After rallying for several weeks, global markets witnessed a sharp reversal this week. Majority of global markets witnessed selling pressures with, the Brazilian market (down 7.7%) and the French market (down 7%) leading the pack of losers.
Worries about global growth were clearly evident. With crude falling to a new 5 year low below US$ 63 per barrel, markets are now factoring the possibility of weaker than expected global demand. Despite positive economic data from the US markets remained jittery. Japan's third quarter GDP contraction was been revealed to be worse than initially reported at -1.9% and China's economy continued to remain sluggish due to falling consumer demand.
In Europe, the German economy showed increasing signs of weakness as the nation's October trade data revealed that exports and imports fell by 0.5% and 3.1% respectively. There were also concerns surrounding the future of Greece in the Euro as presidential elections have been called in the country.
After hitting a life high just last week, the benchmark Dow Jones Industrial average (DJIA) in the US ended the week lower by 3.8%. Back home in India, the BSE-Sensex ended the week lower by 3.9%.
Now let us discuss some of the key economic and industry developments in the week gone by.
As per the financial daily, the long awaited Centre's proposed Goods and Services Tax (GST) once again saw resistance from states in the recently held meeting. The States rejected the revised draft saying it does not address their concerns, particularly on entry tax and taxation of petroleum products. Reportedly, finance ministry officials claimed some breakthrough, and also added that they would try to present the Bill before Parliament in the current session. The GST roll-out has missed several deadlines due to lack of consensus among states and the center.
In a major boost to sugar firms, the government increased the price for procurement of ethanol to Rs 48.5-49.5 per litre. The rates (lower or higher end) will depend upon the distance between sugar mill and the depot of an oil company which procures ethanol. The new rate is much higher than what the oil companies currently pay to sugar manufacturers for supplying ethanol. It may be noted that ethanol is blended with petrol and is a by-product of sugar. Hence, oil companies have to buy it from sugar producers; the price of which is fixed by the government. An increase in price of ethanol will benefit sugar producers as their realizations shall improve.
The recent hike in excise duty on petroleum products is likely to provide a much needed cushion to the government's kitty this fiscal. It may be noted that after a fall in crude prices which resulted in a decline in petrol & diesel prices, the government took the opportunity to raise excise duty on these products so as to shore up its revenues. The excise hike that came in on November 12 (excise was raised by Rs 1.5 per litre on both petrol & diesel) and December 02 (the excise on petrol was raised by Rs 2.25 per litre while that on diesel was raised by Rs 1 per litre) will fetch additional Rs 105 bn to the government this fiscal. A hike in excise will certainly help the government in plugging its revenue gap and meet its fiscal target.
India's current account deficit (CAD) widened to a five-quarter high of 2.1% of GDP for the quarter ended September 2014. The CAD in the preceding quarter was at 1.7% of the GDP. Slowdown in merchandise exports and higher gold imports led to a sharp rise in CAD for the quarter. Merchandise exports slowed down to 4.9% in September 2014 quarter from 11.9% in the corresponding quarter last year. However, higher gold imports pushed up merchandise imports that grew by 8.1% in September 2014 quarter vis-a-vis 4.8% fall in year-ago quarter. Last month, the government removed the 20:80 restrictions on gold imports that required traders to mandatorily export 20% of the imported yellow metal. The Reserve Bank of India has said that it is comfortable with the current account deficit scenario on account of lower crude prices. Brent crude prices dropped below $ 68 a barrel which is a five-year low after Organization of Petroleum Exporting Countries decided against cutting output.
Now let us move on to some of the key corporate developments of the week gone by.
Coal India Ltd (CIL) has received order to supply imported coal to the tune of around 5 lakh tonnes in FY15. The supply is likely to be completed in the third and fourth quarters of FY15. This has been stated by the Coal and Power Minister. The power utility companies have the option of receiving a part of the supply of annual contracted quantity from CIL through imported coal under the revised provisions of the Fuel Supply Agreements (FSA). As per the Minister, the coal demand from the power utility sector has been estimated at 551.5 MT (million tonnes) out of which 466.9 MT will be met by domestic production and the balance 84.7 MT through imports.
Tata Power has acquired a 540 MW thermal power plant near Nagpur in Maharashtra from Ideal Energy Project Ltd. The company's generation capacity is set to increase to 8,885 MW post this acquisition. Tata Power had been looking at a partnership with ICICI Securities to buy out troubled assets. The company has a total operational capacity of 8,613 MW out of which 7,647 MW is thermal power. It is to be noted that Adani Power recently acquired 600 MW Korba West plant from Avantha Group scaling up its capacity to 11,040 MW which is the highest in private power generation space.
The competition commission of India (CCI) has finally cleared US $ 4 bn deal between Sun pharmaceuticals and Ranbaxy laboratories. However the regulator has put some conditions to it. The CCI has asked both the companies to sell 7 brands which could have adverse effect on the competition, post merger. Consequently, the regulator has given 6 months time for the divestment process. The 7 brands that are supposed to be divested are of less than Rs 500 m. Among these 7 products, Sun has to divest a product, Tamsulosin and also Tolterodine which is worth Rs 30 m. While, Ranbaxy has to divest 6 brands worth Rs 300 m, the biggest brand among these is Eligard. In all these brands the companies have market share of above 50-60%, and thus CCI has directed to divest them.
The founders of Infosys sold 32.6 m shares of the company in a block deal. The company's founders N R Narayana Murthy, Nandan Nilenkani, K Dinesh and S D Shibulal and their families have decided to sell 25% of their holding of 124 m shares at base price of Rs 1,988 per share. The total worth of the founder's stake offered for sale is around $1.1 bn. The company has not disclosed the reason for the sale share citing family affair of the promoters, none of whom are actively involved in the company's business any more.
After facing issues with institutional investors over its Gujarat plant transfer to parent Suzuki, car maker Maruti Suzuki India Ltd has deferred seeking shareholders' permission for Gujarat plant. It is now is planning to seek permission of minority shareholders only after a proposed relaxation comes into effect in the Companies Act. Earlier, the company had planned to seek shareholders' approval for the transaction in November month. However, in the meanwhile, the Cabinet cleared a slew of amendments regarding new Companies Act. As such, the management believes it does not make sense to go for the vote until there is more clarity about the bill. It will wait for the changes to come into effect after Parliament's nod.
Going forward, Indian markets will continue to be driven by various macro and micro events. Global growth concerns, crude prices and the US Fed's actions will be important short term factors. Another aspect, driving the market is the FII activity too. Over and above, the markets will also look out for any economic reform announcements from the government. The bills passed by the ongoing winter session of parliament will also be closely tracked. However, we believe that investors will be best served by a long term investing strategy focused on company specific fundamentals.