Weak Rupee sinks Indian equity markets

Sat, 17 Aug RoundUp

   Previous Close   

Good global economic news was plentiful this week: The US had fewer initial jobless benefits claims than in any week since the first week of October 2007. The Eurozone economy grew for the first time in seven quarters. Portugal had an unexpectedly strong second quarter, emerging from its two and a half year recession. Greece posted a surplus. Japan's economy grew by 2.6% in the second quarter, after a 3.8% expansion in the first.

However, the surge of positive economic news led many investors to focus on the downside. US stocks endured a second week of losses as traders appeared to consolidate recent gains in anticipation of an increase in interest rates later this year. As they had the previous week, investors appeared to interpret good economic data as a signal that the Federal Reserve would trim its purchases of long-term securities-namely, Treasury bonds and agency mortgage-backed securities. Rising interest rates generally weigh on stock prices because they threaten to slow borrowing and economic activity. Increased rates can also result in greater competition for stocks from higher-yielding bonds.

In Europe, it has been years since Greece and Portugal reported much positive economic news. That changed with Greece's report of a budget surplus and Portugal's second quarter GDP rising 1.1% (more than 4% annualized). However, Portugal's economic output remained 2% below its level of a year earlier.

For the week, US stocks fell broadly, but European and Asian benchmarks had mixed results. Among global stock markets, the US stock market posted the largest fall (down by 2.2%) while the Brazilian stock market posted the highest gain (up 3.3%).

The Indian equity markets closed the week in the red. On Friday, the benchmark shares indices BSE Sensex and the NSE-Nifty witnessed the highest single day drop since July 2009 amid heavy selling by foreign institutional investors after RBI imposed fresh restrictions coupled with the weakening rupee which plunged to a new all-time low of Rs 62/$ in intra-day trade.

The Indian stock markets witnessed strong buying in Astrazeneca Pharma, Essar Oil, Muthoot Finance, & Gitanjali Gems shares during the week.

Source: Yahoo Finance

Majority of the sectoral indices ended in the green with Consumer Durable (up 3.8%) Pharma (up 2%), witnessing the maximum gains while Banking (down 3.6%), Capital Goods (down 3%), Oil and Gas (down 2.2%) witnessing maximum losses.

Source: BSE

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

The Government of India has released data on inflation. The WPI (Wholesale price index) inflation has increased to 5.79% for the month of July 2013 vs. 4.86% in June 2013. This is the highest in last five months. As per a leading daily, the increase in inflation is on account of rise in the food prices and costly imports as the rupee has fallen to record low levels. The WPI inflation for the food articles category has witnessed a sharp rise to double digits at 11.9%. This was largely driven by soaring prices of onions, cereals and rice. The rise in the prices of the food articles category is for the third consecutive month. Inflation in onions was up by a sharp 145%. The prices of other vegetables have also gone up by 46.59% for the said period. The manufactured items category witnessed a marginal increase of 2.8% in July 2013. This was still higher than June 2013 when it had increased by 2.75%. In the non-food category, which include items like fiber, oil seeds and minerals, inflation declined by 5.51%.

The Government has recently announced a hike in the import duties on gold, silver and platinum in order to curb non essential imports and reduce the pressure on the current account deficit (CAD). This marks the fourth round of custom duty hikes on gold in the last 20 months. It is also likely to trigger an increase in gold smuggling. The import duty on gold and platinum has been increased to 10% from 8%. For silver, the duty has been raised by 4 percentage points to 10%.Finance Minister Mr. P Chidambaram has recently indicated that the Government may announce more measures to restrict other non-essential imports, including luxury items to restrict CAD (current account deficit) to 3.7% of gross domestic product (GDP) in 2013-14. In the last fiscal year, CAD stood at 4.8% of GDP. Finance Minister has said that the Government intends to restrict gold imports to 850 tonnes this fiscal against 950 tonnes last fiscal. He has also announced some measures that are likely to boost capital inflows into the country. These include asking public sector financial institutions to raise funds abroad through quasi-sovereign bonds, liberalizing external commercial borrowing guidelines and NRE (non-resident external account)/FCNR (foreign currency non-resident) deposit schemes.

Many companies reported their quarterly earnings during the week. Let us take a look at the performance of some of them.

