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Global Markets Ended on a Positive Note
Sat, 26 Nov RoundUp

Global financial markets are witnessing volatility. The historic election of Donald Trump as the 45th president of USA has shaken global financial markets.

Most of the volatility was seen as speculation regarding an US interest rate hike by the Fed intensified. This came as data released during the week showed US home resales rose 2% in October to an annual rate of 5.6 million units. This was the highest level in more than 9 and a half years. The data pushed the dollar to its session highs and also sparked optimism regarding the US economy. The US markets were up 1.5% for the week gone by.

The hike, however small, will lead to a global change in the direction of interest rates. This could mean a pullback of cheap liquidity from emerging markets, including India.

In another news, the European Central Bank (ECB), in its Financial Stability Review warned for more volatility in the near future in global financial markets. As per the ECB, the risk of an abrupt global market correction has intensified on the back of widespread political uncertainty, posing a threat to banks, stability and economic growth. Stock markets in Germany and France were up by 0.5% and 1% for the week gone by.

The case for the above uncertainty and volatility is this: Central banks across the world are trying to prod growth with the help of stimulus measures and near-zero or negative interest rates. This is seen because many nations today are struggling through a period of low to no growth. The reasons are many - ranging from central bank policy measures to deleveraging and demographics. The average consumer is saddled with large debts and is looking to pay them off. This means a lower outlook for growth. This low growth scenario is one of the reasons for all the scrutiny over interest rates.

Back home, the BSE-Sensex ended on a flat note and was up 0.6%. The week started on a weak note, with FIIs outflows. The markets reacted to the possible slowdown in the economy amid the demonetisation. Further, the possible fed rate hike added to the woes. However, markets saw some recovery in the later part of the week. DIIs showed buying interest. Demonetisation and the possible Fed rate hike has created some fear in the market and this has led to volatility. We believe this would continue in the short run.

Key World Markets During the Week

On the sectoral indices front, IT and Metal stocks led the gainers this week. On the other hand, stocks from Banking and power witnessed selling pressure.

BSE Indices During the Week

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

The government's recent move to demonetize notes of Rs 500 and Rs 1,000 denominations has resulted in deposits with banks rising. On Monday, the Reserve Bank of India said banks reported having received deposits worth Rs 5,11,565 crore between November 10, the first working day after demonetization was announced, and November 18.

In another news update, in a move to clampdown black money, India and Switzerland signed a declaration allowing automatic exchange of financial information between the two countries prospectively.

The agreement signed will end the era of year's long Swiss Bank secrecy. However, the point to be noted is that the information would be shared prospectively and not in retrospection.

Nevertheless, this move along with the stringent Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, is expected to act as an effective deterrent for tax evaders who stash their money in foreign countries.

Reportedly, as per the agreement signed India will automatically receive all financial information about its residents, including bank accounts and balances, dividends and interest income and sales proceeds used to calculate capital gains tax, from September 2019.

Earlier this month, the government had demonetized the 500 and 1,000 rupee note in a move to curb black money. Vivek Kaul has come out with a special report on how demonetization can have an impact on your investments, properties and effectively your wealth. It's a mind boggling read and you can claim this copy for free.

According to a leading financial daily, India recorded overall power deficit of 0.7% in first seven months of the current fiscal. As per information provided by Power Minister Piyush Goyal, 681.34 Billion Units (BU) were available against the power demand of 686.09 BU during the April-October period this fiscal. In 2015-16, this deficit was 2.1%.

The government has planned to make the country energy surplus with generating target to achieve overall electricity surplus in 2016-17. According to the Load Generation Balance Report (LGBR) for 2016-17, the Centre has set a target of generating 1,178 BU with overall surplus of 1.1% and peak surplus of 2.6%.

Besides, the average Plant Load Factor (PLF or proportion of capacity utilization) of thermal power plants (coal/lignite) during 2016-17 (April - October, 2016) was 59.17% and the PLF for gas based power plants during 2016-17 (April - October, 2016) was 23.59%.

Power shortage is one of the biggest problems faced by the country. Shortage of coal had led to poor electricity generation in the recent past. While the issue of shortfall in coal production has been rectified, another problem facing the power sector is the dismal financial health of state electricity boards.

In another news update, housing prices in 42 major cities in India could drop by up to 30% over the next six-twelve months. This is on account of the recent drive of the government to demonetize the 500 and 1000 currency notes.

