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Global Markets End the Week on a Positive Note Despite North Korea's Aggression
Sat, 16 Sep RoundUp | Prasheel Vartak, TM Team

Benchmark indices in US registered good gains over the week. The Dow Jones Industrial Average posted its biggest weekly gain of 2017. Wall Street largely shrugged off reports showing an unexpected drop in US retail sales last month and the first drop in industrial output since January, both in part due to the impact of Hurricane Harvey. Market participants however are keeping a keen eye on the retail sales data, attributing the current drop to be transitory in nature.

Earlier this week, North Korea fired a second missile over Japan, drawing criticism from global leaders but barely moving shares as market participants await the next catalyst - the Federal Reserve's meeting on September 19-20.

Moving on to European markets, benchmark indices in Germany and France posted gains of 1.7% and 2% during the week on the back of easing global tensions. The FTSE100 in the UK however, fell by over 2.2% during the week amid weak macroeconomic data and fresh selling letter in the week after a terrorist attack in London.

Financial markets in Asia ended on a mixed note. Benchmark indices in Singapore and China corrected marginally by 0.6% and 0.3% respectively during the week. While, the benchmark index in Japan surged by over 3.3% despite aggression from North Korea.

Key World Markets During the Week

Back home, BSE Sensex gained a 1.8% during the weeks supported by a rally in pharma and capital goods stocks. Retail inflation as measured by the Wholesale Price Index (WPI) rose sharply to 3.2% in August, as compared to steady rise from 1.8% in July 2017. Wholesale inflation rate, measured by the wholesale price index (WPI), is a marker for price movements in bulk buys for traders and broadly mirrors trends in shop-end prices. The index portrays new series of WPI data released by the government earlier this fiscal, with 2011-12 as the base year, replacing existing the base year of 2004-05. Food articles turned out to be major drivers as the data showed that prices of food articles rose by 4.4% in August on a yearly basis. Vegetable inflation stood at 44.9%. The BSE Healthcare index was a key driver of the domestic indices this week and was up by 4.8% over the week.

BSE Indices During the Week

Now let us discuss some key economic and industry developments during the week gone by

As per a leading financial daily, a UN report has lowered India's GDP growth forecast for the year 2017 to 6.7% from 7% in 2016. The report has said that the informal sector which still accounts for at least one-third of the country's GDP and more than four-fifths of employment, was badly affected by the government's 'demonetisation' move, and it may be further affected by the rollout of the Goods and Services Tax (GST) regime.

Referring to India and China, UNCTAD's Trade and Development 2017 report noted that at the current levels of growth, the countries are unlikely to serve as growth polls for the global economy in near future.

It pointed out that India's growth performance depends to a large extent on reforms to its banking sector, which is burdened with large volumes of stressed and non-performing assets (NPAs), and there are already signs of a reduction in the pace of credit creation. It added that banking sector in India is saddled with NPAs of over Rs 8 trillion.

It also said that the gradual slowdown of China is expected to continue as it moves ahead with rebalancing its economy, towards domestic markets. Thus, it noted that the dependence on debt makes the boom in China and India difficult to sustain and raises the possibility that when the downturn occurs in these countries, deleveraging will accelerate the fall and make recovery difficult.

In the news from GST space, as per an article in the Economic Times, the tax department is planning to conduct searches and surveys across India to bring more companies under the tax regime.

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The searches could start as early as next week and would have focus on checking if any company was purposely avoiding to come under the Goods and Services Tax (GST) umbrella or if there was a genuine problem.

As per the news, tax officers would conduct physical verification of premises in several areas and check the GST certificates in cases where they have been issued.

This marks a positive development and will benefit the economy as well as the organized players who have been facing competition from unorganized markets.

Speaking of GST, the Goods and Services Tax became the order of the day in July at the start of this month. And all these months we have been subjected to a relentless propaganda by the government and the supporters of the GST, on how it will change our world, only for good.

GST unifies more than a dozen central and state levies including excise duty, service tax and VAT, and the revenue generated is to be split equally between the Centre and states.

Our colleague Vivek Kaul, has studied the finer aspects of the GST and predicted what could go right and wrong.

Download his special report - The Good, the Sad and the Terrible (GST).

The GST Council raised the vehicle cess by less than the maximum possible limit on Saturday.