Auto major Mahindra & Mahindra (M&M), has declared its first quarter earnings for the financial year 2013-2014 (1QFY14). The company witnessed a healthy 29% YoY growth in its net profits at Rs 9.38 bn on account of robust other income and strong tractor business. The total income from operations has grown by a mere 7% YoY to Rs 100.2 bn in the first quarter. The EBITDA (Earnings before Interest, Depreciation and Amortization) grew by 16% YoY to Rs 12.87 bn while operating profit margins increased to 12.8%. The other income performance improved vis-a-vis previous year and it amounted to Rs 1.64 bn. Dividend from subsidiaries also contributed to the strong other income show. The automobile industry in India has been facing severe challenges and the first quarter witnessed shrinkage of 2%. The company has sold 56,969 passenger vehicles during the quarter and has maintained its leadership position.

Movers and shakers during the week

Company	9-Aug-13	16-Aug-13	Change	52-wk High/Low
Top gainers during the week (BSE-A Group)
Astrazeneca Pharma	678	832	22.7%	1940/595
Essar Oil	52	63	21.4%	96/46
Muthoot Finance	80	95	18.9%	246/74
Gitanjali Gems Ltd	59	70	17.7%	650/57
Aurobindo Pharma	161	186	15.5%	203/106
Top losers during the week (BSE-A Group)
Multi Commodity	295	243	-17.6%	1617/241
Financial Tech	178	151	-15.2%	1212/104
Hindustan Copper	64	56	-12.8%	311/43
Bhel	118	106	-9.8%	272/105
Gujarat Fluoro	230	208	-9.5%	395/207

Source: Equitymaster
Britannia Industries has announced its first quarter results for the financial year 2013-14 (1QFY14). The company's consolidated net sales increased by 14.2% year-on-year (YoY) to Rs 15,396.2 m during the quarter. Operating profits shot up 72.9% YoY to Rs 1,377.1 m owing to lower expenses and better realisations. As such, operating profit margins improved by 300 basis points (3%) from 5.9% in 1QFY13 to 8.9% in 1QFY14. Other income increased by 31.1% YoY to Rs 142.4 m. While depreciation charges increased by 18% YoY to Rs 195.7 m, interest expenses declined by 59.6% YoY to Rs 42.1 m. On the back of healthy growth and profitability during the quarter, net profit increased by 92.6% YoY to 895.8 m. Net profit margins improved from 3.4% in 1QFY13 to 5.8% in 1QFY14.

ONGC has announced its first quarter results for the financial year 2013-14 (1QFY14). The company's net sales declined by 4.3% year-on-year (YoY) to Rs 192,183.1 m during the quarter. Operating profits dropped by 30.3% YoY to Rs 69,202.5 m owing to higher operating expenses, increase in subsidy burden and one-time charge towards employee pension benefits. As such, operating profit margins contracted from 49.2% in 1QFY13 to 35.8% in 1QFY14. Other income increased by 15.2% YoY to Rs 11,961 m. While depreciation charges increased by 16.8% YoY to Rs 23,325 m, interest expenses dropped sharply from Rs 293.1 m in 1QFY13 to Rs 2.1 m in 1QFY14. At the bottomline level, net profit declined by 33.9% YoY to 40,159.8 m. Net profit margins declined from 30.1% in 1QFY13 to 20.8% in 1QFY14.

Tech Mahindra has declared its first quarter results for the financial year 2013-2014 (1QFY14). The company witnessed an 8.9% QoQ growth in its revenues (in rupee terms). In terms of US dollars, the growth was 3.9% QoQ. The company's operating margins improved to 21.1% as compared to the 20.5% in the previous quarter (4QFY13). Net profits grew by 7.6% QoQ during the quarter. Excluding the gain on impairment made during 4QFY13, net profits increased by 36.3% during the quarter. The company's active client base stood at 567 at the end of June 2013 as compared to 516 at the end of March 2013.

Tata Steel declared its 1QFY14 results yesterday. The company reported 3% YoY decline in consolidated sales in 1QFY14 due to subdued global steel demand. The company reported 90.5% YoY growth in consolidated net profit at Rs 11.4 bn for 1QFY14 due to significant decline in tax expenses. Tata Steel's standalone net sales were up 6.15% at Rs 93.7 bn. The net profit for standalone India business of Tata Steel remained flat YoY at Rs 13.6 bn.

Several indicators that show signs of business confidence in the US rose recently, reinforcing the view that the US economy is gathering momentum. This along with strong economic data from the Eurozone gives hope of a recovery in the world economy. The strong jobs data in the US also increased the likelihood that the US Federal Reserve will begin cutting its massive monetary stimulus, known as quantitative easing, as early as September, favoring the US currency. This might be bad news for India as foreign capital might flow out of the country and batter the Rupee further.