Typically, real estate throughout the length and breadth of India is bought using black money. A significant part of the payment is made in cash. A Clampdown on black money by demonetization of the 500 and 1000 rupee notes should put pressure on the real estate prices as the demand fades away.

The Jan Dhan Yojana was touted to be a big success story with there now being 250 m Jan Dhan accounts across the country. Now, little did the Government know that it is these very accounts that could be used to work around arguably the biggest financial drive since independence.

With people resorting to innovative ways to prevent their cash from turning trash, the Jan Dhan accounts have been like a godsend. The modus operandi works something like this. Grab hold of a Jan Dhan account holder and deposit the maximum allowable limit of Rs 50,000 only to take it back few months later in exchange for a small fee. Is it any wonder that in the fortnight since demonetization Jan Dhan bank account deposits have swelled a massive Rs 21,000 crores? This is almost 30 times higher than the cumulative amount that was lying in these accounts before demonetization.

While the Government is of course watching this carefully, it will be interesting to see what comes out of this.

Movers and Shakers During the Week
Company18-Nov-1625-Nov-16Change52-wk High/Low
Top Gainers During the Week (BSE Group A)
Berger Paints18822017.2%277/153
Piramal Enterprises1445166014.8%2095/835
Nalco505713.6%58/30
Hindustan Copper556110.6%74/42
Guj. Mineral Dev.961059.9%119/52
     
Top Losers During the Week (BSE Group A)
Jai Prakash Asso.87-9.6%14/5
Reliance Comm.3835-8.7%92/34
Indian Bank262242-7.6%276/76
Eicher Motors21,80520,144-7.6%26602/14818
Corporation Bank4946-6.4%51/31
Source: Equitymaster

Here are some of the key results in the week gone by.

Larsen and Turbo declared its results for the quarter ended September 2016. Net revenues of the company grew 8.5% YoY during the quarter. The revenues grew on the back of a strong performance of its hydrocarbon, heavy engineering and service segments.

Order inflows grew 11% YoY, led by contracts from outside India largely in the infrastructure and hydrocarbon space. The company's consolidated order book now stands at Rs 2500 billion, about 2.5 times its revenues for the year ended 31 March 2016.

The company's net profit grew 41% YoY excluding an exception item of Rs 4 billion on account of divestment of its insurance business. Including this exceptional item, the profits grew 84.3% YoY to Rs 143 billion. The growth in the net profit was mainly due to strong cost controls coupled with robust other income.

Other income grew at a pace of 49.6% YoY on the back of robust profits from treasury operations. The company's efforts to refinance borrowings at lower rates helped trim the financial charges. The employee costs too were tightly managed. The firm has cut about 14,000 jobs across business in the past six months due to factors such as automation, redundancy and changes in technology.

The company has reiterated its guidance for a revenue growth in a range of 12-15% for the fiscal year 2017. Going forward, performance of its infrastructure segment which contributes to almost half of its revenues will be one of the key things to watch out for. Share price of L&T is up by 3.2%.

Some of the key corporate developments in the week gone by.

According to a leading financial daily Vedanta is looking at increasing its captive power generation capacity by 1,200 megawatt (MW) amid rising production. The company is considering setting up 350-MW super-critical units in joint ventures at its different production bases in the country.

The company is also looking at offering excess land at manufacturing units as equity in setting up thermal power units under joint venture with third parties.

Reportedly, Vedanta has already invited an expression of interest and is evaluating the pros and cons of various models. Around 3,554 MW of the total capacity, meant for commercial sale, is running at around 70%.

Vedanta has an electricity generation capacity of nearly 9,000 MW of which 200 MW comes from wind and the rest from thermal. Nearly 60% of the 9,000 MW is for captive use and the remaining is sold in the market. The company's capacity utilization has risen with the rise in production.

According to a leading financial daily, Larsen & Toubro's (L&T) construction arm - L&T Constructions has bagged orders worth Rs 19.26 billion across its various business segments. Under, Power Transmission & Distribution, the business has secured orders worth Rs 5.71 billion. The business continued its winning streak by garnering electrification works orders under the Integrated Power Development Scheme (IPDS) and Deen Dayal Upadhyay Gram Jyoti Yojana (DDUGJY) schemes of the Government of India. It has also bagged a major order from Odisha Power Transmission Corporation (OPTCL) for turnkey electrification works in five circles of WESCO utility area in Odisha.

