Global stock markets took a beating this week as majority of the world indices ended in negative territory. The US markets continued to remain bearish amidst speculation over the drawback of quantitative easing by the Federal Reserve. However the negative impact was somewhat reduced by a 13.4% fall in the US new home sales in July that raised hopes of a likely delay in the stimulus tapering. The key European markets including UK and France ended weak on concerns over cut in stimulus measures. However, the German market was up by 0.3%. This was aided by a strong 0.7% expansion in the German economy for the June quarter that raised hopes of the euro zone recovery.
Barring Japan, all the Asian indices have fallen during the week. Indian equity markets had been facing the brunt of the plunging value of the rupee against the dollar. However in the last two trading sessions, the markets showed some recovery with the rupee plugging the downfall on Friday after the finance minister said that the currency was undervalued. The rupee settled at about 63.36 to USD$ after it hit a peak value of 65.5 to USD$ on 22nd August. The Reserve Bank of India has said that it would continue with its monetary tightening steps until the rupee stabilizes.
Majority of the sectoral indices ended in the red with Pharma (down 3.6%), Auto (down 3.5%) and Realty (down 3.2%), witnessing the maximum losses. The metal stocks witnessed a huge spurt clocking a jump of 12.4% during the week. IT (up 1.4%), Oil and gas (up 0.4%), Power (up 0.2%) were few of the other gainers.
Now let us discuss some of the economic developments of the week gone by.
In a positive development, the retail inflation for farm and rural workers eased marginally in July, despite high prices of food items and cloth. According to the data released by the Labour Bureau, the rate of inflation based on food index of Consumer Price Index- Agriculture Labour (CPI-AL) and Consumer Price Index-Rural Labour (CPI-RL) stood at 12.8% and 12.6%, respectively. The all India retail inflation index for farm and rural workers in July increased by 11 points each to stand at 740 points and 741 points respectively. The rise in index varied from state to state. In case of farm workers, the index recorded an increase that varied between 4 to 18 points in various states. Karnataka with 822 points topped the index table, whereas Himachal Pradesh with the index level of 583 points was at the bottom.
With an aim to raise funds through disinvestment in public sector units (PSU's), the Finance Ministry has asked ministry of mines to expedite the Cabinet note on the stake sale in Hindustan Zinc (HZL) and Bharat Aluminium Company (BALCO). It has also proposed that stake sale should be done via the auction route. HZL and BALCO are erstwhile public sector firms that were sold to mining major Vedanta Resources during 2001-03. The government has a residual stake of 29.5% in Hindustan Zinc and 49% in BALCO. The divestment program could bring in over Rs 130 bn to the government. The government may have to obtain a no objection certificate from Vedanta for the auction sale.
Now let us take a look at news from Corporate India.
The cost of funds for banks have gone up after Reserve Bank of India's (RBI) has taken a series of steps to curb the fall of Indian rupee against the US dollar. The private sector banks in turn have been hiking their lending rates. Axis Bank has increased its benchmark lending rate by 0.25% (25 basis points). As such, the bank's base rate (or minimum lending rate) stands revised to 10.25% effective from August 19, 2013. As a result of the rate hike, all categories of loans (other than exceptions permitted by RBI) will become dearer by at least 0.25%. Home, auto, corporate and all other loans that are linked with the base rate will get costlier. In early August, the country's second largest private sector lender HDFC Bank had increased the base rate by 0.2% (20 basis points) to 9.8%.
Reliance Industries and British Petroleum (BP) have made a new gas condensate discovery in the Cauvery Basin and is the second gas discovery in the block. RIL is the main operator with 70% equity share whereas BP has a 30% share. As per preliminary evaluation of well data and fluid samples, the gas condensate is present in the reservoir interval with a gross column of 143 meters. The well reached its total depth in early August and Reliance has conducted drill stem test (DST) to evaluate the potential of the discovery.
Hero MotoCorp has been going through a tough time as subdued auto sales have impacted its performance in the past several quarters. Therefore the company is pulling all stops to become technologically independent. It has successfully test-fired at least two new home-grown engines- 100 cc engine and a 250 cc engine. Earlier, the company was reliant on Honda for sourcing engines. This testing is a part of its process of coming up with several new launches in next few months. It is noteworthy that over 80% of its bike volumes come from 110cc and sub 110cc models. The company has three technology partners - AVL of Austria, Erik Buell Racing (EBR) of the US and EE of Italy. The company is also setting up a world-class technology & integrated R&D Centre at Kukas, Jaipur. Hero MotoCorp recently forayed into the Latin American market through the launch of Hero range of two wheelers in Peru. The company announced its global vision to be achieved by 2020. Under this, the company wants to surpass 100 m units in cumulative production and achieve annual sales of 12 m units. The company is also targeting sales reach in more than 50 countries and wants to set up more than 20 manufacturing and assembly plants across the globe.
Tata Motors, in a bid to protect its falling market share in the passenger car market, has embarked on adding new features and improving the perceived value of Nano with every subsequent model launch. According to data from Society of Automobile Manufacturers (SIAM), the market share of Tata Motors in passenger cars fell to 8.9% in July 2013 from 11.8% in March 2013. The company is currently operating at a capacity utilization of 48%. The company is planning to add features such as power steering, improved interiors and exteriors, high fuel efficiency to Nano as well as launch its CNG model to attract the urban youth. Nano sales has not been able to pick up despite discounts and freebies offered by the company on the model.
In a major consolidation move in the paints industry, Asian Paints has acquired additional 25.7% stake in Berger International Limited, Singapore (BIL), through its subsidiary Asian Paints (International) Limited (APIL). As a result, the shareholding of APIL has increased to 75.8% in BIL. APIL wants to make BIL a wholly owned subsidiary of APIL and delist from Singapore Exchange Securities Trading Limited. Therefore APIL will come out with a voluntary unconditional cash offer to acquire the balance 24.2% shares of BIL. According to Asian Paints the delisting of Berger will impart it greater flexibility to manage, develop and optimize the use of the management and capital resources and facilitate the implementation of any operational change. Asian Paints has no plans to make any major changes to the business of Berger.
The current slowdown in the domestic markets has led steel companies to focus on exports that are benefitting from the steep rupee depreciation. Reportedly companies are eyeing markets in Middle East, North Africa, South Asia and Europe. Steel Authority of India (SAIL) plans to double exports to 7 lakh tonnes from 3.7 lakh tonnes in FY13. Essar Steel wants to raise exports by over 25% to 1.4 m tonnes. Jindal Steel and Power (JSPL) wants to increase exports to 15% of the increased production base in FY14 and sees huge opportunities for exports particularly in Middle East and North Africa.
The global stock markets remained in a cautious mode over uncertainty as to when the cutback in stimulus measures will take place. Even the Asian markets ended the week on a low note with economic growth faltering in India and China. The slide in the Indian rupee has stabilized after a series of measures. Going ahead, a more credible and stable economic environment will decide the future course of the Indian equity markets.