Global Markets Mixed over Delay in US Tax Reform

Sat, 11 Nov RoundUp

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Global financial markets ended the week on a mixed note, with Asian markets continuing their gains, while the US and European share markets snapped their winning streaks. In the US, the Dow Jones Industrial Average charted its first decline since September as market participant's concerns over the delays in US tax reform weighed on the markets. US markets ended the week marginally lower by 0.4%.

European stocks edged lower during the week as subdued corporate earnings brought down investor sentiment. European stock markets faced volatility during the week as Brexit talks in Brussels concluded with the EU's Brexit negotiator Michel Barnier urging the U.K. to move faster in its negotiations to leave the group. However, despite a tepid showing this week, the European Commission remained optimistic about the economic scenario in the Eurozone and revised its real GDP forecast at 2.2% growth, higher than the previous 1.7%. UK and French markets were down by 1.7% and 2.5% respectively this week, while German indices lost the most and were down by 2.6% over the week.

Asian markets were trading in green during the week. In China exports rose 6.9 %from one year ago whereas imports rose 17.2%. Meanwhile, Japan's Nikkei 225 hit a 26-year high during the week amid positive earnings and economic data.

Japanese Indices ended the week up by 0.6%, while indices in China and Hong Kong were up by 1.8% over the week.

Key World Markets During the Week

Back home, benchmark indices in India declined from record high levels logged last week, amid mixed corporate earnings. Weak manufacturing growth measured by the index for industrial production (IIP) for the month added to the woes. The BSE Sensex ended the week lower by 1.1%.

BSE Indices During the Week

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

In news from the economy, Moody's Investors Service in its latest Global Macroeconomic Update (2018-19) has stated that India is the only G20 emerging market country where growth has slowed sharply for six consecutive quarters.

But it expects economic growth in 2017 to average 6.2% before accelerating to around 7.5% in 2018 and 2019. It said that the slowdown in economy was due to the temporary negative impact of last year's demonetization, temporary disruption related to the rollout of the Goods and Service Tax (GST) and weak bank lending for investment-related activity due to a high proportion of delinquent loans on bank balance sheets. It added that the effects of demonetization and GST implementation will fade.

It also said that despite progress on economic reforms and monetary policy easing, the flow of bank credit for investment activities has been hampered by both the inability of the banking sector to lend and weak demand for credit.

Moody's further noted that the reforms, including liberalization of foreign direct investment in key sectors and the GST, will increase efficiency, boosting trend growth.

Meanwhile, Fitch group company, BMI Research in its latest report has said that India will remain one of the fastest growing emerging markets, with real Gross Domestic Product (GDP) growth set to average 6.5% over the next five fiscal years, highlighting the ongoing economic reforms and improvements in the business environment to continue to support India's economic growth.

As per the report, insolvency regulation is a positive step in cleaning up the financial system in the country and tax reforms will help strengthen India's fiscal revenues. But it also said that significant bureaucratic inefficiencies are likely to cap the country's growth potential further.

According to the report, India's improvement in the ease of doing business ranking masks the fact that bureaucratic inefficiencies remain rife, as indicated by the stalling of the 2015 Land Acquisition Bill in Parliament and a massive backlog of unresolved cases in courts. BMI Research said that these issues are likely to continue to cap India's growth potential below the 7% level over the coming years, and the country is likely to continue facing challenges in completing large-scale infrastructure projects and establishing a strong manufacturing base.

The report further stated that there has been a surge in foreign investment, which is likely to continue at a as global firm look to tap into India's vast market potential and that pro-business and pro-investor policies are likely to encourage investment.

In the latest development, foreign institutional investors (FIIs) are returning after recent government announcements such as the Rs 2.11 trillion PSU bank recapitalisation plan. FIIs are mainly buying into new shares.

Over October and November so far, FIIs have invested a net of US$ 1.9 billion in Indian equities. For the year to date, they are buyers to the tune of US$ 7.4 billion.

While flows to Asia ex-Japan country funds were mixed in the week to 1 November, commitments to both Korea and India Equity Funds hit a 13-week high even as China Equity Funds recorded their second straight week of outflows in excess of US$600 million, the reports noted.

