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Global markets end lower this week
Sat, 27 Sep RoundUp

The global markets ended the week lower on concerns regarding the end of the US Fed's QE program. Geopolitical concerns in the Middle East also weighed down markets. In the US the benchmark Dow Jones Industrial Average (DJIA) closed the week lower by 1%. However, it must be kept in mind that the US markets haven't corrected in any significant manner since the bull market began in March 2009.

In Europe, the relief surrounding the result of the Scottish independence vote was short lived. European indices like the French CAC, British FTSE and the German DAX ended the week lower by 1.5%, 2.7% and 3.1% respectively. European markets remain concerned over the Eurozone slipping back into recession. Also, European nations have begun to join the US in taking military action in the Middle East and this has created fresh uncertainties in the markets.

Along with global indices, the Indian indices too closed lower this week. The BSE-Sensex was down by 1.7%. The Supreme Court's Coalgate verdict as well as the deferral of the decision on gas prices impacted market sentiment. On a positive note, S&P upgraded India's credit outlook to stable from negative while re-affirming the country's BBB- credit rating.

Key world markets during the week
Source: Yahoo Finance

Among the sectoral indices, the FMCG index (up 0.9%) was the only gainer this week. Realty (down 8.2%), BSE Small Cap (down 6.1%) and capital goods (down 4.6%) were the top sectoral 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.

The global rating agency, Standard & Poor's Ratings services has revised its outlook on India to stable from negative. The rationale for the upgrade stems from the fact that the country's improved political scenario is quite favorable for reforms which could not only propel economic growth but also improve fiscal management. The agency is also convinced about effective implementation of the Reserve Bank of India's Monetary Policy. The agency also mentioned that it will raise the rating if the economy reverts back to 5.5% GDP growth every year, and fiscal, external or inflation metrics improve. However, the rating might be lowered if the government's structural reform agenda stalls and the economic growth do not accelerate or the fiscal and debt ratios fail to improve.

After two years of sluggishness, car makers are gearing up for the upcoming festive season in October. It is worth noting that for the first time in a decade, festivals like the Durga Puja, Idu'l Zuha, Dusshera, Diwali, Dhanteras, Bhai Duj, Chhat and many regional festivities have fallen in the same month. Car makers are thus expecting that this will give a big boost to car sales during the month. Customers will witness higher discounts and dole out of goodies during the festival period as well as launches of feature-rich new cars with appealing designs. It must be noted that 2.39 lakh passenger vehicles were sold in October 2013.

In a major setback to the energy sector, the Cabinet Committee on Economic Affairs (CCEA) has deferred its decision on revising gas prices. A decision is now delayed until November. While the oil ministry favors remunerative gas price that will boost investments in exploration and production, the Power Ministry does not want the rates to be hiked by more than 25% over the current price to avoid the huge rise in electricity tariffs. The rise in gas prices will further impact the prices of auto gas and cooking gas. And with State elections coming up, the Government does not want to take risks. This is a negative development for firms like Oil and Natural Gas Corporation Ltd. (ONGC).

The big news that had an impact on the Indian markets was the Supreme Court judgment which cancelled 214 of 218 coal block allocations. It had declared these as illegal back in August. This move is expected to have major implications on the energy, metals and mining sectors. Also, it is worth noting that only four blocks linked to big power projects have been spared. Thus, all private firms allotted coal blocks by various governments between 1993 and 2011 have lost their mining rights. And now the government is free to auction or allot the blocks to central firms. The court's decision hinges on the fact that the government had underpriced coal mines and had effectively given away as much as US$ 33 bn or in windfall gains to companies in the process. This scandal came to be known as 'Coalgate'. It must be noted that India is acutely suffering from low coal supplies which it needs to fuel power plants.

The national pricing pharmaceutical authority (NPPA) of India, has withdrawn the price control order on 108 drugs. Some time back, NPPA's order had broadened the scope of price control even to drugs outside of the National list of essential medicines (NLEM). The order was to cap prices of a list of 108 cardiovascular and diabetes drugs, not part of NLEM. This had created uproar from the industry, which also led to several lawsuits filing contesting the order of reducing the prices. However now the authorities have decided to withdraw this order and hence the notification given during the July 2014 order ceases to be valid. Among the various companies, Sanofi India had large part of its portfolio exposed in cardiac and diabetes therapies and was expected to get impacted the most. Among the other pharma companies Vis; Abbott India, Cipla, Sun pharma, Ranbaxy, Lupin were also expected to get impacted on the back of this event. This new order of withdrawal will be a big relief for the pharma players, especially for Sanofi whose revenues were expected to get impacted the most.

