After a weak performance last week on heightened geopolitical tensions, most of the stock markets across the world have bounced back for the week ended 14th August. Concerns of pullback in stimulus measures were quelled by weak macro-economic data from around the world. Factors such as economic contraction in Japan, fall in Chinese loans, a dovish stance by Bank of England and fall in US retail sales all put together eased concerns of any monetary tightening in the medium term. This in turn led to the recovery in the markets around the world.
The Japanese market was the biggest gainer (up 3.6%) backed by heavy buying by the country's giant pension fund. Even the Indian markets were up by 3.1% backed by improvement in business sentiment as indicated by the industrial growth for the period April-June 2014 as well as easing in wholesale price inflation. Among European markets, the German and UK markets were up by 2.6% and 1.9%, respectively. Even the US market yielded positive gain of 0.6% for the week.
Now let us discuss some of the economic developments of the week gone by.
Industrial output witnessed slowdown in June. The Index of Industrial Production (IIP) grew by a slower 3.4% as compared to 4.7% growth registered in May. However, the IIP for the cumulative period April-June 2014 grew by 3.9% as compared to a contraction of 1% in the corresponding period last year. This signals significant improvement in the overall business sentiment. But inflation woes continued to plague the economy. The consumer price inflation (CPI) has risen to 7.96% in July as against 7.46% in June primarily due to higher food and beverage prices. High inflation continues to remain a headwind as the economy struggles to get back on track.
In a move that will help improve liquidity in the cash starved real estate sector, SEBI has issued the final guidelines for Real Estate Investment Trusts (REITs) and Infra Investment Trusts (InvITs). As per the new norms, both REITs and InvITs can now be listed on the stock exchanges. These financial instruments can invest in income producing real estate and infra assets. Their earning can be distributed among shareholders. To make REITs an attractive proposition, SEBI has reduced the minimum asset size requirement by 50% to Rs 5 bn. While listing, the size of initial offering should be at least Rs 2.5 bn and free float of at least 25%. REITs will be allowed to invest only in commercial properties and no REIT will be allowed to invest more than 10% of funds in under construction properties. The taxation aspect has also been clarified. REITs will be taxed only when projects are sold or investment is monetized.
The recent measures announced in the Union Budget such as revival of stalled projects, higher spending on infrastructure such as roads and highways and emphasis on building smart cities are being banked upon by capital goods companies to revive growth. Engineering behemoth, Larsen & Toubro (L&T) expects 75% of the order inflows from the domestic sector by the end of FY15. For the June 2014 quarter, L&T witnessed 44% of its order inflows from international projects. As per the company, sectors such as water, urban transportation and power transmission are expected to see a smart revival. The company also expects investments from the government in industrial corridors and opportunities arising from revamping of smaller airports. Higher domestic orders are expected to improve the margin profile of capital goods companies as international orders are won on stiff competition keeping margins under tight leash.
Now let us move on to some corporate developments in India Inc.
For a stronger focus on growth, Hindustan Unilever (HUL) has separated its home and personal care portfolio in two separate business segments. The two business segments will have separate business directors. The home and personal care segment accounts for 78% of the company's overall revenues out of which soaps and detergent segment has a share of 49% whereas personal product segment has a share of 29% of total sales.
Britannia is planning to sell its loss-making wholly owned subsidiary, Daily Bread Gourmet Food. The subsidiary has 29 stores in Bangalore that sells bakery products and reported revenue of Rs 200 m and a loss of Rs 20 m in FY14. Britannia acquired majority stake of 51% in Daily Bread in 2006 and remaining stake in the next 2 years. However, the business has not been performing well. Britannia has made impairment provision of Rs 200 m in the value of investment in the subsidiary which was earlier valued at Rs 270 m. It plans to invest Rs 1.5 to 2 bn over next 2 years to expand its production capacity.
On account of the economic slowdown, a number of thermal assets have become stressed and have been put up for sale. NTPC has been offered 55,000 MW of stranded thermal assets out of which 7,000 to 8,000 MW are being evaluated by the company for acquisition. The company has appointed a consultant to aid in its assessment process. NTPC is the country's largest power producer having an installed capacity of 43,128 MW, including group companies, while an additional 22,414 MW capacity is currently under construction. The company plans to add 14,228 MW by FY17. However Central Electricity Regulatory Commission's new tariff order has adversely impacted the company's profits.