The GST Council on Saturday left untouched the rates on small cars and hybrid vehicles. But mid-sized cars will now attract a cess that's 2% higher, large sedans 5% higher, and SUVs 7% higher. Initially, the cess was proposed to be raised by a maximum of 10%.

The above increase on mid and high segment cars approved by the GST Council came into effect from last week.

As per the news, the revised rates mean a partial reversal of the price benefits buyers enjoyed after the GST rollout.

The total tax incidence on vehicles in the midsized, large and SUV categories will be lower by 1.6%, 3.8% and 5.3%, respectively, as compared to pre-GST levels. However, luxury carmakers such as Audi, Mercedes-Benz and BMW will be more affected by the increase in the cess, as these companies had benefitted the most from the initial decline in total levies.

Automobile manufacturers may face some hiccups on the back of this development. Executives from auto industry have said that they may re-evaluate their business plans. Meanwhile, we'll keep you posted on the recent developments from this space.

Moving on to news about the economy. According to data released by the Central Statistics Office (CSO), retail inflation as measured by the Wholesale Price Index (WPI) rose sharply to 3.2% in August, as compared to steady rise from 1.8% in July 2017.

Wholesale inflation rate, measured by the wholesale price index (WPI), is a marker for price movements in bulk buys for traders and broadly mirrors trends in shop-end prices.

The index portrays new series of WPI data released by the government earlier this fiscal, with 2011-12 as the base year, replacing existing the base year of 2004-05.

Food articles turned out to be major drivers as the data showed that prices of food articles rose by 4.4% in August on a yearly basis. Vegetable inflation stood at 44.9%.

Fuel and power segment, too rose by 9.9%, from 4.4% in July.

The Reserve Bank of India (RBI) in its monetary policy review meeting last month, announced a cut its policy rate by a quarter of a percentage point.

The decision to cut rates is in line with the RBI's neutral monetary policy stance, tracking the rate of inflation.

The RBI's monetary statement in June had projected quarterly average inflation in the range of 2-3.5% in the first half of fiscal 2018, and 3.5-4.5% in the second half. Now it expects inflation to be about 4% by the year end. As long as inflation follows this track, the possibilities of rate cuts during this fiscal year remain slim.

In news from economy, as per a leading financial daily, a joint study carried out by the industry body Associated Chambers of Commerce & Industry of India (ASSOCHAM) and EY have said that the government should focus more on ways to push manufacturing sector growth in order to The joint report titled 'Sustaining India's growth by accelerating manufacturing' has stated that even though rollout of the Goods and Services Tax (GST) regime has addressed several regulatory issues, state governments must look into the issues like bureaucratic obstacles, obstructive regulations and policies to boost manufacturing sector.

Adding further, it noted that manufacturing sector in each Indian state and union territory (UT) has the potential to grow either directly by setting up new industries or by creating ancillary facilities, infrastructure and necessary forward-backward linkages to existing ones.

The ASSOCHAM-EY study further said that for states, the best way to grow is to focus on industries where a particular state has competitive edge over others in terms of raw material availability, demand, user industries, logistics and availability of skilled manpower, besides geographical location.

It also said that the government's Make in India initiative will help elevate country's manufacturing sector as it aims to increase share of manufacturing in the GDP to 25% from current 16% and to create 100 million new jobs by 2022.

In the latest development, the Central Statistics Office released the data on the Index of Industrial Production (IIP) and consumer price index (CPI)-based inflation yesterday.

The IIP data showed that economic activity was yet to pick up. Food items becoming more expensive and some services turning pricier because of the goods and services tax (GST) meant CPI-based inflation remained high.

In July, the IIP grew by only 1.2% over the same month last year, recovering slightly from a contraction of 0.1% in June.

The low expansion in July this year seems to be due to negligible growth of 0.1% in the manufacturing sector that had seen low demand due to the roll out of the goods and services tax.

However, electricity generation grew by a robust 6.8% in July while mining expanded by 4.8%.

Meanwhile, retail inflation rose to a five-month high of 3.4% in August due to costlier vegetables and fruits. The consumer price index (CPI) based inflation stood at 2.4% in the previous month.

The August inflation number is the highest since March 2017, when it was recorded at 3.9%.

However, the Finance Ministry continued to be hopeful that the benefits of demonetisation and the roll out of the goods and services tax will increase the size of the formal economy and bring in more revenue.

