Global Markets Remain Upbeat

Sat, 28 Oct RoundUp

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Global markets continued to remain buoyant in the week gone by. The US markets ended higher by 0.6% on the back of a tech rally fueled by strong quarterly performance by IT heavyweights such as Amazon, Microsoft, Alphabet and Intel.

Even the U.S. dollar rallied backed by a brightening outlook for tax cuts, better-than-expected third quarter GDP data and a dovish take on actions by the European Central Bank. The central bank said it would halve its asset purchase program to €30 billion a month, but also extend it for at least nine months until September 2018.

With the European Central Bank extending its stimulus package, both France and German indices yielded returns of 2.3% and 1.8%, respectively. But the UK market was marginally down by 0.4% in the week gone by.

Majority of the Asian markets ended on a firm footing on positive global cues. The Japanese market was the biggest gainer, up 2.6% in the week gone by. Japan's Nikkei hit a 21-year high led by bank and tech stocks. The Indian indices were the second best performing after Nikkei. The BSE Sensex breached the 33,000 mark after the government's big-ticket announcements to recapitalise state-run banks and invest in the road infrastructure revitalised the markets. The Chinese market was up by 1.1% for the week that saw President Xi Jinping consolidate power at a key Party Congress, pledging to build a modern social country for a "new era".

Key World Markets During the Week

Back home, the spectacular stock market gains were powered by banks, particularly state-run, that rallied the most after government's Rs 2.11 trillion recapitalization infused fresh hopes in resolving the bad loan mess. Majority of the sectoral indices ended the week on a positive note. Stocks from capital goods and power sector were among the major gainers during the week.

BSE Indices During the Week

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

The biggest economic development in the week gone by was the mega package unveiled by the government to resolve the bad loan mess and stimulate the road infrastructure in the country. The finance ministry announced a Rs 2.11 trillion bank recapitalisation plan for state-owned lenders weighed down by bad loans, seeking to stimulate the flow of credit to spur private investment. Out of the total commitment, Rs 1.35 trillion will come from the sale of so-called recapitalisation bonds. The remaining Rs 760 billion will be through budgetary allocation and fundraising from the markets.

The bank recapitalisation package marks a sharp increase over the current budgetary allocation. Under the Indradhanush plan, the government has allocated Rs 200 billion towards bank recapitalisation over the current and next fiscal years. This is part of a broad plan to create thousands of new jobs, raise income, boost investment and quicken growth in the broader economy.

One shall note that, Indian banks are sitting on a stressed asset pile of close to Rs 10 trillion, crimping their ability to give fresh loans; of this, gross non-performing assets (NPAs) account for Rs 7.7 trillion and the rest are restructured loans.

Considering the government's current fiscal position and the huge bank recapitalisation requirement, this method of capital infusion is possibly the best option because not all PSU banks are in a position to tap markets given the asset quality issue, the reports noted.

The government also approved mega infrastructure projects worth Rs 6.92 trillion as part of a broad plan to create thousands of new jobs, raise income, boost investment and quicken growth in the broader economy.

Finance minister Arun Jaitley said that the government will launch an umbrella road building programme to de-bottleneck the sector. The program will cover 83,677 km of roads and will involve a capital expenditure of Rs 6.92 trillion over the next 5 years.

Of this, 34,800 km of roads will be created under the Bharatmala Pariyojana (BMP) with an outlay of Rs 5.35 trillion will generate 142 million man-days of jobs, a finance ministry statement said.

Apart from this, as many as 10 public sector undertakings under the Ministry of Petroleum & Natural Gas, has unveiled a Rs 3.2 billion startup fund with a view to support startups in the oil and gas sector for a period of three years,

Union Petroleum Minister Dharmendra Pradhan has said that the oil sector PSUs have partnered with 36 projects (startups). He believes that this initiative would help promote innovation and new business models in the oil and gas sector. He pointed out that India will offer investment opportunities worth US$300 billion in oil sector over next 10 years so as to keep pace with the country's energy demand.