With an aim to pare its debt burden, Tata Power is planning to sell its non-core investment. The company's net debt stood at Rs 386 bn in FY14 vs net debt of Rs 359 bn in FY13. Its non-core investments include stakes in Tata Teleservices (Mah), Nelco, Tata Ceramics, Tata Projects among others. In fact, the company has signed an agreement to sell 30% stake in PT Arutmin mine in Indonesia which is valued at about US$ 510 m.
Tata Motors has been working to turn around the domestic business and regain lost market share in the passenger car segment. The company has launched its first passenger vehicle in the last four years. The new compact sedan named 'Zest'. The car has been competitively priced at Rs 4.64 lakh for the petrol variant and Rs 5.64 lakh for the diesel variant (ex-showroom Delhi). The car is a Tata-Fait JV produced in Ranjangaon, Maharashtra. Tata Motors faces stiff competition from the Honda Amaze, Hyundai Xcent and the Swift Dzire. The company also wants to revamp Tata Nano and re-launch as 'Smart City Car' next year. The brand image of the car was hit due to delay in deliveries and incidents of fire catching that dented safety aspects for the car. The company has taken steps to safe-proof the car against fire catching incidents The company hopes to see a turnaround in Nano's fortunes post refurbishment that includes possible exports to international markets.
Let's talk about few quarterly results released during the week.
Tata Motors has declared its results for the June 2014 quarter. On the back of new launches and higher offtake, net sales for the quarter increased by 38% YoY. Better performance of Jaguar Land Rover (JLR) across the geographies also fueled this robust growth. The revenues from JLR witnessed robust growth of 54% YoY. The profits were up by 213% YoY. Better product mix and richer geography mix helped in better realizations.
State-run Steel Authority of India (SAIL) has announced its financial results for the quarter ended June 2014. During the quarter, net sales increased by 10.8% YoY to Rs 111,956.8 m. Operating profit grew by 33.7% YoY to Rs 11,298.2 m during the quarter. Operating profit margin expanded from 7.4% in 1QFY14 to 8.9% in 1QFY15. Interest expenses rose substantially by 59% YoY to Rs 3,049.5 m. At the bottomline level, net profit increased by 17.5% YoY to Rs 5,298.8 m. Net profit margin expanded from 3.9% in 1QFY14 to 4.2% in 1QFY15.
However, Tata Steel has announced lower profits for the quarter ended June 2014. The net sales for the quarter grew 11% YoY aided by higher volumes. The operating profit for the quarter grew 15% YoY. The consolidated net profit for the quarter registered a whopping decline of 70% YoY on account of increased finance cost, higher tax rate and exceptional charges of Rs 2.6 bn on provision for impairment of non-core asset. The company sold its entire stake in Dhamra Port resulting in profit Rs 13 bn but wrote off goodwill and other assets of Rs 16 bn of its joint venture Rio Tinto Benga (Mauritius), thus leading to net negative impact of Rs 2.6 bn.
State-run oil marketing firm HPCL has turned in the black for the quarter ended June 2014. During the quarter, net sales increased by 16% YoY to Rs 591,517.1 m. The company reported an operating profit of Rs 5,898.4 m during the quarter as against an operating loss of Rs -7,524.9 m during the corresponding quarter last financial year. Interest expense declined by 67.8% YoY to Rs 1,295.4 m. At the bottomline level, the company reported a net profit of Rs 460.4 m as against a net loss of Rs -14,604.8 m in 1QFY14.
State-run mining giant Coal India Ltd has announced its results for the June 2014 quarter. During the quarter, consolidated net sales increased by 8.1% YoY to Rs 177,995.4 m. Operating profit stood at 42,809.5 m, growing in line with the topline growth. Operating profit margin expanded marginally from 24.0% in 1QFY14 to 24.1% in 1QFY15.. Net profit margin remained constant at 22.7% during the quarter.
Tata Power has posted a dismal financial performance for quarter ended June 2014. Consolidated total income fell 6%YoY. This was largely due to lower realizations from its coal plants and lower volumes traded by Tata Power trading company. At the bottomline, the company has reported a consolidated net loss of Rs 1.1 bn. This was due to a poor operational performance in the quarter. Operating profit fell 14% YoY due to lower sales and realizations.
Going ahead, domestic markets will continue to be governed by improvement in macroeconomic environment as well as geopolitical concerns globally that can threaten to derail the recovery in the short run. However, investors should not be carried away by these short term deviations but rather focus on investing in companies with sound fundamentals.