Global markets ended the week on a steady note followed by key positive developments during the week. The US markets remained buoyant as the weaker than expected jobs data assuaged worries of potential rise in interest rates. Major indices across the globe remained positive.Opting for unconventional monetary policy measures, the European Central Bank (ECB) surprised the markets by reducing all three of its main interest rates. The ECB monetary policy decision was a welcome step for the European economy. Even the Bank of England on Thursday, 4 September 2014, left its bank rate unchanged. This in turn helped boost the European markets, with economic powerhouse Germany topping the pack of winners.
Eased global monetary policies have helped spark a surge of funds into emerging markets. In Asia, most markets ended the week on a strong note with China followed by Japan and India leading the pack of gainers. The buoyancy in Indian equity markets continued with the Indian benchmark index closing up by 1.5% up for the week gone by.
Barring FMCG, sectoral indices in the Indian markets ended the week on a firm note. Consumer durables (up 5.2%) and Capital goods (up 3.4%) indices led the pack of gainers. BSE Mid Cap and BSE Small Cap indices also ended the week on a strong note.
Now let us discuss some of the economic developments of the week gone by.
The central government will be commissioning a study to provide a boost to the export revenues of herbal drug manufacturing industry. The Department of ayurveda, yoga,unani, siddha and homeopathy (Ayush) will commission a detailed study by a market consultant. The study will determine the demand supply dynamics of medicinal plants in India and international markets, get up-to-date data on cultivation, land available and required and production. The National Medicinal Plant Board will oversee the project and create a policy framework for infrastructure, incentives and other mechanisms. This data will then be used by the government to create special economic zones to promote the sector. This move is likely to benefit companies like Dabur, Emami (Zandu), Himalaya and Charak and a host of small entities and cultivators of herbal plants.
As per a leading financial daily, rating agency Moody's is believed to have mentioned that the chances of an upward revision in the country's sovereign ratings stands limited. That's because the agency believes that despite the positive economic growth in the first quarter, the high fiscal deficit and the sticky inflation continue to dampen the upward momentum in the sovereign rating. While the 1Q GDP stands at 5.7%, the CAD stands at 1.7% of GDP. Moreover, the government has committed 4.1% of fiscal deficit target for the current fiscal, but has already exhausted over 61% of the fiscal's target in the first four months itself. The rating agency has further stated that he macroeconomic outlook will improve if the government is able to "implement policies that ease inflationary pressures and increase infrastructure investment", as put forth by the financial daily.
As per a leading financial daily, India's telecom operators, have written to the Reserve bank of India (RBI) regarding the issue of payment banks. The RBI had issued draft guidelines in July 2014, for setting up payment banks to boost financial inclusion in the country. The RBI had asked for public comments on the guidelines by 28 Aug 2014. The telcos have replied that the proposed regulatory structure governing payment banks is too restrictive. The telcos have argued that as they will not be lending the money that they collect as a payment bank, they should not be subjected to restrictions pertaining to promoter holding, FDI norms and the maximum deposit per customer. They have also asked the RBI to regulate non-financial aspects of this business, like customer service and KYC norms etc, without forcing telcos to separate the financial and non-financial parts of the business of payment banks.
On expectations of an economic revival, Foreign Institutional Investors (FIIs) have been favoring investments in midcap stocks of late. Expected reforms that will encourage a revival of the growth of the economy by the new NDA government have been driving this trend. As per reports, FII ownership for mid caps is at an all time high of 15% currently. This moved up higher by 50 basis points during the June 2014 quarter. FIIs now own US$ 36 bn in stocks that constitute the BSE Mid Cap Index.
As reported by the Economic Times, the large housing finance companies and banks have brought back fixed-rate mortgages. As reported, ICICI Bank is offering home loans of up to 10 years at a fixed rate of 10.25%, which is slightly higher than the 10.15% figure it charges for its floating home loans. HDFC is believed to be providing such loans (particularly fixed) at rates of 10.25% as well. As reported by the business daily, the aim of bringing back such loans is to lock a sizeable home loan portfolio which can be funded by floating infrastructure bonds. A month ago, the RBI allowed lenders to raise infrastructure bonds equal to the home and infrastructure loans on their books. Given that infrastructure bonds are relatively a cheaper source of finance this would be an option the lenders would be going for.
Now let us move on to some corporate developments in India Inc.
