In what was an otherwise tepid show for the Indian equity markets, over the past week, the BSE Midcap and Smallcap indices fetched the maximum gains. Reports of lower GDP growth prospects and anxiety over the onset of the June quarter result season seem to have kept investors on the edge. However, stocks from the banking, consumer durables and realty sector found renewed interest. That the Indian and Mauritius governments are trying to work out negotiations on the revision of tax treaty is also a reckoner for investors.
Amongst global markets, Singapore, Brazil and Hong Kong led the pack of gainers for the week. Although UK and India trailed close behind, the Indian markets gained just about 0.5% for the week. Prevailing uncertainty about the Eurozone's risks led to Germany, US and France lose about 1% each. While crude oil prices gained almost 7% during the week, gold prices remained flat.
Let us now take a look at key economic news during the week. Indian economy is agrarian by nature and thus is largely dependent on monsoons. Rainfall in July is particularly important for kharif crops that account for about half of our food grain output. Monsoons this year came in late and so far there is 28% rain deficit. If the situation persists, lower agricultural output may result in higher prices of food grains thereby fuelling inflation.
Now let us take a look at key corporate events during the week. The Indian IT sector has some news to cheer about. As per a leading daily, reforms in the American healthcare sector are expected to benefit the Indian IT companies. According to the Patient Protection and Affordable Care Act, around 30 m uninsured Americans will have to compulsorily go for a health insurance cover. This would imply big opportunities for IT companies in the form of data creation, analytics as well as management. This may fetch deals worth US$ 22 bn.
Pharma company Dr Reddy's has launched 'Ibandronate' Sodium tablets in the US market. These are the generic version of Roche Therapeutics Inc's 'Boniva' tablets. These tablets are used to treat post-menopausal osteoporosis. This move by Dr Reddy's is expected to bring in more revenues for the company from the competitive generics market of the US. The market for generics is huge and Indian phrama companies have a slew of launches lined up to make the most of it. However, with more launches the competition will intensify.
Steel Authority of India Limited (SAIL) is planning to expand the capacity of its Gua iron ore mine in Jharkhand. The capapcity will be ramped up to 10 m tonnes per annum. There are plans to set up a 4 m tonne per annum pelletisation plant too. All this will entail an investment of Rs 30 bn from SAIL; Rs 20.9 bn will be for the expansion of the mine while the remaining will be for the pelletisation plant. We may note here that Gua mine has reserves of 142 million tonne (MT) and a production capacity of 2.4 m tonne per annum. However, it could produce only 0.5 MT during the last fiscal for lack of forest and environment clearances for most part of the year and has remained close since June last year. SAIL will require additional 16 mtpa of iron post capacity expansion. As of now, it mostly sources its iron ore requirements from captive mines.
Power major Tata Power aims to increase its total generation capacity to 26,000 megawatt by 2020. One fourth of this total capacity would be from clean energy sources. As regards the coal supply, Tata Power is tying up for securing 50 m tonnes of coal every year. There are aggressive plans to set up power plants abroad too for which 7 countries have been shortlisted. These include South Africa and other Sub-Saharan Africa countries, Indonesia, Vietnam, Turkey and West Asia. At present, they have a 600 megawatt hydropower project in Nepal and a 114 megawatt hydropower project in Bhutan. Plans are also on to expand the retailing network in Mumbai.
Ashok Leyland is planning a capital expenditure of Rs 40 bn over the next 3 years. Out of this, Rs 12 bn has already been invested. The auto company wants to invest the remaining amount (Rs 18 bn) in its joint venture with Nissan. The company will use a mix up of debt and equity for this. Rs 8 bn will be funded through debt and Rs 10 bn through equity. For the main company, Rs 21 bn worth capex has been planned for medium and heavy commercial vehicles. Of this, Rs 3 bn will be spent on setting up a plant in Tamil Nadu for FY13 and another 8.5 bn over next 2 years. This new plant will help the company avail tax benefits. Tamil Nadu offers waiving value added taxes for a 14-year period, after which Ashok Leyland would have to pay back the total amount waived without paying any interest.
It will be earnings season again from next week onwards. IT majors Tata Consultancy Services and Infosys will be declaring their results. This will be a factor in determining in which direction markets move in the coming weeks. However, investing should be for a long term horizon and investors should look for opportunities to invest in stocks with strong growth prospects, good management and available at attractive valuations.