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Global markets end on a weak note
Sat, 13 Sep RoundUp

Overall sentiment in the global markets remained weak as most of the developed markets ended the week in red. Less than a handful of Asian indices have managed to stay afloat during the week. The US markets adopted a cautious tone ahead of the Federal Reserve meet next week. Details of the quantitative easing and possible interest rates are expected to be announced during the Fed meet. Even energy stocks in the US were down as crude prices slid below US$ 100 a barrel and therefore overall markets were down 0.9% for the week. Even European markets ended lower on rising investor concerns as Europe and US implemented a new round of sanctions against Russia.

Some Asian markets have been able to trade positive during the week. The Japanese index was the biggest gainer up by 1.8% on the back of a weak yen. Even China, India and the Singapore markets were marginally up for the week.

The Indian markets remained barely positive because of weak macro data. Industrial production hardly expanded in the month of July and consumer inflation eased slightly to 7.8% in August from 8% in July.

Key world markets during the week
Source: Yahoo Finance

Midcap and smallcap stocks continued to perform well recording much higher gains than the broad BSE-Sensex. A large number of sectoral indices ended the week on a firm note. Auto (up 2%), FMCG (up 1.8%) and Banking (up 1.7%) indices led the pack of gainers. Oil & gas (down 0.8%), IT (down (0.6%) were among the major losers for the week.

BSE indices during the week
Source: BSE

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

Industrial activity continued to be a big dampener. The index of industrial production (IIP) recorded a growth of mere 0.5% YoY in July, the slowest in the last three months. The index had logged growth of 3.9% in the month of June. Manufacturing contracted by 1% while mining slowed down to 2.1% for the month. However, electricity has registered growth of 11.7% in July. The economic growth for April-June quarter has been at 5.7% and was the fastest in two years.

On a positive note, car sales in India grew for the fourth successive month, posting an increase of 15.16% YoY to 153,758 units in August. This makes even Society of Indian Automobile Manufacturers' (SIAM) believe that the auto sector is on the verge of turnaround; albeit gradual. The month-on-month numbers are seen to be improving gradually. For the period April-August 2014, car sales have grown by 5.24% YoY to 735,873 units. Despite high interest rates, car sales have been robust on account of positive sentiments and hefty discounts from the companies. Even motorcycle sales have seen an upsurge. According to SIAM, motorcycle sales during the month grew by 14.45% YoY to 910,312 units.

The government has cleared the decks for the divestment programme that it had announced in the Union Budget. The Cabinet Committee on Economic Affairs (CCEA) has approved stake sales for Coal India, ONGC and hydropower utility NHPC. At the current price levels, disinvestment in these companies is expected to meet budget target of Rs 434.25 bn. CCEA has cleared a 5% stake sale in ONGC in which the government currently holds 68.94% stake. This is likely to fetch over Rs 190 bn at current price levels. A 5% stake sale in steel maker SAIL is expected to fetch Rs 17 bn. CCEA has cleared a 10% stake sale in Coal India in which the government currently holds 90% stake. This could fetch the government close to Rs 240 bn at current prices. The proposed 11.36% stake sale in NHPC is expected to fetch over Rs 30 bn. In addition, the government also plans to divest 5% stake each in Power Finance Corporation (PFC) and Rural Electrification Corporation (REC).

With an aim to meet the short term asset-liability mismatches during the weekends, lenders led by State Bank of India have requested the Reserve Bank of India (RBI) to provide liquidity support through the liquidity adjustment facility (LAF) on Saturdays. While other clearing facilities such as RTGS and NEFT are operational on Saturdays, banks tend to face fund shortfall in case of a huge outflow.

Banks are allowed to borrow money through the liquidity adjustment facility at the repo rate which is at 8% now. Repo borrowings are capped at 25% of the net demand and time liabilities. Moreover, the daily requirements of 95% cash reserve (CRR) and 100% on the reporting fortnight poses liquidity challenges for the bankers. Therefore, bankers need to avail of the repo facility over the weekends.

Movers and shakers during the week
Company5-Sep-1412-Sep-14Change52-wk High/Low
Top gainers during the week (BSE-A Group)
Bhushan Steel106135 27.5%504/87
Torrent Power141165 17.1%173/69
MRF Ltd27,16231,138 14.6%31800/12700
Aditya Birla Nuvo 1,4391,624 12.9%1647/1030
Motherson Sumi388437 12.5%448/140
Top losers during the week (BSE-A Group)
J&K Bank171151 -11.4%200/108
Ranbaxy Lab652610 -6.5%667/297
Sun Pharma858806 -6.1%877/536
SAIL8480 -5.7%113/47
NMDC Ltd185176 -4.4%196/118
Source: Equitymaster

Now let us move on to some corporate developments in India Inc.

