Global markets gained modestly on favorable US economic data, including tame inflation and fewer-than-expected weekly jobless claims. Although the Fed has so far held off on tapering its monthly bond purchases, central bank officials still expect to begin to reduce thequantitative easing program in the coming months. The minutes of the Fed's late-October policy meeting indicate that officials are searching for other ways to provide support for the economy and that short-term interest rates are likely to remain low for a long time. The US markets closed at record high (up 0.6%).
China's central bank followed up this week on last week's announcement of significant economic and financial reforms. The Chinese equity market ended the week up 1.4%.Overall weakness in the Eurozone stood in contrast to rising business confidence in Germany. The Eurozone composite purchasing managers' index slipped to 51.5 in November, from 51.9 in October. All the major European equity markets closed the week in the red.
The Indian stock markets closed in red. Indian Indices lost ground during mid-week after starting the week on a higher note. The indications from the Fed signaling withdrawal of QE in coming months and persisting worries over the slowdown in FIIs investments into Indian shares weighed on sentiments of local investors. The BSE Sensex closed the week with 1.2% loss.
Most of the sectoral indices ended the week in the red with stocks in the Consumer Durable (down 2.3%) and Auto (down 2.0%) space witnessing maximum losses. Capital Goods (up 2.0%) and BSE Small Cap (up 0.6%) were the biggest gainers.
Now let us discuss some of the economic developments of the week gone by.
As more and more multinationals are eyeing Indian pharma firms for acquisition, the Department of Industrial Policy and Promotion (DIPP) has proposed steps in a draft cabinet note that aim to tighten the Foreign Direct Investment in domestic pharmaceutical companies. As per the proposal, the foreign company will not be allowed to close down the existing Research & Development (R&D) centre. Further, it will have to mandatorily invest upto 25% of the FDI in the new unit or R&D facility. The total investment, as per the conditions proposed, will have to be incurred within three years of acquisition. The note also proposes to slash FDI cap to 49% in rare or critical pharma verticals. Currently, India allows 100% FDI in the pharmaceutical sector through automatic approval route in the new projects. However, the foreign investment in the existing pharmaceutical companies is allowed only through Foreign Investment Promotion Board's (FIPB) approval.
As reported in a leading business daily, the Deputy Chairman of the Planning Commission Mr. Montek Singh Ahuwalia is of the view that the price of locally mined coal should be aligned to those of the global market prices. This he suggests should be done to prevent any distortion in the Indian energy market. Currently, the price of domestic coal is much lower than imported coal. But domestically there is a huge supply deficit of coal. This has led to increased use of imported coal. As a result some sectors have to pay high tariffs for power. The price differential between domestic and imported coal has led to deviation in electricity prices. Considering that demand for coal is expected to increase, aligning domestic coal prices with international prices would provide all sectors to have a level playing field in terms of power tariffs.
Now let us move on to some more news from the corporate world.
Coal India has raised the charges for transporting coal from minefields to loading points in light of the rising diesel prices. CIL had last effected a significant hike in transport charges in 2009. In addition to higher fuel prices, there has also been an increase in salaries and wages of employees and contract employees engaged in coal transportation. According to the revised price schedule, the transportation cost for 3-10 km has been raised by Rs 13 to Rs 57 per tonne resulting in a 29.5% increase. For distances of 10-20 km, the surface transport charges have been increased by 51% to Rs 116 per tonne. This price-hike is expected to raise the fuel cost for power producers. CIL stock is currently trading down by 0.3%.