Movers and shakers during the week
Company19-Sep-1426-Sep-14Change52-wk High/Low
Top gainers duringthe week (BSE-A Group)
GSK Pharma2,5002,7048.2%3,054/2,352
GSK Consumer5,0565,2674.2%5,487/4,064
HCL Tech.1,6701,7152.6%1,734/1,034
Top losers duringthe week (BSE-A Group)
Suzlon Energy2014-29.9%37/6
Jaiprakash Asso.3427-19.2%90/24
Jaypee Infratech2621-18.8%42/16
Andhra Bank8067-16.3%90/24
Source: Equitymaster

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

India's leading automobile manufacturer, Mahindra & Mahindra (M&M) has launched a new version of its successful sports vehicle utility (SUV) Scorpio. The company has made this launch 12 years after its first model was rolled out. The new generation Scorpio, which comes with numerous add-on features, is priced between Rs7.98 lakh and Rs 11.46 lakh (ex-showroom Mumbai). Not only in India, the Scorpio brand has a good market share, but also in international markets Vis Chile, Peru and South Africa; Scorpio has established its brand. The first version of Scorpio was launched in 2002, since then the company has sold over 4.5 lakh units. The launch of new version is intended to sustain the rising competition. Various automobile companies have geared up with the new launches in order to increase their market shares.

The Department of Telecommunications (DoT) has proposed that Loop Mobile and the Telecom Enforcement, Resource and Monitoring, the arm of the DoT will notify Loop's current subscribers that their network operator will cease to exist once the permit for Mumbai expires in November and those customers need to port out to other network providers. Loop Mobile did not buy back airwaves from auctions this February, which implies it would shut shop and the customers will no longer receive network. This move will affect the Bharti Airtel - Loop Mobile deal and might delay the process. Although both companies did not give financial details of the deal, it is believed Bharti Airtel paid Rs 70 bn for Loop, which is considered to be a slump sale as Loop has about 3 m subscriber and about 25,000 cell sites. However, the current DoT's move may affect the financials of the deal. And it comes when Bharti Airtel, has already started making calls to Loop's subscribers asking them to gather the requisite forms which are needed for porting out to Bharti Airtel's network.

India's largest lender State Bank of India (SBI), is likely to put on hold the plan to merge its subsidiaries. The bank may also decide not to merge all of its five associate banks, allowing some of them to continue with the existing structure. Reportedly, the bank will have to take various regulatory approvals before going ahead with the merger which are still pending. SBI first merged its associate, State Bank of Saurashtra with itself in 2008. Two years later, it merged State Bank of Indore. Among the other five associate banks, State Bank of Bikaner and Jaipur, State Bank of Mysore and State Bank of Travancore are listed entities. SBI was widely expected to merge either State Bank of Patiala or State Bank of Hyderabad. While the bank is still working on plans, before going ahead, the bank will also make assure that it follows Basel III norms. Thus one can expect, merger to take place over a period of time after SBI has taken the necessary steps for the merger to become more value adding.

Engineering major Larsen & Toubro (L&T) has launched a foreign currency convertible bond (FCCB) issue worth $200 m. The FCCBs have a face value of $2 lakh per bond and carry a coupon rate of 0.675% (payable semi-annually). The bonds will have tenure of five years and one day and the initial conversion price has been fixed at Rs 1,916.5 per share. The company has applied for the FCCBs to be listed on the Singapore Exchange Securities Trading Ltd and also in-principal approval for the shares to be issued on conversion of FCCBs to be listed on the NSE and BSE.

Oil and Natural Gas Corporation (ONGC) will be commissioning its long-delayed petrochemical project at Dahej in Gujarat in June 2015. The plant, that would manufacture polymers and plastic products, was originally planned to go on-stream by the end of 2012 but the completion dates have been pushed ahead twice. Due to the long delay there has been an escalation in the project costs from Rs 124.4 bn estimated in 2006 to Rs 271.2 bn as per present estimates. As per the company, the delay in commissioning has been on account of contractors and project cost has inflated due to interest payout during the construction phase. For the purpose of building the mega petrochemical complex, ONGC had set up ONGC Petro-additions Ltd (OPaL) in 2006. As per the original agreement, ONGC was to hold 26% stake in OPAL with Gas Authority Of India Ltd. (GAIL) and Gujarat State Petroleum Corporation (GSPC) having stakes of 19% and 5% respectively and the remaining 50% offloaded to strategic investor or offered in an initial public offering. However, due to cost and time overrun, the equity stakes of both GAIL and GSFC have come down but both the companies will not infuse further money in the project. ONGC has no plans of bringing an IPO and will be funding the balance equity stake in OPaL. Till date, ONGC has invested Rs 16.6 bn in OPaL.

Going forward, the markets will look for direction from both global and local factors. Economic data from the west will be closely watched as well as any comments from the US Fed concerning their post QE policy. Back home, the markets will watch out for any positive policy announcements from the government. The Prime Minister's US visit will also be tracked closely. However, investors should not be swayed by short term market movements and should rather invest in stocks that are fundamentally sound for the long term.

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