Movers and shakers during the week

Top Gainers During the Week (BSE Group A)
Company	23-Oct-17	27-Oct-17	Change	52-wk High/Low
Punjab National Bank	130.9	196	49.9%	232/112
Union Bank	127	176	38.6%	205/116
SAIL	59	80	35.2%	83/45
Bank of India	135	180	33.5%	201/ 100
Canara Bank	306	404	32.0%	463/250
Top Losers During the Week (BSE Group A)
Yes Bank	354	307	-13.2%	383/218
Havell's India	542	483	-10.9%	564/304
Reliance Communications	18	16	-9.9%	47/16
63 Moons Tech	160	144	-9.6%	166/54
Tata Comm.	718.4	657.0	-8.6%	784/543

Source: Equitymaster.com

Some of the key corporate developments in the week gone by

Yes Bank reported a 25% jump in net profit for the second quarter ended September 2017 mainly due to a rapid growth in advances and a rise in fee income. The bank reported a growth in deposits of 23.4% year-on-year driven by a healthy growth in current and savings account deposit which constituted 37.2% of the total deposits. The loan book grew 34.9% on the back of robust growth in both corporate and retail businesses. Retail banking advances grew by 78% year-on-year and now constitutes 11.4% of total advances.

However, a sharp increase in provisions due to a Reserve Bank of India direction to recognise some loans as non-performing, moderated the bank's profits. Net profit increased to Rs 10.02 billion from Rs 8.02 billion a year earlier, but the bank had to set aside Rs 4.47 billion as provisions which was one-and-a-half times higher than the Rs 1.62 billion reported a year earlier.

This is the second time that the RBI, in its annual risk-based supervision, has observed divergences in the banks' NPA reporting. Yes Bank reported a divergence in gross bad loans of Rs 63.55 billion for FY17. Divergence refers to the difference between the RBI's inspection report and the bank's own report. As a result of which Yes bank had to make an extra provisioning of Rs 15.36 billion.

Kotak Mahindra Bank Ltd reported a 20% rise in its September quarter net profit due to higher net interest income and other income. On a consolidated basis, the bank reported a profit of Rs 14.4 billion, up 20% from Rs 12.02 billion a year ago. Net interest income (NII) or the core income a bank earns by giving loans increased 16% to Rs 23.12 billion versus Rs 19.95 billion last year.

Asset quality of the bank improved. As a percentage of total loans, gross non-performing assets (NPAs) fell to 2.47% as compared to 2.58% in the previous quarter and 2.49% in the year-ago quarter. Net NPAs were at 1.26% in the September quarter compared to 1.25% in the previous quarter and 1.2% in the same quarter last year.

IDFC has started work on exiting the infrastructure and private equity funds management business, IDFC Alternatives, which has assets worth Rs 170 billion (US$2.6 billion). The Alternatives business is not a part of IDFC Asset Management Company, one of the country's largest mutual fund houses with Rs 650 billion in AUM. Nevertheless, the exit deal signals the marginalisation of Indian financial institutions in the alternate asset management industry where IL&FS, IDFC and ICICI dominated in the past decade.

Larsen &Toubro's construction subsidiary - L&T Construction won orders worth Rs 35.51 billion across various business segments. The Transportation Infrastructure & Water Effluent Treatment businesses have jointly bagged an order worth Rs 11.23 billion from a prestigious government client. The Water & Effluent Treatment Business has received engineering, procurement & construction orders worth Rs 5.72 billion.

Its building and factories divisions have won orders worth Rs 8.66 billion for design and construction of 22 tower, while smart world and communication business vertical has got order worth Rs 2.13 billion in Gujarat.

In the news from the telecom sector, Reliance Communications has reported that it will shut down its direct-to-home (DTH) business, operating under Reliance Digital TV, effective November 18. The company has cited expiry of DTH licence as the reason for the above closure.

Apart from that, the telecom operator is also looking to shut down major parts of its wireless business in the next 30 days. As per an article in the Economic Times, the operator has cited the competition brought in by new entrant Reliance Jio's free voice and cheap data services as one of the factors behind this development.

FMCG giant, Hindustan Unilever reported second quarter (July-September) profit higher-than-expected at Rs 12.8 billion, growing 16.4% compared with Rs 11 billion in same quarter last fiscal, mainly on account of lower expenses.

Net sales during the quarter under review stood at Rs 82 billion as against Rs 83.4 billion in the year-ago period, down 1.6%. While transition to GST impacted trade purchases in early part of the quarter, consumer offtake remained stable. Trade conditions will continue to improve and the wholesale channel is steadily improving, the company stated.

HUL's expenses in the second quarter were down 6% at Rs 67.5 billion compared to Rs 71.8 billion during July-September last fiscal. Earnings before interest, tax, depreciation and amortization, an indicator of operating profitability, increased 20% to Rs 16.8 billion. It posted an exceptional gain of Rs 0.5 billion on the sale of shares in Kimberly Clark Lever Pvt. Ltd.

