World markets have a mixed week
RoundUp

In the week gone by, global markets delivered a mixed performance. While Asian markets barring Japan performed well, European indices faced selling pressure. In the US, economic news was mixed. While industrial production numbers beat forecasts housing statistics disappointed. The US Fed's Beige Book of anecdotal information on business activity showed a pickup in activity as the harsh weather conditions eased up.

European stocks struggled as the US dollar weakened due to the dovish statements by the US Fed. Profit booking was clearly evident before the Easter holidays in European indices as the German DAX, the British FTSE and the French CAC ended down by 3.9%, 1.9% and 1.8% respectively.

Back home, the Indian equity markets ended flat after starting the week on a negative note. The results season has begun and attention is now likely to shift to stock specific developments rather than expectations from the general elections.

Key world markets during the week
Source: Yahoo Finance

Most of the sectoral indices ended in negative territory for the week with realty (down 4.1%) and consumer durables (down 1.6%) being the biggest losers. IT (up 0.8%) and FMCG (up 2.2%) were the biggest gainers for the week.

BSE indices during the week

Now let us discuss some of the economic developments of the week gone by.

The Reserve Bank of India (RBI) has taken an important decision regarding the country's forex rate. The RBI has suggested setting up an independent body to recommend a benchmark forex rate. This, the RBI believes, will reduce the chance of forex manipulation by banks. The RBI has directed Fixed Income Money Market and Derivatives Association of India (FIMMDA) and Foreign Exchange Dealers Association of India (FEDAI) to take necessary steps to act as administrators of the Indian rupee interest rate and the forex rate respectively. The benchmark setting process is currently plagued with conflicts of interest due to the corporate governance structure of the two institutions. This is an important development after the manipulation of the London Interbank Overnight Rate (LIBOR) had come to light in June 2012. The suggestions will help to prevent such manipulation in the Indian forex markets.

Wholesale Price Index (WPI)-based inflation increased to 5.7% in March from 4.68% a month ago, snapping a three-month easing trend as fruit and vegetable prices started to climb up again. Food inflation rose to 9.9% in March from 8.1% in February and, within it, prices of vegetables jumped 8.5% compared with a 3.9% rise a month ago and that of fruits rose 16.1% compared with a 9.9% growth earlier. Fuel inflation increased to 11.2% from 8.7% a month ago as the government raised cooking gas prices. According to the data released by the Government today, the January inflation number has been revised upwards to 5.1% as well.

Business confidence, as reflected in the Index for Industrial Production (IIP), de-grew 1.9% in February against the 0.8% growth in January, while the country's trade deficit hit a five-month high in March at US $10.5 bn. The IIP data showed de-growth in capital goods at 17.4% against the previous month's de-growth of 4.2%, while consumer durables also de-grew at 9.3% against the negative growth of 8.3% in the earlier month. Consumer non-durables contracted 1.2% against the previous month's growth of 4.4% and consumer goods fell by negative 4.5% versus the previous month's de-growth of 0.6%. The most disappointing part is decline in the growth rate of 13 out of the 22 industry groups in the manufacturing sector during February 2014.

As per a leading financial daily, India turned into a net steel exporter in FY14 after a gap of five years. According to the Joint Plant Committee, steel exports increased by 4% to 5.6 million tonnes (mt) whereas steel imports slumped by 31% to 5.4 mt in 2013-14. Going forward, steel exports are likely to be hit by the recent rupee appreciation as well as the expected recovery in the infrastructure projects in the country post elections that is likely to boost domestic steel demand. Domestic steel consumption in FY14 clocked a growth of a mere 0.6%, the slowest in last four years, to reach 73.9 mt. However JSW Steel has said that despite improvement in domestic demand, steel companies will continue to focus on exports backed by higher production and no currency fluctuations.

Movers and shakers during the week
Company 11-Apr-14 17-Apr-14 Change 52-wk High/Low
Top gainers during the week (BSE-A Group)
Future Retail8610725.0%158/63
Adani Enterprise38243915.0%478/126
Crompton Greaves16518914.5%188/72
Reliance Infra46252212.9%524/308
Pipavav Defence394412.6%75/31
Top losers during the week (BSE-A Group)
Suzlon Energy1513-10.6%16/6
DLF Ltd.177160-9.7%255/120
Bank of India240220-8.6%345/127
JSW Energy6359-6.6%69/34
Adani Power5652-6.5%62/29
Source: Equitymaster

Now let us move on to some more developments in India Inc.

