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Global markets cheer debt ceiling deal 
(Sat, 19 Oct RoundUp) 
 
Up against a debt-ceiling deadline of 17 October, 2013; the US Congress ended its 16-day government shutdown and extended the country's ability to borrow. However, the standoff hurt millions of people and was costly to businesses and the economy in general. Fitch placed the US credit rating on a negative watch, and Standard & Poor's reported that the overall economic slowdown lowered the country's fourth-quarter gross domestic product by an estimated 0.6%, or US $24 bn. Economic uncertainty is expected to persist, as the US government will be financed only until 15 January, 2014 with the debt ceiling issue to be revisited on 7 February, 2014. The US markets however cheered the government's decision and ended the week up 1.1%.

The Eurozone showed signs of having emerged from recession, with a stronger-than-expected industrial production number in August 2013. Output grew 1.0% in August after a 1.0% drop in July. Economists had forecast a 0.8% growth in output for the month. Output grew in four of the region's five largest economies. However, industrial production declined 2.1% from a year earlier.

China's economy grew at its quickest pace this year, expanding by 7.8% in the third quarter from a year earlier. GDP growth accelerated slightly from the 7.7% and 7.5% pace of the first and second quarter, respectively. Economists expect China's economic growth to subside in the fourth quarter, as export data in September indicated a decline in global demand. Despite upbeat data, the Chinese markets ended the week down 1.5%.

BSE-Sensex was among the top gainers among the various global markets. The Indian stock market closed up 1.7% for the week gone by. The week for Indian markets started on the negative note. High inflation, doubts over US debt ceiling and the downward revision of GDP growth estimates by IMF and World Bank played on investors mind. But markets recovered over the course of the week after the US uncertainty ended and strong data from China came out.

Key world markets during the week
Source: Yahoo Finance

Majority of the sectoral indices ended in the green with Metal (up 3.4%) and Oil and Gas (up 3.4%) witnessing maximum buying interest. Stocks from Pharma (down 0.4%) and Capital goods (down 0.5%) were the biggest losers.

BSE indices during the week
Source: BSE

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

As per a leading financial daily, the Wholesale Price Index (WPI) soared to a seven-month high of 6.46% in September 2013 from 6.1% in August 2013. The higher inflation has been fuelled by rise in food inflation that surged to 18.4% in September from 18.18% in August. Even inflation attributable to manufactured products increased to 2.03% from 1.9% in August. However, fuel & power inflation decreased to 10.08% in September from 11.34% in August. Even the factory output as measured by the Index of Industrial Production (IIP) slowed down to a mere 0.6% in August from a growth of 2.75% witnessed in July. Reportedly, the Finance Minister and the RBI Governor have pinned their hopes on robust performance by the agriculture sector aided by good monsoons to revive growth in the later part of the year.

India's growth story took a further hit, after another multilateral agency, the World Bank, said that the country will grow at 4.7% as against 6.1% projected in its April forecast. This is a cut of 1.4 percentage points. Last week, International Monetary Fund (IMF) in its World Economic Outlook, had cut the growth forecast for India by 1.8 percentage points and projected an average growth rate of about 3.75% in market prices as against 5.6% in its July forecast.

The domestic pharma business witnessed its first-ever decline during the month of September 2013, shrinking by 1.8% year-on-year (YoY). The negative growth follows the tepid 1.1% YoY growth witnessed in August 2013, the lowest in the last six years. Price-controlled drugs which account for less than 15% of the total domestic market, declined by 14% YoY in September. The rest of the market grew marginally by 0.4% YoY. It must be noted that while the domestic pharma industry has been growing at about 12-13% for the last 3-4 years, demand started slowing in January 2013. The size of the domestic pharma business is about Rs 720 bn.

Movers and shakers during the week
Company 11-Oct-13 18-Oct-13 Change 52-wk High/Low
Top gainers during the week (BSE-A Group)
Jaiprakash Associates 40 47 18.1%107/28
Multi Commodity Exchange 446 510 14.4%1617/238
MRPL 34 38 13.1%70/26
Suzlon Energy 7 8 10.5%27/6
Nestle 5,045 5,524 9.5%5865/4410
Top losers during the week (BSE-A Group)
Bank of India 186 172 -7.0%392/127
Unitech 19 18 -6.2%41/15
IPCA Labs 729 685 -6.1%744/401
Power Finance Corp 137 129 -5.9%227/97
TTK Prestige 3,481 3,294 -5.4%3899/2870
Source: Equitymaster

Now let us look at some of the corporate earnings which were released this week.

India's largest software firm Tata Consultancy Services (TCS) announced a great second quarter result for FY14. The company's revenues and net profits grew by 16.6% and 21.2% QoQ respectively. The company's operating margin improved to reach 30.1% helped by the rupee which declined by nearly 11% in the quarter. The company witnessed broad based growth in all of its verticals and service lines which is a testament to the management's foresight and capabilities. The company said that it is seeing a revival in discretionary spending in the US which will help it bag large deals going forward. The management was confident that it could maintain margins in the range of 26-28% excluding the effect of the rupee, as it did not foresee any pressure on pricing due to competition.