IT behemoth, Infosys reported a 7% quarter-on-quarter (QoQ) growth in net profit at Rs 37.3 billion for the September quarter. The IT firm had reported a net profit of Rs 34.8 billion in the June quarter. On year-on-year (YoY) basis, profit rose 3.4%. This was the company's first quarterly earnings after co-founder and former CEO Nandan Nilekani returned and took over the reins of the IT bellwether. In dollar terms, revenue for the IT major rose 2.9% sequentially, while the revenue growth was 5.4% QoQ on constant currency terms.

The company has cut its FY18 revenue growth guidance to 5.5-6.5% in constant currency from 6.5-8.5%. It is expecting to grow at 6.5-7.5% in dollar terms based on the exchange rates as of 30 September.

A weak growth outlook amid uncertainty over when Infosys expects to appoint a full-time CEO probably suggests that the worst is not over for Infosys and Nilekani has a challenging task on hand.

TVS Motor Company has entered in an exclusive partnership with Motoplex S.A.S of Grupo Bonanza, a leading automobile business house in the Dominican Republic. This partnership is in line with the company's plan to expand and strengthen its presence in the Caribbean region.

As per this partnership, Motoplex S.A.S will develop and operate 40 TVS Motor Company dealerships in Dominican Republic. Motoplex S.A.S currently operates through a network of more than 80 touch points in the region.

Biocon reported 53.10% fall in its net profit at Rs 688 million for the quarter ended September 30, 2017 as compared to Rs 1.46 billion for the corresponding quarter in the FY17. However, total income of the company increased by 2.71% at Rs 10.19 billion for quarter under review as compared to Rs 9.92 billon for the same quarter in the previous year.

A number of pharma companies won USFDA approvals.

Cipla's subsidiary, InvaGen Pharmaceuticals Inc., received final approval for its Abbreviated New Drug Application for Sevelamer Carbonate Tablets, 800 mg, from the United States Food and Drug Administration (USFDA) to market a generic version of Genzyme's Renvela Tablets, 800 mg. Reportedly, Renvela Tablets had US sales of approximately US$1.85 billion for the 12-month period ending August 2017.

Sun Pharma's wholly owned subsidiary has received final approval from the US Food and Drug Administration (USFDA) for its Abbreviated New Drug Application (ANDA) for generic version of Coreg CR, (carvedilol phosphate) extended release capsules, 10mg, 20mg, 40mg, 80 mg. As per IMS, Coreg CR had annual sales of around US$208 million in the US for the 12 months ended August 2017.

Lupin has received the final approval from the US health regulator for its testosterone topical solution. The company has received approval to market the product from the United States Food and Drug Administration (USFDA). The approved product is a generic version of Eli Lilly and Company's Axiron topical solution. According to IMS MAT June 2017 data, testosterone topical solution had sales of US$244.2 million in the US.

The testosterone topical solution is indicated for replacement therapy in males for conditions associated with a deficiency or absence of endogenous testosterone. the company also received final approval for its carbidopa tablets, used for treatment of idiopathic Parkinson's disease, from the USFDA. Reportedly, carbidopa tablets, 25 mg had annual sales of approximately US$ 21.9 million in the US as per IMS MAT June 2017.

In another development, Lupin has also received final approval for its Clonidine Hydrochloride Extended-Release Tablets, 0.1 mg from the Unit USFDA to market a generic version of Concordia Pharmaceuticals Inc.'s Kapvay Extended-Release Tablets 0.1 mg. As per IMS MAT Jun 2017, Clonidine Hydrochloride Extended-Release Tablets, 0.1 mg had annual sales of around US$66 million in the US.

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

This week, the Nifty 50 Index traded on a strong note. Monday saw it open the session with 30 points gap up that continued to trade higher. On Wednesday, the index gapped up 113 points to hit a new lifetime high when the government announced the recapitalization package for PSU banks. The steady momentum continued as the index touched new life highs. On Friday, the index witnessed minor profit booking, but ended its weekly session 1.70% up.

Last time, we observed a negative divergence between Nifty index and Bank Nifty index. This week, the government's recapitalisation plan pushed the Bank Nifty higher. Unfortunately, the index failed to make a new life high. On the flip side, the Nifty index kept hitting new life-highs during the week.

This indicates that the divergence is still intact.

So, is the red flag still waving at the top?

Let's wait and see how things pan out next week.

You can read the detailed market update here...

Divergence Between Nifty and Bank Nifty Intact

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