India's top two telecom operators, Bharti Airtel and Vodafone; have increased tariffs on some plans. On some of its plans, Airtel has increased tariffs from 45 paise to 50 paise per call. The validity of its 28-day mobile internet pack has now been lowered to just 21 days. This means that, effectively, customers would have to pay higher internet charges. On similar lines, Vodafone too has tweaked some of its plans to hike tariffs. It is worth noting that Bharti Airtel and Vodafone India together control about 52% of the Indian telecom market. The recent moves by these two leading players could trigger a tariff hike by other telecom players as well. Both Vodafone and Airtel have always maintained till now that there have been no changes in the base tariffs. There have only been reductions in discounts and promotions.

As per a leading business daily, Ashok Leyland has launched 'Partner', a light commercial vehicle (LCV) in the Indian market. The LCV comes with various features including air-conditioning, sports car-like interiors among others. 'Partner' is the latest product from the Ashok Leyland-Nissan joint venture, after the commercial successful launch of 'Dost' and the recently launched 'Stile'. Ashok Leyland has always been a strong player in the medium and heavy commercial vehicle (MHCV) space. But in recent times, the company has been looking to strengthen its presence in the LCV space as well given that the demand for LCVs has ramped up and also because this segment is expected to grow faster than the MHCV segment. What more, the company has been facing several headwinds in the past few quarters on account of the weak economic environment which has considerably impacted demand for MHCVs. However, the company intends to keep up the pace of its product launches and the launch of 'Partner' is a step in that direction.

As per a leading business daily, Glenmark Pharma has received milestone payment of US$ 5 m from Sanofi. This is on a collaboration of its VLA2 (alpha2-beta1) integrin monoclonal antibody. GBR 500 is a first-in-class therapeutic monoclonal antibody for chronic autoimmune disorders. Glenmark had already received upfront payment of US$ 50 m from Sanofi in FY12. Hence, the total payment that Glenmark has now received from Sanofi from this molecule stands at US$ 55 m. It must be noted that Glenmark has actively been following a strategy of either out-licensing its molecules to global pharma majors for developing them further or entering into alliances with them. Given that the R&D process involves heavy costs and does not always yield success, the partnership route helps. This is because it enables the Indian company to leverage on the expertise of the global innovator and also receive some revenue visibility in the form of milestone payments.

Let us now have a look at the fourth quarter results announced by India's top two software companies

India's largest software services exporter Tata Consultancy Services (TCS) has announced its financial results for the fourth quarter of the financial year 2013-14 (4QFY14). During the quarter, the company's consolidated revenues stood at Rs 215.5 bn, higher by 1.2% on a quarter-on-quarter (QoQ) basis. The company witnessed 2.6% QoQ growth in volumes. At the bottomline level, consolidated net profit increased marginally by 0.5% QoQ to Rs 53.6 bn. Net profit margin contracted marginally from 25% in 3QFY14 to 24.9% in 4QFY14. For the full financial year FY14, revenues and net profit stood at Rs 81.8 bn (up 29.9% YoY) and Rs 19.2 bn (up 37.7% YoY) respectively. There were 9,751 net employee additions during the quarter.

India's second largest software services firm Infosys has announced its financial results for the fourth quarter of the financial year 2013-14 (4QFY14). During the quarter, the company's consolidated revenues stood at Rs 128.75 bn, lower by 1.2% on a quarter-on-quarter (QoQ) basis. However, gross profit increased by 1.1% QoQ as the gross profit margin improved from 36.1% in 3QFY14 to 37% in 4QFY14. Operating profit increased by 0.7% QoQ to Rs 32.81 bn. At the bottomline level, net profit increases by 4.1% QoQ to Rs 29.92 bn. Net profit margin improves from 22.1% in 3QFY14 to 23.2 in 4QFY14. For the full financial year FY14, revenues and net profit stood at Rs 501.33 bn (up 24.2% YoY) and Rs 106.48 bn (up 13% YoY) respectively. The company's board of directors has recommended a final dividend of Rs 43 per share for FY14.

Going ahead, the markets will respond to the results season that has begun. Stock and sector specific volatility can be expected over the next few weeks. However, investors should not base their investing decisions on short term price movements and must stick to investing in stable companies with good fundamentals.

Market close flat in a short week
Closing

After a weak session yesterday, Indian equity markets began the day's proceedings on a positive note. The subsequent hours saw the indices scale higher as buying activity continued across index heavyweights. The momentum was maintained in the final trading hour as well and the indices closed well above the dotted line. While the BSE Sensex today closed higher by 352 points, the NSE-Nifty closed higher by 104 points. The BSE Mid Cap and BSE Small Cap also did well and notched gains of 1% each. Gains were largely seen in auto, banking and oil & gas stocks.