The Central Government has issued guidelines to GAIL (India) Ltd to supply gas across the country at a uniform rate by the end of this month (November 2013). However, an exception will be made in the case of poll bound states where the order will become effective after the election process gets over. The move follows the Gujarat High Court directive of supplying compressed natural gas (CNG) to Gujarat at the same rate as Mumbai and Delhi. GAIL (India) Ltd has been asked by Ministry of Petroleum and Natural Gas (MoPNG) to finalize the modalities of natural gas supply to all city gas distributors (CGDs). The supply will be without discrimination between state companies and private ones, at the base rate and reduced prices by November 30. The Central Government guideline states that the ratio of supply of domestic gas vis-a-vis RLNG (regasified liquid natural gas) for use in CNG (transport) and piped natural gas (PNG) segments be kept uniform for all CGD entities. However, the delivered price of domestic gas may differ on account of transport charges and local taxes and duties. The current allocation of domestic gas for all CGD entities will be cancelled or withdrawn except in case of Tripura Natural Gas Company Limited and Assam Gas Company Limited. Further, as per the guideline, GAIL must ensure to allot 6.4 million standard cubic metres per day (mmscmd) of domestic gas supply to CGDs. This will include Administered Price Mechanism (APM) supplies of 5.21 mmscmd and further supply of 0.72 mmscmd by imposing cuts on all APM and PMT (Panna Mukta Tapti) customers in non-priority sectors. If the requirement is greater, CGDs will have to source through RLNG or other options.
As per a leading financial daily, domestic institutional investors (DII) have voted against Swiss cement major Holcim's restructuring plans of its Indian operations wherein Ambuja Cements would buy a majority stake in fellow subsidiary ACC Ltd by paying Rs 35 bn to parent firm Holcim. If the transaction comes through, Holcim's stake in Ambuja would increase from 50.01% to 61.3%. On the other hand, Ambuja would buy Holcim's 50.1% stake in ACC. As per Securities and Exchange Board of India's (SEBI) new guidelines on mergers and acquisitions, listed companies require majority support of minority shareholders in case of restructuring or merger and acquisitions. DIIs such as Life Insurance Corporation of India and General Insurance Corporation of India together hold 9% stake in Ambuja Cements. Despite the opposition from DIIs, the deal is likely to come through because of support from foreign institutional investors (FII) who account for a little over 30% of the company's equity.
SAIL is planning to raise the iron ore production capacity to 43 million tonnes per annum (MTPA) by 2015-16 in order to expand its steel making capacity. It normally takes 1.6 tonnes of iron ore to produce one tonne of steel. Currently, the production capacity stands at 28 mtpa. It plans to invest around Rs 700 bn on its mines and steel plants for expansion. SAIL expects that with the ongoing and proposed expansion at the mines, it would be able to achieve 58 mtpa iron ore production by 2020. The company gets all its iron ore needs from captive sources. Of the various mines, the major boost in iron ore production is expected to come from the Rowghat mine, where the company plans to produce 12 mtpa iron ore. SAIL has already received all statutory clearances for the mine to develop. However, it has not been able to do much work so far at the ground level because of Maoists' threats.
Bharti Airtel is considering the option of selling its tower business in Africa. This would be done with a view to raise much needed cash to reduce the debt on its balance sheet. Bharti Airtel's debt which stood at US$ 9.69 bn in 2QFY14 is largely due to its US$ 10.7 bn acquisition of Zain Telecom's Africa business in 2010. Its Debt/Equity ratio stood at 1.33 at end of FY13. Bharti had earlier also considered the option of transferring the African tower business to its Indian tower arm Bharti Infratel. Bharti has an extensive tower network in Africa of about 15,000 towers and is looking for a buyer for the entire business. It has already received expression of interest from a few large global tower operators.
BHEL, the state-run giant has bagged Rs 13 bn order from NTPC for equipment supply and installation work at the former's Unchahar plant in Uttar Pradesh. As per the company statement, BHEL has bagged the main plant package contract for 500 MW thermal power plant of NTPC. BHEL's activities under the contract pans out from designing, engineering, manufacturing, supplying, erecting and commissioning of Steam Turbine Generator and their auxiliaries. Besides, certain civil work is also included in the scope of its activities. The key equipment for the project will be manufactured at BHEL's Trichy, Ranipet, Haridwar, Hyderabad, Bangalore and Bhopal plants. Whereas the erection and commissioning of the equipment will roll out in the company's power sector northern region. BHEL has established the capability to deliver power plant equipment of 20,000 MW per annum.
As the September earnings come to an end, it was a mixed bag for Indian companies. While India's economic indicators indicate challenges ahead for the Indian markets, the extended stimulus measures by the US have eased up the uncertainty at least for now.
But the point is that investors should not take their investment decisions based on specific events or short term developments. Indeed, the focus should be on stocks of companies that have good fundamentals, a sound management and available at attractive prices so that they have the potential to deliver healthy returns in the longer run.