Apart from the US markets, the optimistic mood in global markets continued this week as the US Federal Reserve extended its support for the slowing US economy by choosing to continue with its US$ 85 bn per month bond purchase program. The Fed noted that the bond purchases would have to continue for the time being because the US economic recovery remained weak and its near term prospects were not good. The US markets remained subdued due to the negative outlook for the US economy and ended down 0.2% for the week.
European Markets ended positive for the week. The markets were up on expectations of an interest rate cut by the European Central Bank (ECB). The euro area's annual Consumer Price Index (CPI) declined to 0.7% for the month of October, lower than 1.1% in the month of September. This is the lowest reported inflation rate in the European region since November 2009. Additionally, unemployment climbed to a record 12.2%.
Most of the Asian markets ended positive for the week. The Asian markets received support from good economic data during the week from Japan, Korea and China. The Chinese economy, which has been slowing down in the last few months, reported a better than expected Purchasing Managers Index (PMI) number of 51.4 for the month of October. This was better than the September number of 51.1 and it is the highest since April 2012. The PMI, which is considered to be a leading indicator of manufacturing activity, indicated that growth in factory output has risen the fastest in the last 18 months on the back of new orders.
The BSE Sensex closed the week up 2.5%. The Indian stock markets cheered the Reserve Bank of India's monetary policy in which the RBI raised the benchmark repo rate by 0.25% and reduced the marginal standing facility (MSF) rate by 0.25%.
Now let us discuss some of the economic developments of the week gone by.
The Reserve Bank of India announced its mid-year policy on the 29th October 2013. The RBI maintained its hawkish stance against inflation by raising the repo rate by 0.25%. The repo rate, at which the RBI lends money to banks, has now been raised twice in less than two months by the new RBI governor Dr. Raghuram Rajan. It now stands at 7.75%. The RBI simultaneously reduced the Marginal Standing Facility (MSF) rate by 0.25%. The MSF rate, at which the banks borrow overnight funds from the RBI, now stands at 8.75%. The RBI left the CRR unchanged at 4%. The RBI has thus restored the gap between the Repo and the MSF back to 1%. This gap had been increased to 3%, with the repo at 7.25% and the MSF at 10.25%, as part of the extraordinary measures taken by the RBI in August, in response to the sharp depreciation of the rupee. The RBI has reiterated that controlling inflation and managing inflationary expectations was critical to fostering long-term stable economic growth.
The much delayed Direct Taxes Code (DTC) bill, which seeks to overhaul the structure of levying direct taxes in the country by replacing the archaic Income Tax Act (1961), could finally see the light of day in the coming months. Finance Minister P. Chidambaram announced that the government would introduce the bill in Parliament during the winter session in December. The final draft of the bill has already been cleared by the cabinet. The final draft has incorporated several suggestions of the parliament standing committee. The proposals seek to maintain the existing Income tax exemption limit of Rs 2, 00,000. Also, the bill looks to introduce a fourth tax slab with a 35% tax rate for those with an annual income of over Rs 100 m and seeks to levy a 10% tax on dividend income exceeding Rs 10 m.
The Petroleum Ministry has received the recommendations of the Kirit Parikh Committee, the expert group tasked to develop a suitable methodology for pricing diesel and cooking fuel. The committee has recommended an immediate hike in the diesel price by Rs 5 per litre. The other recommendations include an increase in the price of kerosene by Rs 4 per litre and an increase of Rs 250 per cylinder for LPG. The committee has favored the complete deregulation of the diesel price within one year. It has also asked the government to fix the subsidy for diesel at Rs 6 per litre and reduce the quota of subsidized LPG cylinders from 9 per household to 6 per household. These recommendations are certainly strong and would result in a significant reduction in the government's subsidy burden, by up to Rs 400 bn. Whether the government will follow through with the recommendations when elections in 5 states are just around the corner, is another matter altogether.
Now let us look at some of the corporate earnings which were released this week.
Bharti Airtel has declared its September quarter results. The consolidated sales were up by 10% YoY. The mobile subscriber base in India increased by 4% YoY during the quarter while the total subscriber base increased by 7% YoY. The operating margins of the company improved by 1.4% YoY to 32% for the quarter. However, the positive effect on operating level was mitigated by increase in the interest costs and higher tax expenses. The increase in interest costs was on back of forex losses and mark-to-market losses on investments. Thus, the profits declined by 29% YoY during the quarter.