But whether the gains accrue this fiscal or over the medium term is yet to be seen.

One shall note that earlier this year, four state banks viz. Syndicate Bank, Canara Bank, Vijaya Bank, and Dena Bank made presentations to the finance ministry on their merger plans.

However, the central bank expects inflation to rebound soon. The RBI's monetary statement in June had projected quarterly average inflation in the range of 2-3.5% in the first half of fiscal 2018, and 3.5-4.5% in the second half. Now it expects inflation to be about 4% by the year end. As long as inflation follows this track, the possibilities of rate cuts during this fiscal year remain slim.

Rate cut or not, at Equitymaster we do not attempt to predict how and when macroeconomic developments will unfold. Instead, we focus on the fundamentals and the underlying business strength of companies. The ValuePro team is always on the lookout for all-weather stocks whose fortunes are not tied to economic cycles.

Movers and Shakers During the Week
Company08-Sep-1715-Sep-17Change52-wk High/Low
Top Gainers During the Week (BSE Group A)
IPCA Labs42151823.2%656/400
Divis Labs70886922.8%1,380/533
63 Moons Tech738516.2%91/54
Andhra Bank515915.8%76/46
Sun Pharma47152411.2%795/433
Top Losers During the Week (BSE Group A)
Jaypee Infratech1715-13.1%25/6
Jayprakash Asso.2320-12.8%30/7
Central Bank10091-8.3%125/71
Reliance Coomunications2221-7.4%50/18
Oberoi Realty419396-5.4%436/256
Source: Equitymaster

Some of the key corporate developments in the week gone by

In news from the IPO space, IPO's of Capacit'e Infraprojects, Matrimony.com and ICICI Lombard General Insurance, opened during the week.

So, do these companies have sound business models? Are they leaving enough money on the table for investors?

We have released our IPO note on the above IPOs. You can access the same in our IPO section.

With so many new IPOs set to hit the market, it is prudent to be ready with a strategy to take advantage of the frenzy.

It's good to be very selective when investing in IPOs. Carefully analyse each company for its own merits and don't give in to the hype surrounding the public offering.

That's Ankit Shah's approach at Equitymaster Insider. He keeps a sharp eye on developments in the IPO space and keeps his readers up to date on the big-ticket IPOs.

Ankit and his team of researchers constantly reference this handbook on investing in IPOs. You can download a copy for yourself. It's free. Just click here.

Hindustan Unilever was in focus during the week as the company joined a chorus of foreign consumer packaged goods firms betting on India becoming their largest market in the coming years.

India could become Unilever's biggest market, Paul Polman, chief executive of the company, said in an interview with the Economic Times on Monday but did not specify a timeline. Reportedly, India contributes 9% to Unilever's total sales of £4.5 billion.

As per an article in a leading financial daily, a deal to merge the European steel operations of Tata Steel and ThyssenKrupp could be struck this month, after Tata removed a significant obstacle by offloading its UK retirement fund.

Tata Steel had earlier announced that Britain's pensions regulator has approved a regulated apportionment arrangement (RAA) in respect of the British Steel Pension Scheme (BSPS).

Estimated to be worth 15 billion British pounds, the pension fund threatened to drag the company into insolvency, making it less attractive to a potential buyer of its assets.

As part of the RAA, a payment of 550 million pounds from Tata Steel UK has been made to the BSPS and shares in Tata Steel UK, equivalent to a 33% of economic equity stake in the company, issued to the BSPS Trustee.

Reportedly, both the groups are now close to a memorandum of understanding, paving the way for a detailed look at one another's books and detailed negotiations.

One shall note that, a merger would create Europe's second-largest steelmaker behind only ArcelorMittal and represent a major consolidation move in a sector plagued by overcapacity.

InterGlobe Aviation Ltd., which operates IndiGo airlines, announced an institutional share sale of 33.6 million equity shares to reduce promoter holding and meet minimum public shareholding norms.

The qualified institutional placement (QIP) will include a fresh issue of 22.4 million shares, and an offer for sale of 11.2 million shares by certain promoter entities.

At its Monday closing share price of Rs 1,220.30, the sale could be worth around Rs 40,975 million. The fresh issue of shares could fetch the company around Rs 27,317 million.

According to the rules, companies need to ensure minimum public shareholding of 25% within three years of listing. InterGlobe has to reduce its promoters' holding from 85% to 75% to meet the regulatory norm.