Under Building & Factories, the business has bagged an order worth Rs 5.14 billion. Under Water & Effluent Treatment, the business has secured orders worth Rs 3.97 billion. In Metallurgical and Material Handling, it has bagged orders worth Rs 2.98 billion, while under Civil Infrastructure Business; it has won an Engineering, Procurement and Construction order worth Rs 1.46 billion in the special bridges sector from a prestigious client.

According to a leading financial daily, Bharat Forge Limited (BFL) is set to acquire 100% shareholding of Walker Forge Tennessee LLC (WFT) through its US subsidiary, Bharat Forge America. The transaction is valued at US$14 million, which will be funded through internal accruals & debt.

WFT is a leading supplier of complex, steel and high-alloy steel, engine and chassis components to a diverse group of customers across automotive and industrial sectors. WFT is expected to record revenues of US$28 million in CY 2016 with a balanced revenue mix across the automotive and industrial sectors.

For BFL this proposed acquisition is focused establishing manufacturing footprint in North America and increasing product offering into the passenger car and commercial vehicle segments as well into industrial sectors such as construction & mining and allied industries.

Meanwhile, for Bharat Forge, the acquisition of Walker Forge Tennessee creates a strategic manufacturing footprint in North America to leverage their existing customer relationships. It also enables the company to address new end market segments and broaden the product portfolio

According to a leading financial daily, Sun Pharmaceutical Industries has executed definitive agreements for acquisition of 85.1% of JSC Biosintez, a Russian pharmaceutical company engaged in manufacture and marketing of pharmaceutical products in Russia and CIS region. The equity consideration for the 85.1% stake is US$24 million.

Sun Pharma would also assume a debt of approximately US$36 million as part of this transaction. This transaction will give Sun Pharma access to local manufacturing capability across multiple dosage forms in Russia, enabling it to serve the Russia pharmaceutical market more effectively

In another news update, State Bank of India has slashed bulk term deposit rates between 1.2-1.9% across various tenors from November 24. Bulk deposits cover funds over Rs 1 crore but less than Rs 10 crore.

The rates for 7-45 days have been cut by 1.25% to 3.75%, while the largest cut is in the 180-210-days deposit by 1.9% to 3.85%.

The cut was imperative given credit offtake is low and fund inflows have been huge following demonetization of 500 and 1,000 rupee notes.

Lending rates too are expected to come down in tandem with the deposit rates. The Prime Minister's Office (PMO) has been focusing on how this whole demonetisation exercise and the deposits that have been flowing into the bank chest should be utilised to extend loans to the rural sector, the rural economy, bring down lending rates

Tanushree Banerjee, Co-Head of Research, had recently written an excellent piece on how demonetization can adversely impact the household savings rate in the country as 70% of the country's household savings is in bank deposit.

As per an article in Livemint, US drug regulator has found seven breaches of manufacturing standards at Sun Pharmaceutical's formulation plant in Mohali, Punjab. This facility formerly belonged to Ranbaxy Laboratories. Moreover, this facility has been under an import alert ban since 2013.

Reportedly, the US drug regulator inspected the Mohali plant between 7 November and 16 November. Post the inspection; the drug regulator issued a Form 483, citing four deviations from the norms. Experts believe that barring one, the rest three deviations are not severe in nature.

Ranbaxy's units at Dewas, Panota Sahib and Toansa are also under the US FDA import alert. This bars drugs manufactured in these plants from being sold in the US.

Currently, the company is not only finding it difficult to resolve compliance issues at Ranbaxy's plant but also finding it increasingly difficult to resolve issues at its own manufacturing facility at Halol and Kharkhadi in Gujarat.

Recently the company declared its results for the quarter ended September 2016. The company's gross sales grew by 13.2% YoY during the quarter. The sales grew on the back of a good performance from Indian as well as US geography. Sales in the US geography grew by 9% YoY in dollar terms.

However, the main over hanging regulatory issue pertaining to its Halol plant has not been cleared yet. The company has addressed all concerns as pointed by the US FDA and have taken appropriate remedial measures. Once the plant is compliant again, it will be a huge positive for the company. The share price of Sun Pharma is trading higher by 3.3%.

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

Markets started the week on a terrible note. The Nifty slipped below the crucial psychological mark of 8000 on Monday and traded around there with high volatility for the next three days. Finally, it recovered most of the losses on Friday and ended with gains of 140 points. On a weekly basis, the index ended flat with a nominal gain of 34 points to 8108. It seems like the Nifty can continue with the pullback in the coming week as well. You can read the detailed market update here...

Nifty Trades on a Volatile Note


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