Global markets witnessed the worst ever lows in the week gone by on account of concern over the global economy, conflicting views on the timing of the next policy move by the Federal Reserve, and headlines about the Ebola virus. This triggered tumult in financial markets and a bout of volatility not seen in years. Moreover, there was a growing sense of structural change in the oil market, as the unyielding rise in US shale oil production is expected to have an important bearing on oil prices going forward. After nearly a decade of worry over the scarcity of oil, some see a new era of abundance dawning, leaving Saudi Arabia and OPEC to determine where they draw a line under declining prices. After a four-month rout, Brent crude was up close to a dollar to above US$ 86 a barrel.
US stocks continued to face choppy session the entire week gone by but managed to stay above multi-month lows towards the week end, and the benchmark index closed down by 1.8% during the week.
Deflation has already hit five peripheral euro zone countries in September, including Italy and Spain, while a string of surprisingly weak German data showed the euro zone's power house is losing momentum. However, German benchmark index closed positive for the week, while the other European indices continued to languish in the red.
Underlying worries about slowing world economic growth kept investors on edge, hence Asian indices too faced a turbulent week. The Japanese index witnessed the steep fall (down 5%) on account of its floundering economy, followed by China and India.
Back home, the Indian equity markets witnessed a major correction for the week gone by putting the investors in a cautious mode. While few major IT companies have kick-started the earnings season, the weak global cues continued to dent the stock market momentum.
Barring banking (up 3.1%), all the other sectoral indices in India ended on a negative note. While realty index witnessed the steepest fall (down 10.2%), IT (down 5.1%) and consumer durables (down 3.2%) were the other leading losers during the week.
Now let us discuss some of the economic developments of the week gone by.
The Indian government is looking to speed up the process of auctioning 3G spectrum for telecom companies. The Department of Telecom (DoT) has asked the regulator TRAI to recommend a base price for the same. The government is currently in talks with the defense ministry to release 15 MHz of spectrum that can be auctioned. However, with the talks currently in a deadlock, the government is looking to speed up the other parts of the process. 3G usage is growing at an exponential pace in the country and the government is keen to meet its target of 600 m broadband customers by 2020. All leading telcos have also asked the government for a speedy resolution to the issue.
Telecom Regulatory Authority of India (TRAI) has suggested a 10% hike in the base price for spectrum in the 1800 megahertz (MHz) band across the country. TRAI has based its valuation on the price discovered in the last auction of airwaves in February. It has recommended that the minimum price for 1MHz of spectrum in the 1800MHz band be set at Rs 21.4 bn. For spectrum in the more efficient 900MHz band, the regulator has set a base price of Rs 30 bn per MHz in the 18 circles where the airwaves will be auctioned. It has further said that that the government should allow telecom operators that offer services based on the more popular GSM technology standard to use the 800MHz band. The latter is currently reserved for operators using the rival CDMA standard. The government, which has so far raised Rs.1.8 trillion through four spectrum auctions, expects to start the next auction in the 800MHz, 900MHz and 1800MHz bands from 3 February 2015.
The Wholesale Price Index (WPI) inflation for the month of September has declined to a 5-year low of 2.38% as against 3.7% in August. The fall has come on account of the Food Price Index that fell steeply to 3.52% from 5.15% in August and the fuel and power inflation that came down to 1.33% as compared to 4.54% in August. Even retail inflation as measured by the consumer price index (CPI) dropped to its lowest level since the time it was launched in 2012. The consumer inflation decreased to 6.46% in September from 7.8% in August backed by sharp decline in vegetable inflation and high base effect of last year. Falling inflation levels have set the tone for the RBI to cut interest rates particularly after growth in industrial production remained low for the second month in a row in August.
With signs of economic revival being on the anvil the government has decided to defer the roll out of GAAR. Basically, these rules were aimed to avoid tax evasion. However, many foreign investors were apprehensive with introduction of GAAR as such rules dampen investor sentiment. It gives government the power to deny any deal where it sees a deliberate attempt has been made to avoid taxes. With investor sentiment riding high the Modi government has decided to defer the implementation of GAAR. This may further attract investor interest into India.
Now let us move on to some corporate developments in India Inc.
The stock of DLF cracked in excess of 25% in a single trading session on Tuesday after market regulator SEBI banned the company from accessing capital market for 3 years. The ban has come from failing to disclose certain material information in its prospectus when the company came out with its IPO in 2007. The company was accused of cheating a person in land transaction.