As regards global markets, Asian indices closed mixed today while the European indices have also opened mixed. The rupee was trading at Rs 60.39 to the dollar at the time of writing.

Most pharma stocks closed firm today with the key gainers being Cipla, Sun Pharma and Dr.Reddy's. As per a leading business daily, Dr.Reddy's has launched Eszopiclone drug in the US market post the approval received from the USFDA. Eszopiclone is the generic version of Lunesta and is used for the treatment of insomnia. Sunovion Pharmaceuticals Inc is the owner of the drug. According to IMS Health, Lunesta tablets and generics combined had US sales of about US$ 887 m for the 12 months ended January 2014. This is a positive for the company and will enhance its sales from the highly competitive US generics market. It must be noted that given the intense competition in the US market, Dr.Reddy's has put in place a strategy of not only launching new products but also focusing on those drugs that are in a niche category. Niche drugs typically have higher barriers to entry and so the competition and price erosion is not very high.

Telecom stocks closed in the positive today with the key gainers being Bharti Airtel and Idea Cellular. The Supreme Court (SC) has ruled that the books of any telecommunications company can be audited by the Comptroller and Auditor General of India (CAG), an order that has the potential to affect all private firms that pay the government to use public resources. According to the SC, the scrutiny by the government auditor is necessary to ensure the exchequer gets its legitimate share of the revenue generated from public resources. The apex court modified an earlier verdict of the Delhi high court that allowed the CAG to conduct statutory audit of only the telcos' revenue. India's telecom services firms had moved the Supreme Court in January on grounds that they were private companies and not under the jurisdiction of CAG, the public auditor tasked with auditing accounts of government agencies and schemes.

Indian share markets firm up
01:30 pm

Indian share markets continued to soar higher in the post-noon trading session. All the sectoral indices are trading in the green with realty, auto, and oil & gas stocks being the biggest gainers.

BSE-Sensex is up 246 points and NSE-Nifty is trading 50 points up. Both BSE Mid Cap and BSE Small Cap indices are trading up by 1.2% each. The rupee is trading at 60.4 to the US dollar.

Most of the FMCG stocks are trading in the green with Kokyo Camlin and Colgate being the major gainers whereas Marico and Godrej Consumer Products Ltd (GCPL) are among the few stocks trading in the red. As per a leading financial daily, the FMCG industry faced a severe slowdown in 2013 on account of a sharp pullback in the demand for the top five consumer good segments. According to data agency Nielsen, the top five FMCG segments namely biscuits, soap, washing powder, refined oil and salty snacks registered growth of 4%-10% in 2013 as compared to 15%-23% growth in 2012. This dragged down the overall growth of the FMCG industry to 9.4% in 2013, almost half of the 18% growth recorded in 2012. Snacks, packaged atta and rice, chocolates and non-refined oil were among the few segments that have grown by over 20% in 2013 mainly on account of efforts by companies to increase penetration.

All software stocks are trading firm with HCL Infosys and Wipro leading the pack of gainers. As per a leading business daily, India's second largest software major Infosys plans to reorganize and consolidate its data analytics operation as a separate vertical. Currently the company has presence in analytics as a sub operation across its various verticals. It plans to get them together as a separate vertical in order to expedite the process and scale thereby enabling growth. The creation of the data analytics vertical would entail recruitment of personnel in data sciences and statistics. Such move by Infosys is aimed at gaining back its leadership position in the software industry. The consolidation of analytics vertical is on similar line as earlier announced by another IT company, Wipro.

Broad based rally in the markets
11:30 am

After opening on a mixed note, the Indian Indices are trading well above the dotted line in the morning. All sectoral indices are trading in the green. The buying interest is the highest in software and auto stocks.

The BSE-Sensex is trading up 185 points and the NSE-Nifty is trading up 56 points. The BSE Mid Cap index is trading up 0.8% and the BSE Small Cap index is trading up 1.1%. The rupee is trading at 60.38 to the US dollar.

Software stocks are trading positive today. HCL Technologies and Wipro Ltd are leading the gainers. India's fourth largest software firm HCL Technologies has announced third quarter results for FY14 (the company has a June year ending). The results have surpassed market expectations. HCL's Application Services business registered a robust performance led by its Digital Systems Integration proposition on the discretionary side and its ALT ASM business on the non-discretionary side in this quarter. The company's revenue has risen by 2% QoQ to Rs 83.5 bn. The company's EBIT has expanded by 6.1% sequentially and 44.5% YoY resulting in a healthy EBIT margin of 24.6%. Its consolidated net income for the quarter has risen to Rs 16.2 bn from Rs 10.2 bn in the same period last year. There is a sequential (QoQ) growth of 8.5% in profit after tax (PAT). HCL Tech is trading 1.3% up today.