Also, dedicated Brazil, Russia, India and China (BRIC) equity funds posted consecutive weekly inflows for the first time since early April as well.

Notably, a surging primary market has attracted a lot of foreign investor interest. Further, Indian companies raised a total of Rs 1.39 trillion from the primary market in 2017, exceeding the previous high of Rs 1.04 trillion in 2010.

FIIs, who were net sellers in the secondary market to the tune of US$3.43 billion from the start of the year up to 31 October, have simultaneously pumped in US$9.41 billion in the primary market alone, their highest in the last seven years. In November, they have invested US$1.5 billion in the secondary market.

While valuation has reached dizzy heights, earnings are yet to catch up. Fund managers believe there are some underlying risks that the Indian market is not factoring in like sluggish earnings growth. PE multiple expansion rather than earnings growth explains nearly all of the performance this year for India.

So, should you stay away from the market? Or swim with the tide?

Here's an excerpt of what Rahul Shah, Co-head of Research, wrote in one of the edition of The 5Minute WrapUp:

• "Indian retail investors should not blindly follow FPIs in and out of stocks. It is far better to take advantage of the volatility caused by their selling to enter good quality stocks for the long-term."

In news from telecom sector  According to an article in The Economic Times, the Telecom Regulatory Authority of India (TRAI) is considering the removal of the 50% limit on spectrum holdings within a particular band.

The article noted that TRAI is considering reducing the limit to 25%. Currently, government rules bar any company from holding more than 25% spectrum allocated in a service area or circle, and above 50% in a spectrum band. Carriers in India use airwaves in the 800 MHz, 900 MHz, 1800 MHz, 2100 MHz, 2300 MHz and 2500 MHz bands.

The proposal, if it goes through can prove beneficial for Vodafone and Idea, as they will be able to retain their spectrum post the merger as opposed to them requiring selling off the airwaves under the current rules.

The relaxation will also afford Reliance Jio Infocomm leeway to acquire more airwaves in 850 MHz band of Reliance Communications, which may otherwise breach limits in some circles, they said. The government is also likely to benefit as it should mean more bidders available for a band at the next auction, possibly boosting revenue.

TRAI recently held consultations with carriers on spectrum holding limits after the Department of Telecommunications (DoT) sought the regulator's opinion on the issue.

TRAI is likely to give its recommendations to DoT by the end of the month. It would be interesting to see how the change affect the dynamics of the Indian telecom space which is currently undergoing consolidation.

Also, the TRAI recently reduced the interconnect usage charge (IUC) from 14 paise per minute to six paise per minute. IUC are charges paid by operator companies for voice calls terminating from a different operator's network.

The 57% reduction in IUC is the steepest drop till date. TRAI has proposed phasing it out the IUC by 2020. This is another blow for industry players, as India has one of the lowest IUC rates in the world.

The above IUC rate cut is expected to have a negative impact on domestic telecom players. As we wrote in a recent edition of The 5 Minute WrapUp...

• The IUC rate cut is expected to adversely impact established players like Bharti Airtel and Idea Cellular. What this means is that these companies would no longer be able to enjoy additional revenues from having a large subscriber base thereby impacting their profitability and debt servicing capability. At the same time this development would entail significant cost savings for entrant Reliance Jio.

Credit rating agency, ICRA in its latest report has said that Indian commercial vehicle (CV) sales are expected to register a growth of 6-7% in the financial year 2017-18, mainly driven by pent-up demand post Goods and Services Tax (GST) and replacement cycle in CVs driving the sales.

It also pointed out that the CV sales remained on the slow lane prior to July during the first quarter due to various reasons including pre-buying in fourth quarter of last fiscal and fleet operators deferring new vehicle purchases in view of incoming GST regulation from July 2017.

It said that the industry will find its momentum back aided by increased thrust on infrastructure and rural sectors in the recent budget, potential implementation of fleet modernisation and higher demand from consumption-driven sectors. It also noted that there has also been considerable improvement in cargo managed by Railways during the same period.

