Global markets end on a mixed note

Equity markets across the world continued to witness pressure from escalating tensions between the West and Russia over the Ukraine crisis. However, the overall weakness was somewhat reduced by positive performance of a handful of Asian and European indices. Among European markets, UK and France ended higher by 0.9% and 0.3%, respectively whereas Germany was marginally down.

The geopolitical tension continued to loom large on the US equity markets even as the Thomson Reuters/University of Michigan's consumer sentiment for April was upbeat and ahead of market expectations. The US markets were down by 0.4% for the week.

In Asia, the poll frenzy kept Indian markets buoyant whereas the Japanese market ended higher on a weak yen. Even the Singapore markets ended 0.4% higher for the week. However, the Chinese and Hong Kong indices were down by 3% and 2.4%, respectively.

While the Indian equity markets continued to scale new highs during the week on increased buying by foreign institutional investors, some gains were pared off in the absence of positive cues from global markets.

Key world markets during the week
Source: Yahoo Finance

Most of the sectoral indices ended in positive territory for the week with capital goods (up 4.3%) and banking (up 1.9%) being the biggest gainers. FMCG (down 2.5%) and power (down 1.5%) were the biggest losers for the week

BSE indices during the week

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

Early forecasts signal a below normal monsoon this year for India. As per the Indian Meteorological Department's (IMD) southwest monsoon forecast, there is only a 35% chance of a normal monsoon in 2014. The main reason for poor rainfall is being attributed to the El Nino, which is a weather phenomenon that heats up the Pacific Ocean and causes droughts in south East Asia as well as in India. The El Nino effect is expected to coincide with the monsoon season. Although there is no direct correlation between the El Nino and monsoon, if the monsoon were to be adversely affected then agriculture and allied industries would suffer. The agriculture sector had performed well last year as India had received above average rainfall.

The twin effect of economic slowdown and decontrol of petroleum products is pulling down fuel demand in India. The total demand for petroleum products in the country has grown by just 0.7% YoY in FY14 to 158.197 m tonnes. This is the slowest growth seen since FY02. The main culprit was diesel which recorded a drop in consumption by 1% YoY largely due to the steady price increases. In contrast, diesel demand rose by 6.7% YoY in FY13. Diesel rates have increased by Rs 8.3 since January 2013. Even though petrol prices have been fully decontrolled, the current market price of diesel still is about Rs 5.5 per litre lower than its cost.

With an aim to reduce the unsystematic business risk of Indian banks, Reserve Bank of India (RBI) has barred Indian manufacturing and infrastructure companies from repaying their bank loans through ECBs (external commercial borrowings) availed at the bank's overseas branches or subsidiaries. The central bank's rationale for the same is that risk remains intact in the Indian banking system when ECB is availed from banks' overseas branches. RBI has also cautioned the commercial banks from issuing guarantees or letter of credit to Indian companies' overseas JV or subsidiaries for purpose other than ordinary business course of that overseas arm. It has also sought out to effectively monitor the end use of funds to overseas arms of the Indian companies.

As per a report by the World Economic Forum, India still lags far behind in its digital capabilities. The report places India at the 83rd position, out of 148 countries, in terms of leveraging its information and communication technologies for growth and well being. The performance has deteriorated from 2013 when India was positioned 68th out of 144 countries. In fact, India is the worst performer among BRIC economies with China and Brazil ranked at 62nd and 69th positions, respectively. India's poor rankings have been attributed to political, business and regulatory environment and lack of digital infrastructure.

Movers and shakers during the week
Company 21-Apr-14 25-Apr-14 Change 52-wk High/Low
Top gainers during the week (BSE-A Group)
Future Retail11113017.5%158/63
Strides Acrolab46152714.3%1,050/344
Container Corp93210239.8%1,037/637
Mahindra Finance 2362547.7%356/213
Top losers during the week (BSE-A Group)
MRF Ltd.23,56220,422-13.3%24,500/12,052
Financial Tech358324-9.7%870/102
Cairn India364335-7.9%372/273
Jaiprakash Power1615-7.8%30/9
Ultratech Cement2,2252,083-6.4%2,275/1,405
Source: Equitymaster

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

Amidst concerns of below normal monsoon this year due to the El Nino effect, FMCG companies are gearing up to increase presence in rural India. Companies like Glaxo SmithKline Consumer Healthcare, Dabur, Jyothy Labs and Godrej Consumer Products, that derive a sizeable share of sales from rural markets, would be launching more low-price packs and stepping up micro-marketing to widen rural penetration and safe-guard against a dip in rural demand. According to market research agency Nielsen, in 2013 rural regions grew by a faster 12.2% as compared to 8% growth clocked by urban India. The overall FMCG growth in 2013 halved to 9% on account of slowdown in discretionary spending.