As per a leading financial daily, Maruti Suzuki reported a 27% YoY jump in sales to 1.1 lakh units in August 2014. Backed by robust performance by the compact car segment (Swift, Ritz, Dzire, Celerio) that saw a 53% surge in sales as well as a 114% jump in super compact segment (Dzire Tour) sales, passenger car sales grew by 30% YoY to 82,832 units in August 2014. On the export front, sales increased by 10.3% YoY to 12,472 units for the month.
A leading financial daily has reported that the state-run United Bank of India turns out to be the first bank to declare debt-ridden Kingfisher Airlines and its promoter Vijay Mallya as willful defaulters. This implies that the entity and its authorities would not be able to borrow from the bank in future. The Untied bank's exposure to Kingfisher Airlines was around Rs 3.5 bn as part of consortium led by State Bank of India. Subsequently, other lenders namely; State Bank of India, IDBI Bank and Punjab National Bank are also expected to follow suit. The consortium of 17 banks has an outstanding debt of about Rs 40.22 bn. Banks in February last year had decided to sell a portion of the collateral with them, including shares of its group companies United Spirits Ltd and Mangalore Chemicals & Fertilizers Ltd, Mallya's Goa villa, Kingfisher House in Mumbai and the Kingfisher brand as part of the recovery process.
As per a leading financial daily, Bharti Infratel is said to be eyeing the acquisition of Vodafone and Idea towers in India. Reports state that the telecom tower infrastructures provider is in initial talks with both the companies for part or complete buyout while exploring various fundraising options. For the deal to go through, Bharti Infratel would require to raise capital to the tune of Rs 50 bn. The current cash flows of the company stands above Rs 20 bn. The company aims to scale up in terms of number of towers. While the deal completion date stands as November, the process may get delayed due to high valuations.
As per a leading financial daily, Tata Power's Ultra Mega Power Plant (UMPP) at Mundra has been certified by Indian Register Quality Systems(IRQS) for quality, environment and OHSAS Management Systems. The certification recognizes that the company has processes and systems in place to ensure healthy and safe work environment. Presently, Tata Power along with its subsidiaries have an installed generation capacity of 8,613 MW. The company has a presence in all segments of power sector including generation (thermal, hydro, solar, wind), transmission, distribution, trading.
As per a leading financial daily, India's leading passenger vehicle maker Maruti Suzuki will pay royalty on its future car models to Japanese parent firm Suzuki Motor Corp in Indian rupees instead of Japanese yen. The move is aimed at insulating the company from forex fluctuations. In addition, the company has been augmenting its research and development capabilities and playing a greater role in joint product development with Suzuki. As a result, the royalty payout is also set to reduce. Maruti paid a royalty of Rs 6.89 bn (6.2% of net sales) in the first quarter ended June 30, 2014. The company expects the royalty paid to Suzuki to decrease starting with its upcoming compact SUV as its engineers enhance their role in the joint development of future products. It is worth noting that Maruti is investing Rs 20 bn on a research and development facility, including a test track at Rohtak in Haryana. The company is set to enter the SUV segment early next year.
India's second largest IT services exporter Infosys has inked a five-year contract with BP (earlier known as British Petroleum) to improve the oil major's IT processes across key operations. The Bangalore-based IT company will provide both IT and business consulting services to BP. It is a framework agreement that covers exploration, production, refining, marketing and business functions (including HR). The financial details of the deal have not been disclosed. It must be noted that this is a new agreement with BP and replaces all other agreements Infosys has with BP.
India's fifth largest software firm, Tech Mahindra, has signed a multi-year agreement with Bombardier Aerospace for providing engineering solutions. Bombardier is an existing client of the IT firm and this new agreement will boost the partnership further. As per the agreement, Tech Mahindra will support Bombardier's existing IT operations and will also develop new products for the company. This deal will enable Tech Mahindra to work with Bombardier globally but a large part of the operations will be based in Montreal, Canada. Tech Mahindra has significant domain expertise in the manufacturing/aerospace verticals and plans to develop Canada as its aerospace headquarters where it will employ about 1,200 people in five years time.
Going forward the global economic data and the Central bank stance across globe will decide the further jitters in the market. Weak global cues and an overnight rally in Brent crude oil prices have already weighed down the Indian indices towards the end of the week gone by. Therefore, the world and the domestic markets are expected to remain choppy for the week to come. That said, we recommend investors to exercise caution and do not get carried away by short term gyrations. Instead focus on the cherry-picking of value stocks so as to build-up a resilient investment portfolio.