Subsequently, there was an FIR against the company and its key executives. The company chose to not disclose this matter in its prospectus. This has resulted in a ban by SEBI. We reckon such moves will tighten governance disclosures in India.
Tata Steel Ltd is in talks with the Swiss investment firm Klesch Group to sell a part of its European assets, including mills in northern England and Scotland. The division employees about 6,500 people in Britain and Europe. The decision has been taken in wake of weak prices and poor market sentiments. As per the management, the company will now deploy its resources mainly on strip products activities, where it has greater cross-European production and technological synergies. The management has declined to give a value for the potential sale or to reveal losses by the division.
The drug pricing regulator has demanded penalty of Rs 3 bn from Novartis India for overcharging consumers on the sale of its leading selling brand Voveran. The said drug is indicated for pain. However as per the reports, the company did not confirm the quantum of the total penalty by the drug regulator, and termed the notice as "erroneous and entirely misconceived". In its recent press release the company will be challenging both the basis of the demand as well as the entire quantum of the demand. Reportedly, according to IMS Health annual data, Voveran, has annual sales of about Rs 2.2 bn, and is among the top 10 brands in the domestic drug market. While Novartis has already filled the petition in Delhi high court, any negative verdict can hamper the profits of this company in a scenario where the pharma companies already face various challenges.
The country's largest state run power producer National Thermal Power Corporation (NTPC) is expediting its plan to enter into the distribution businesses. The company has long stayed away from the power distribution business. However, it plans to bid for distribution rights in cities which are opening up for private players. Currently very few cities at present have private distributors along with joint venture with public utilities. Many states in a bid to incorporate efficiency are opening up the segment for private players or with public partnership. NTPC sees this as an opportunity of participating in the bids.
Ranbaxy Laboratories has agreed to pay US$ 39.7 m for the settlement of its litigation pertaining to Texas Medicaid. Texas Medicaid is a US federal-state healthcare programme for the poor. The claims in the litigation are related to historical pricing data of drugs reported by Ranbaxy to Texas Medicaid. Ranbaxy will be making the payments in tranches through August 2015.
Let's move to few corporate results declared during the week:
Mukesh Ambani-controlled Reliance Industries Ltd reported its financial results for the second quarter of the financial year 2014-15 (2QFY15). The company reported a consolidated turnover of Rs 1,134 bn, lower by 4.3% YoY. Exports were down by 14.7% YoY at Rs 660.7 bn during the quarter. However, the company reported positive growth of 1.7% YoY in the bottomline which stood at Rs 59.7 bn. The factors that impacted the company's performance were lower exports, a decline in crude oil prices and reduced refining and oil & gas volumes. However, higher profitability in the core refining and petrochemicals business aided the growth at the net level.
Leading two-wheeler maker Hero MotoCorp has announced its financial results for the second quarter of the financial year 2014-15 (2QFY15). Standalone net sales grew by 20.5% year-on-year (YoY) to Rs 68,635 m. Operating profit grew by 12.3% YoY to Rs 9,348.2 m as operating profit margin contracted from 14.5% in 2QFY14 to 13.5% in 2QFY15. Other income rose sharply by 67.6% YoY to Rs 1,935.1 m. Depreciation charges declined significantly by 73.9% YoY to Rs 749.6 m. Owing to higher other income and lower depreciation net profit shot up by 58.6% YoY to Rs 7,633.7 m.
India's largest software services exporter TCS has reported its financial results for the second quarter of the financial year 2014-15 (2QFY15). The company reported a consolidated turnover of Rs 238,164.8 m, higher by 7.7% on a quarter-on-quarter (QoQ) basis. Operating profit grew almost in line with topline growth to Rs 68,004 m. Operating profit margin contracted marginally from 28.7% in 1QFY15 to 28.6% in 2QFY15. Consolidated net profit declined by 5.8% YoY to Rs 52,442.8 m.
Signs of worsening growth in euro zone, Ebola's spread and rise of unrest in the Middle East could hurt sentiments across global markets for the coming week. Back home, stock market ddirection could be influenced by two key state election results on Sunday, company earnings and global events. Barring short term hiccups from weak global cues, the long term fundamentals of the economy remain strong and investors should focus on investing in financially strong stocks.