Against the backdrop of depressed demand, leading car manufacturers have deferred price hikes in passenger cars to avoid being hit by a backlash. Car companies like Maruti Suzuki, Hyundai, Tata Motors, Toyota Kirloskar, Ford Motors, General Motors & Mercedes Benz have kept old prices in-tact amidst weak demand and falling sales. Car sales declined by 7% in March to 2.4 lakh units while for the full year 2013-14, overall car sales were down by 5% to 17.9 lakh units. Car companies normally hike prices in the months of January and April. Most companies had raised prices in January and a few in February. But with no significant recovery in sight despite excise tax concessions of 4%-6% by the government in February, car companies largely stayed away from hiking prices although faced with margin pressures. Only a few companies such as Honda Car India, Mahindra & Mahindra have raised prices whereas German car company Audi will increase price from May.

In order to reduce dependence on domestic markets, Hero MotoCorp will be setting up its first manufacturing facility abroad. The company has entered into a 55% joint venture with Bangladesh-based Nitol Niloy Group for retailing its two-wheeler brands in the country. The manufacturing plant will have an annual capacity of 1,50,000 units initially and is likely to commence operations in the second-half of FY16. As per initial plans, at least 11 Hero motorcycle and scooter brands will be marketed in Bangladesh through 50 retail outlets. The two joint-venture partners would be infusing US$40 m into the venture over the next five years.

With rising attrition, large software companies are resorting to hiking salaries to retain staff. IT major Infosys witnessed attrition rate as high as 18.7%, most of which was voluntary. The company had a second round of compensation increase - 6% to 7% for its offshore employee and 1% to 2% for its onsite employees - in a nine month period to curb attrition levels. Wipro and TCS are expected to implement salary hikes in the range of 8% to 10%. For Wipro, the reported attrition level stood at about 15% in FY14, while for TCS the figure came in at a much lower 11%. As business in the US is picking up, rising attrition is expected to be a cause of concern for the IT players.

Titan Industries wants to grow more than two times its current size over the next five years. In order to diversify, the company is planning to foray into new segments such as women's wear, accessories and personal lifestyle products and double its retail presence to 2,000 stores by 2019. Titan has outlined a capital expenditure of Rs 10 bn as part of the five-year plan. Presently, jewellery divison is the biggest division contributing more than 60% of overall revenues. This is followed by eyewear, watches and accessories that account for 20% of sales share with the balance coming from precision engineering.

Domestic pharma companies have been increasingly launching generic versions of blockbuster drugs in the US markets. Dr. Reddy's Laboratories (DRL) has launched Fenofibrate capsules in the US market. The drug is a therapeutic equivalent generic version of Antara capsules that are indicated to reduce cholesterol and triglycerides (fatty acids) in the blood and has been approved by the United States Food & Drug Administration (USFDA). According to IMS Health, the Antara (fenofibrate) capsules brand and generic had U.S. sales of approximately US$ 74 m for the twelve months ending in February 2014.

Ranbaxy Laboratories will soon be launching first generic version of Swiss drug maker Novartis' Diovan (Valsartan) in the US market. It is a blood pressure drug for which the company will have 180 days exclusive marketing opportunity in the US. As per industry sources, the company may have tied up with Hyderabad-based Divis Labs for the active pharma ingredient (API) formulations. Novartis currently earns around US$ 3.4 bn from this drug globally.

Let us now have a look at the results announced by companies

Cairn India Ltd has reported a 7% YoY growth in revenues for FY14. The growth has been driven by increase in volumes to 137.1 kilo barrels of oil equivalent per day (kboepd) in FY 2014, from 127.8 kboepd in FY 2013 coupled with weak rupee. In Rajasthan, the company achieved 200,000 boepd production milestone during the year. It has also added to its resource base with a success ratio of 50%, and has established six discoveries. Since the resumption of exploration in March 2013, the company has added over 1 billion barrels of oil equivalent in-place reserves to the existing 4.2 billion barrels of oil equivalent. The net profit for the year was up 3 % YoY. The company has declared a final dividend of Rs 6.50 per share for the year.

HDFC Bank posted 17% YoY and 26% YoY growth in net interest income and net profits respectively in FY14. The growth in the net interest income was on the back of 26% YoY growth in advances. The net interest margins (NIMs) moved up slightly to 4.4% in FY14, despite the fall in CASA proportion. The other income for the year grew by 17% YoY, with fees and commissions growing at 11% YoY. The cost to income ratio dropped from 49.6% in FY13 to 45.6% in FY14. The net NPA to advances ratio moved up from 0.2% of advances in FY13 to 0.3% in FY14. Restructured loans were also 0.2% of loan book at the end of March 2014. At the end of the year, the capital adequacy ratio (CAR) stood at 16.1%. The Board has recommended a dividend of Rs 6.85 per share.

Going ahead, the brewing tension in Ukraine is likely to keep global markets volatile. Back home, the fortunes of the Indian markets will be driven by the earnings season as well optimism regarding a stable government post elections. Keeping these short term market gyrations aside, investors should invest in stocks with strong fundamentals.