HDFC Bank has announced results for the second quarter ended September 2013. As reported in a leading business daily, the bank's profit growth at 27% YoY was the first time growth had fallen below 30% in a decade. This was on account of losses in its investment portfolio, higher operating expenses and worsening asset quality. Non-performing loans as a percentage of total assets stood at 1.1% as compared to 0.9% a year earlier. Having said that, the bank does not see significant pressure on margins and asset quality. The restructured loan book of the bank is also the lowest in the sector. However, with an employee base of around 67,000, HDFC Bank's cost efficiency will have to be under close watch.

Bajaj Auto has announced its results for the second quarter of the financial year 2014 (2QFY14). The sales volumes during the quarter fell to 961,330 units from 1049,208 units in the corresponding quarter last year (down 8.4% YoY). However, gross revenues were up by 4.6% YoY mainly on account of rupee depreciation. The export revenue for the quarter was up by 26 % YoY. The operating margins for the quarter stood at 23.1% as compared to 20% in the corresponding quarter last year. The company has reported a 13% year on year (YoY) increase in the net profits on the back of higher realizations per vehicle, growth in exports and tighter cost control. As per the management, the Pulsar mix was relatively good in the second quarter. Further, the management has stated that exports are likely to do well.

Axis Bank also declared the results for the second quarter and half year ended September 2013 (1HFY14). The bank reported a 22% growth in profits for 1HFY14 on the back of a 17% YoY growth in loan book. While the retail advances comprised 30% of loan book, the low cost deposit base (CASA) comprised 39% of total deposits. The Net NPA came in at 0.4% of loan book (0.35% in 1HFY13), while restructured assets were 2.1% of loan book. The capital adequacy ratio (CAR) of 16.4% at the end of September is reasonably comfortable. The bank's net interest margin was 3.8% at the end of 1HFY14 as against 3.5% at the end of 1HFY13. The bank held provision coverage of 80% at the end of 1HFY14. The provision coverage before accumulated write-offs was 89%

Now let us move on to some more news from the corporate world.

Mr. Kumar Mangalam Birla, Promoter and Chairman of Hindalco Industries has been booked in the coal allocation scam. Mr Birla faces charges of cheating and conspiracy and will be called in for questioning by CBI. CBI has alleged that Hindalco was wrongfully allocated the Talabira II coal block in Jasukuda district of Orissa in 2005. This coal block is a JV between Mahanadi Coalfields and Neyveli Lignite Corporation and was allocated to power 900 MW captive thermal power plant of Hindalco for its greenfield 'Aditya Alumina and Aluminium' Project in Orissa. A year ago, Mr Birla had assured shareholders and investors that none of the company's coal blocks were named in the coalgate scam and hence there will be no impact on the company's projects.

Oil and Natural Gas Corporation's (ONGC) overseas arm ONGC Videsh intends to buy an additional 12% stake in a Brazilian oil block from Petrobras for US$ 529 m. Both ONGC Videsh and Shell had served a pre-emption notice to jointly acquire the 35% stake. Shell is the operator of the block with a 50% stake, while ONGC already owns 15% of the block. Earlier, Petrobras was looking to sell its 35% stake in the oil block to China's Sinochem Group. But the deal was subject to the pre-emption rights of both Shell and ONGC Videsh. It must be noted that India imports around 70% of the oil that it consumes. In recent times, the steep depreciation of the rupee has wreaked havoc as the value of oil payments has risen putting further pressure on the current account balance. Hence, it has become important for the country to become self reliant as far as energy is concerned and acquiring stakes in oil fields abroad is one such step that the oil sector has been undertaking.

Wockhardt seems to be at the receiving end once again. As per a leading business daily, the UK's health regulator has withdrawn the good manufacturing certification of the company's Chikalthana facility in Maharashtra. This facility contributed approximately GBP 12 m from the UK and EU markets to the consolidated annual revenues of the company. This plant manufactured both injectables and solid dosages. It must be noted that the US FDA had also imposed an import alert on the same plant in May this year as a result of which sales in the US are also expected to be adversely impacted. The US FDA in recent times has become quite strict with respect to compliance with good manufacturing practices (GMP). In this regard, it has also been conducting surprise checks on plants. Subsequently, quite a few plants of Indian pharma companies have come under the US FDA scanner with the worst hit being Ranbaxy.

India's leading auto firm Tata Motors' global sales during the month of September 2013 declined by 15.8% on a year-on-year (YoY) basis to 87,316 units. This includes sales of Jaguar Land Rover (JLR). During the same period last year the company had report sales of 103,656 units. However, global sales of passenger vehicles and luxury brand JLR reported a positive growth. Global passenger vehicle sales increased marginally in September by 0.8% YoY to 49,267 units as against 48,895 units in September 2012. JLR sales increased by 35.6% YoY to 35,874 units as against 26,461 units in the corresponding month of the previous year.

In the coming week, further developments in the US following the end of 16-day shutdown will be on investor's radar. The European Union and China are also expected to release its flash composite purchasing managers' index which will be closely watched by investors. Back home, earnings from major corporates are likely to be the driver for the Indian markets.

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