The Reserve Bank of India (RBI) has taken an important decision regarding the country's forex rate. The RBI has suggested setting up an independent body to recommend a benchmark forex rate. This, the RBI believes, will reduce the chance of forex, manipulation by banks. The RBI has directed Fixed Income Money Market and Derivatives Association of India (FIMMDA) and Foreign Exchange Dealers Association of India (FEDAI) to take necessary steps to act as administrators of the Indian rupee interest rate and the forex rate respectively. The benchmark setting process is currently plagued with conflicts of interest due to the corporate governance structure of the two institutions. This is an important development after the manipulation of the London Interbank Overnight Rate (LIBOR) had come to light in June 2012. The suggestions will help to prevent such manipulation in the Indian forex markets.

TCS announces Q4 results
09:30 am

Asian stock markets have opened the day on a mixed note with stock markets in Japan (down 0.2%) and South Korea (down 0.2%) leading the losses. However, markets in Indonesia (up 0.3%) and Taiwan (up 0.3%) are trading firm. The Indian share markets have opened the day on a firm note. Barring capital goods and banking, all sectoral indices have opened in the green with stocks in the telecom and software space leading the gains.

The Sensex today is up by around 63 points (0.3%), while the NSE-Nifty is up by about 21 points (0.3%). The mid and small cap stocks have also opened in the green with the BSE Mid Cap and BSE Small Cap indices up by around 0.4% and 0.8% respectively. The rupee is currently trading at Rs 60.23 to the US dollar.

Software stocks have opened the day on a firm note with HCL Infosystems, NIIT Ltd and Wipro leading the gains. India's largest software services exporter TCS has announced its financial results for the fourth quarter of the financial year 2013-14 (4QFY14). During the quarter, the company's consolidated revenues stood at Rs 215.5 bn, higher by 1.2% on a quarter-on-quarter (QoQ) basis. The company witnessed 2.6% QoQ growth in volumes. At the bottomline level, consolidated net profit increased marginally by 0.5% QoQ to Rs 53.6 bn. Net profit margin contracted marginally from 25% in 3QFY14 to 24.9% in 4QFY14. For the full financial year FY14, revenues and net profit stood at Rs 81.8 bn (up 29.9% YoY) and Rs 19.2 bn (up 37.7% YoY) respectively. There were 9,751 net employee additions during the quarter.

Indian pharma stocks have opened the day mainly on a firm note with Orchid Chemicals, Wockhardt Ltd and J B Chemicals leading the gains. After recently selling off its 11% stake in Vodafone India for a windfall gain of 52%, Piramal Group flagship firm Piramal Enterprises has now agreed to acquire an effective 20% equity stake in Shriram Capital Ltd for an aggregate consideration of Rs 20.14 bn. Shriram Capital is the holding company for the financial services and insurance entities of the Chennai-based Shriram Group. It must be noted that in May 2013, Piramal had invested Rs 16.36 bn to acquire about 9.9% equity stake in Shriram Transport Finance Company Ltd (STFCL), one of the listed non-banking financial company of the Shriram Group.

Micro-cap stocks find favour
Pre-Open

Retail investors often in search of quick gains end up buying penny stocks. The reason is not difficult to understand. Such micro-cap stocks tend to move rapidly. This can lead to quick profits. However the opposite is also true. When the markets fall, these stocks tend to crash. Therefore, such stocks rarely witness any action when market sentiment is poor. They only start their up-move when there is widespread optimism in the markets.

This certainly seems to be the case these days. Retail investors are flocking to stocks of smaller companies again. Market sentiment has definitely improved over the last few months. Expectations of a new government, post the elections, is the main reason for the same. With the markets touching new life highs almost every week, retail investors have been returning to the market. What is unfortunate is that their interest has not been directed towards stable companies with strong fundamentals. As per an article in the Economic Times, retail investors have increased their holding in small companies with questionable fundamentals.

The buying interest seems to be coming from a new set of investors who have entered the market for the first time during a bullish phase. Also there are many people who had missed out on the big up move in sectors like software last year. It appears that greed has taken over in the stock markets. Retail investors are buying shares in firms without paying heed to the fundamentals.

This is extremely risky behavior, we believe. While stocks of small companies certainly offer an opportunity for large gains, they are inherently risky investments. Time and again investors have burnt their fingers in such stocks. The opportunity to make quick gains cannot override the need for a detailed analysis of such companies. Retail investors would do well to avoid small companies with poor fundamentals and stick to stable firms which can offer better long term returns.