IndusInd Bank was in focus during the week after the bank entered into an agreement with Bharat Financial Inclusion for a potential merger.

The agreement provides for a mutually agreed exclusivity period for due diligence and discussions to evaluate a potential strategic combination between the two companies.

The transaction will be subject to due diligence approval of the boards, shareholders, statutory/regulatory and other third-party entities, as required under the applicable laws.

The two financial firms had long been speculated to be interested in a deal, with multiple media reports saying previously, it could come in the form of a share swap.

IndusInd Bank is India's sixth-largest private sector lender by assets and has a market value of about $16 billion, while Bharat Financial Inclusion, formerly known as SKS Microfinance Ltd, is valued at more than $2 billion.

The development comes at a time when Bharat Financial is facing stiff competition from banks, both universal and small finance banks.

If the deal goes through it would be interesting to see how both the institutions are able to match their synergies and grow in the long term.

As per an article in a leading financial daily, Tata Chemicals is in advanced stages of discussions with Indorama Holdings BV, Netherlands (subsidiary of Indorama Corporation, Singapore), for the potential sale of its phosphatic fertiliser business located at Haldia and the trading business comprising of bulk and non-bulk fertilisers.

The two companies have signed a mutually agreed exclusivity agreement in this regard which expires on 31 October 2017.

The transaction, if materialised, would involve the transfer of Haldia plant, trading Business along with immovable, movable properties, working capital and product brands but excluding outstanding subsidy amounts.

Further, if the deal goes through, Tata Chemicals will exit the fertiliser business completely. The company is expected to receive consideration in the range of Rs 4 billion to Rs 5 billion.

In August last year, Tata Chemicals sold its urea plant in Babrala, Uttar Pradesh, to the Indian unit of Norway-based Yara International for Rs 26.7 billion. The company is awaiting final NCLT approval for the deal.

In the ongoing inter-connect usage charges (IUCs) saga between the incumbents and the new entrants in the telecom sector, Idea Celluar warned the Telecom Regulatory Authority of India (TRAI) that any move to lower the IUCs would turn the entire telecom industry sick barring Reliance Jio.

IUC is levied by a telecom operator on incoming calls from other networks and the charges are passed on to subscribers.

Incumbent telecom operators have been demanding higher IUC with reasoning that every call on the network incurs a cost and expenses of an incoming call on their network should be borne by the operator from whose network the call has originated.

The telecom giant urged TRAI to put industry call minutes into two buckets for a "correct" assessment of costs and then decide on the merits of reducing IUCs.

Idea Cellular in a written communication said that TRAI should bifurcate current industry minutes into those terminating on the voice over long-term evolution (VoLTE) networks used by Jio, and other networks like 2G/3G and 4G used by Idea, Vodafone and Bharti Airtel.

Idea Cellular estimated that over 95% of its calls terminate on the networks other than VoLTE

The letter said the regulator must review the weight of voice traffic volume between the two types of networks for a year and take the previous three months' traffic data as the basis and be reviewed in a frequency of 36 months.

Idea's communication to the regulator comes after reports that TRAI plans to reduce IUC to seven paise per minute and then to zero from the current 14 paise per minute. The earlier move to reduce IUC to 14 paise per minute has already been challenged by Idea in Gujarat High Court and by Airtel in Delhi High Court. Both cases remain pending.

And here's an update from our friends at Daily Profit Hunter...

The Nifty 50 Index traded on a positive note during the week. The index set the week with 37 point gap up and continued to trade up until mid-week almost hitting a new life high. The index traded sideways for the next two sessions. On Friday, the index dropped a bit as North Korea fired another ballistic missile over Japan. But it didn't sustain the dip for long and recovered immediately. It finally ended the weekly session with 1.48% gains.

We mentioned last week, the index is finding support from the channel's support line. The index bounced strongly from this support and traded higher. But it couldn't overhaul its previous life high of 10,138 which is acting as a resistance. If the index closes above this level, it might open up further upside. On the flip side, if it finds selling from this resistance, it might as well slip back to the channel's support line. You can read the detailed market update here...

Nifty 50 Index Traded on a Strong Note
Nifty 50 Index Traded on a Strong Note 

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Read the latest Market Commentary

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Mar 16, 2018 (Close)