It also said that the segment would also benefit from stricter implementation of regulatory norms especially related to vehicle length (for certain applications) and overloading norms.

In the news from the GST space, The 23rd meeting of the goods and services tax (GST) council was on 9-10 November in Guwahati. Tax rates on 177 items were cut from 28%, and the GST council approved sweeping changes including simpler procedures and a single return filing form for small firms.

In the meeting, the GST Council will also discuss the inclusion of real estate in the new indirect tax regime. It also discussed ways of reducing the compliance burden on taxpayers.

Notably, the GST Council in the last three or four meetings has reduced rates on over 100 items, bringing them down either from 28% to 18% or from 18% to 12%.

A wider tax base will also allow the government to lower its tax rates in future.

After studying these and other finer aspects of GST, our colleague Vivek Kaul, has penned his views on what could go right and wrong. Get a balanced perspective on the entire GST saga from Vivek. The report is titled The Good, the Sad and the Terrible (GST). Claim your own copy of his special report now.

As we have been saying, GST is a much-needed economic reform. It should eventually expand India's narrow tax base and increase government revenues. But only growth will determine how well the Indian economy has adapted to GST.

Our colleague Vivek Kaul, has studied the finer aspects of the GST and predicted what could go right and wrong.

Download his special report - The Good, the Sad and the Terrible (GST).

Movers and Shakers During the Week

Top Gainers During the Week (BSE Group A)
Company	03-Nov-17	10-Nov-17	Change	52-wk High/Low
TITAN COMPANY	659	782	18.6%	823/296
INDIAN BANK	347	406	16.9%	411/196
MMTC LTD	73	85	16.1%	102/41
HINDUSTAN COPPER	87	99	14.3%	111/54
GSK CONSUMER	5,370	6,049	12.6%	6,110/4,650
Top Losers During the Week (BSE Group A)
LUPIN LTD	1,049	834	-20.5%	1,572/829
RELIANCE COMMUNICATIONS	17	14	-16.9%	43/14
RELIANCE CAPITAL	588	490	-16.6%	878/408
VIDEOCON INDUSTRIES	16	14	-13.4%	110/14
JAIN IRRIGATION	110	96	-12.5%	120/80

Source: Equitymaster

Some of the key corporate developments in the week gone by

In news from the pharma space, Lupin was in focus during the week  after the US drug regulator issued warnings for company's two sites. USFDA issued a combined warning letter for company's Goa and Indore (Pithampur Unit II) sites.

Reportedly, the USFDA warning will likely delay new product approvals from Goa and Pithampur facilities. There will be no disruption of existing product supplies from either of these locations.

Notably, the company had earlier received three form 483 observations for the Goa facility on 7 April 2017 and six form 483 observations for Pithampur (Unit II) on 19 May 2017.

Divis's Lab witnessed interest during the week after the company said that the US Food and Drug Administration (USFDA) has closed out a warning letter issued to the company's unit at Visakhapatanam.

The company said that the US health regulator completed the inspection of the corrective action and measures initiated by the company and closed out the warning letter.

Last week, Divi's Labs had announced that the US health regulator would lift an import alert imposed on the company's Unit-II in Visakhapatnam and was moving to close out the warning letter issued to the unit.

The USFDA in March had issued import alert, and a warning letter later for the Visakhapatnam facility for non-compliance of good manufacturing practice (GMP) norms, the company had informed bourses earlier.

The company in July announced that USFDA had moved to lift import alert imposed on the unit.

Larsen & Toubro (L&T) has received an order from Mumbai Metropolitan Region Development Authority to construct two sections of the Rs 178 billion Mumbai Trans Harbour Link project. A consortium led by L&T-IHI Corp, a joint venture between L&T and Japan's IHI Corp, will construct the Sewri side of the sea-bridge, which is the first section, while L&T alone will construct bridge portion on land towards Chirle, which is the third section of the project.

Additionally, the company's construction arm bagged orders worth RS 40 billion.

L&T said its heavy civil infrastructure business has bagged orders worth Rs 19 billion in the domestic market, while its building and factories business received an order worth Rs 8.3 billion in the international front.