In line with the improvement in offtake in the domestic automobile market, Maruti Suzuki has revised upwards its sales growth projections for FY15. The company expects double-digit sales growth in the range of 12-16% for FY15. It had earlier projected sales growth of 7-8% for the year. Maruti Suzuki would be investing Rs 40 bn over the next five years for the development of at least five new products at the domestic Research & Development Centre. But the new products will continue to have platform and power trains from Suzuki Japan. The first model with substantial local content will be a sports utility vehicle to be launched in 2016. This development is significant as the company will have to shell out royalty lower than 5% for these new cars designed and developed in India.

Cigarette companies are likely to be hit by stricter provisions by the government against smoking. The government is contemplating to implement a proposal for banning the sale of loose cigarettes. This is likely to adversely impact cigarette companies as reportedly 70% of retail cigarette sale is in the loose form. The other measures suggested by the expert panel set up by the health ministry include raising the age limit for smoking, imposing a higher fine of Rs 20,000 for smoking in public spaces as compared to a fine of Rs 2,000 at present as well as making it a cognizable offence. Besides the expert panel has also suggested increase in penalty on manufacturers from Rs 5,000 to Rs 50,000 for violations in carrying pictorial warning signs on cigarette packs.

Regulatory woes faced by domestic pharma companies due to strict norms by US regulators seem to be far from over. In a latest development, Sun Pharma's facility located in Halol, Gujarat is undergoing a surprise USFDA inspection. This move was triggered as there have been instances of drug recalls in the US market. These drugs were manufactured in this facility. Reportedly, the plant contributes approximately 40% to US sales and approximately 25% to consolidated profits. Thus any negative development with respect to this facility can impact the company's overall performance. This plant was last inspected in September 2012.

Coal India has set aside Rs 8 bn as provision to guard against its coal grade slippages for supply made to state power major NTPC. There has been dispute between both the companies and ministry of finance has worked out a formula of about Rs 8 bn for mismatch in supply of coal from total sum of about Rs 16 bn for the grade slippage. However, differences between the two companies still remain. As such, NTPC has recently appointed a third party coal sampling team which will work independent of team appointed by Coal India at various loading points near the mines.

In order to diversify risk, State Bank of India (SBI) wants to increase the share of sales from international business from 18% at present to 25% over the next three years. For international operations, SBI wants to localize as much as possible. The bank is participating in syndications for local business and signing master risk participation agreements. The number of foreign offices of SBI increased from 186 in FY13 to 190 in FY14 across 36 countries. In FY14, the bank entered two new countries Botswana (Africa) and South Korea. Along with growing the share of the total asset base, the bank also wants to improve International Business Group's contribution to profits. For the quarter ended June 2014, SBI posted a 15% YoY increase in net interest income but net profit margin was down by 1% to 9.2% due to higher provisioning and lower non-interest income.

Tata Consultancy Services (TCS), has begun operations from its Japanese joint venture (JV) with Mitsubishi Corporation. The IT firm expects revenues to touch US$ 600 m from Japan in 2016. The July-Sep 2014 quarter will be the first quarter which will include revenues from Japan. TCS has a big first mover advantage among Indian IT firms in the country where the entire software industry is dominated by four large local firms. Global IT firms have found it extremely difficult to grow in Japan given serious language and cultural constraints as well as a lack of tie-ups with local firms. TCS has a 51% stake in its Japanese JV with IT Frontier Corporation (ITF), Mitsubishi's IT division.

On account falling price of coal in the international markets, Tata Power is expected to sell its balance holding of 25% in the Indonesian coal mines. The company's stake in the mines is valued at US$ 1 bn. Tata Power bought 30% stake in two Indonesian thermal coal producing companies along with related power infrastructure companies in 2007. While it sold 5% stake in the coal companies together with infrastructure companies, it still was left with 25% stake.

Going forward, global markets will eagerly watch for cues on quantitative easing from the Federal Reserve meeting scheduled next week. Even the ongoing tussle of US & Europe with Russia as well as falling price of crude on slow demand are expected to impact global markets. Back home in India, while the macro economic data continues to remain weak, a pickup in car sales has given some reason to cheer. Even government has kick-started its disinvestment programme to meet its target. Barring short term hiccups, the long term fundamentals of the economy remain intact. Therefore investors should not get swayed by short term jitters but rather focus on investing in fundamentally strong stocks.

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