National Thermal Power Corporation (NTPC) announced results for the second quarter of the financial year 2013-14. The company reported a year on year (YoY) decline of 0.6% in total revenues for the quarter, while net profits declined by around 21% YoY. The company reported poor performance due to lower demand from state utilities and a rise in imported fuel cost thus impacting the margins. NTPC plans to double its investment target for FY14 to Rs 210 bn. Currently, NTPC has an installed generation capacity of 41,684 MW. It is likely to import about 14 million tonnes (MT) coal this financial year.
Maruti Suzuki announced results for the second quarter of the financial year 2013-14 (2QFY14). During the quarter, net sales stood at Rs 104,681 m, higher by 26% on a year-on-year (YoY) basis. The growth in the topline was driven by robust volumes. Total vehicles sold stood at 275,586 units during the quarter, higher by 19.6% YoY. While sales of domestic vehicles (87.7% of total vehicles sold) increased by 15.1% YoY, export sales increased by 66.6% YoY. Operating profits reported a sharp rise of 160% YoY. Operating profit margins improved from 6.1% in 2QFY13 to 12.6% in 2QFY14 on account of a substantial fall in raw material costs (as percentage of sales). Net profits increased by 195% YoY. Net profit margins improved from 2.7% in 2QFY13 to 6.4% in 2QFY14. It must be noted that the profits in the corresponding quarter of the previous financial year were significantly subdued on account of a month-long industrial lockout at the company's Manesar plant.
FMCG behemoth, Hindustan Unilever Ltd (HUL) declared its second quarter results for FY14. The company posted a 9.2% YoY growth in revenues during the quarter. The domestic consumer business grew by 10% YoY driven by an underlying volume growth of 5% YoY. Among product segments, each of the beverage & personal care product segments registered double-digit growth during the quarter. The largest product segment, soaps & detergents, grew by tepid 6% YoY due to price reduction in soaps taken earlier. The company managed to improve operating margin slightly by 0.2% to 15.7% as input cost savings were partly neutralized by higher ad-spends (both as a proportion of sales). Excluding the impact of exceptional income, net profit grew by 9.3% during the quarter. The company has declared an interim dividend of Rs 5.5 per equity share of face value Re 1 each for FY14, translating into a dividend yield of 1%.
Now let us move on to some more news from the corporate world.
India's second largest software firm Infosys has reached a settlement with the US government to pay a record fine of US$ 34 m over an immigration dispute. The issue pertains to the alleged misuse of business visas (B1 visas) by Infosys in the years 2010-11. The BI visas, as opposed to H1B visas, are issued only for the purpose of short term business trips and do not allow people from taking up employment during their stay in the US. The US Justice Department was to decide if Infosys had sent software engineers on these visas, rather than H1B visas, for onsite work at big corporate clients across the US. Infosys in its settlement has not admitted guilt but has agreed to pay the fine. In a regulatory filing in June 2011, the company had admitted that any action by the US government against it in this regard would seriously affect its business prospects in the US which is its biggest market. It must be noted that Infosys, in its latest quarterly result (2QFY14), had already set aside an amount of this size as a provision for 'visa related matters'.
As per a leading financial daily, Securities Exchange Board of India (SEBI) has approved the restructuring of parent Holcim India's stake in Ambuja Cements. As a part of the restructuring process, Holcim India will merge Ambuja Cements with itself in a cash and share deal worth Rs 145 bn. Under this process, Holcim India's stake of over 50% in ACC will be transferred to Ambuja at a price of Rs 35 bn while shares will be issued by Ambuja for the rest. Post merger, Holcim India's stake in Ambuja will rise to 61.39% from a little over 50%. According to Ambuja Cement, the entre restructuring exercise will be completed by June 2014 after acquiring shareholder's approval. The company has also applied for approval from the Gujarat and Delhi High Courts and Foreign Investment Promotion Board. Ambuja Cement is expected to make savings as a result of a common management structure post the restructuring.
India's leading steel company, Tata Steel has announced further restructuring of its European operations. The restructuring pertains to its long products business in the United Kingdom (U.K) which produces tubes, rails and rods. The prolonged slowdown in steel demand in Europe since 2007 has resulted in this restructuring. The company confirmed that these proposals would affect the employment of up to 500 people. The sites in the UK that would be affected are Scunthorpe, Workington and Teesside. The demand for the products manufactured at the Scunthorpe site, in particular, has been facing a serious downturn. Tata Steel, which is Europe's second largest steel producer, has faced a slowdown in steel demand since 2007. This was the same year that it acquired Corus Steel in the U.K.
In the coming week, all eyes will be on the important manufacturing data from the US as well as the ECB meet. Back home, corporate earnings will continue to drive Indian markets. Having said that, we believe that investors should not depend upon specific events to make their investment decisions. The focus will have to be on studying companies and investing in those that have good business models, sound management and ultimately available at reasonable valuations.