Besides, the company also orders worth Rs 7.8 billion in water & effluent treatment business, Rs 3.4 billion worth orders in power transmission & distribution business.

The company's smart world communication business also bagged Rs 1.6 billion worth orders from Raipur Smart City for implementation of intelligent traffic management services.

Bharat Heavy Electricals (BHEL) bagged a major order for setting up two 765 kV substations on EPC (Engineering, Procurement & Construction) basis, in West Bengal.

Significantly, valued at over Rs 3.5 billion, this is the largest value 765kV substation project order for BHEL so far.

With this, the company has maintained its undisputed leadership in the 765 kV Power Transmission segment. The order has been placed on the company by Powergrid Medinipur-Jeerat Transmission (PMJTL), a 100% wholly owned subsidiary of Power grid.

The company's scope of work in the contract envisages constructing two large sized greenfield 3,000 MVA, 765/400 kV substations, at Medinipur and Jeerat (near Kolkata). These EHV substations will play a key role in strengthening the 765 kV system in the Eastern region (ERSS-XVIII), for delivering power to important load centres in the state of West Bengal.

Reportedly, the substations are slated to be commissioned within a schedule of 30 months. The project shall be engineered and delivered by BHEL on total turnkey basis.

The company has been contributing significantly in making the 765 kV Ultra High Capacity inter-state transmission network a reality by undertaking the commissioning of 765 kV greenfield substations across the nation on turnkey basis.

Moving on to Tata Stocks. Titan reported better-than-expected earnings for the quarter. Profit jumped 67.4% in its September quarter versus the same period a year ago on strong sales in its jewellery business. Consolidated net profit rose to Rs 2.8 billion in the three months to September from Rs 1.7 billion a year ago. Total revenue increased 29.6% to Rs 35.2 billion from Rs 27.1 billion a year ago.

Tata Global Beverages  completed the sale of two of its subsidiaries in Russia -- Sunty and Teatrade -- for 375 million roubles (about Rs 410 million). The company in August had announced sale of its business in Russia as part of restructuring operations in that country.

Moving on to the news from the banking sector.

Punjab National Bank (PNB) laid down plans for merging branches. The bank said that it has identified 300 branches to either be merged with profitable ones or be relocated. It plans to make operations more efficient.

The bank has also formed a group of senior officials to carry out a detailed study and flesh out strategies for branch network rationalization.

As per the reports, the company has a customer base of 100 million. The bank added nine branches to its network from April to June, but also closed six in the second quarter, taking the total to 6,940 till September end.

Last week, the bank said that September quarter net profit rose just 2% to Rs 5.60 billion from a year ago, as provisions for bad loans increased.

Axis Bank said that its board has given its approval for a proposal to raise equity capital from the market at a time when the spotlight is on worsening asset quality. The board approved plans to raise capital worth Rs 116.2 billion by issue of equity of equity linked securities on a preferential basis, by the way of a 9% stake sale to Bain Capital and other investors including LIC.

Last week, various media reports highlighted the bank was looking to raise as much as US$ 1 billion from a group of investors after an increase in bad loans. The reports have named U.S. group Bain Capital, Singapore state investor GIC and Canada Pension Plan Investment Board among potential investors.

And here's a note from Profit Hunter:

The Nifty 50 Index traded on a negative note during the week. On Monday, it opened the session gap down, but recovered to hit a new life high of 10,490. The euphoria did not last as the index slipped 102 points the next day. It continued to trade dull throughout the week. Finally, on Friday, the index recovered a bit, before ending the weekly session 1.25% down.

Last week, we mentioned that the index formed a hanging man candlestick pattern on the daily chart, which is a short term reversal pattern. And a negative open-and-close in the next trading session will validate the pattern, which could mean a short-term correction on cards. As a result, the index corrected 131 points.

This week, the index formed a bearish engulfing pattern at the start of the week, indicating a short-term top reversal pattern. The RSI indicator also formed a negative divergence, another sign of correction.

Will the index continue to correct or will it resume its uptrend? Let's wait and see how things pan out next week.

You can read the detailed market update here...

Nifty 50 Index Off Its Lifetime High

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