipments, are performing badly. The Planning Commission has asked the power ministry to examine the CEA report. Chinese companies are believed to have orders worth Rs 400 bn for supplying equipments for upcoming capacities in the country. There have always been speculations that Chinese equipments are lesser efficient and not suitable for Indian coal. If the findings of the report come to be true, it may discourage developers from importing Chinese equipments. This in turn could be beneficial to several domestic engineering companies such as BHEL, Larsen & Toubro (L&T), Thermax and BGR Energy.
It was a mixed week for major global stock markets. While the indications of Fed cutting down on bond purchase programme weakened the sentiments across markets, the positive data on Chinese economy eased investors' concerns on China's slowdown derailing the global economic growth. The Indian stock markets remained weak on economic concerns, rupee depreciation and were also impacted by corporate earnings announcements. Some more quarterly results are expected to be declared in the following week and are likely to influence the movement of the indices. However, investors should not get too affected 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.