A Weak End to the Month
RoundUp

The month of September was not a great one for global markets, and the last few days did not bring any cheer. The relief surrounding the US Fed's decision not to raise interest rates has been replaced by fears of a global slowdown.

Much uncertainty surrounds the future of the Fed's policies and how they could affect global markets. This uncertainty, along with the fears of a prolonged economic slowdown in emerging markets including China, has kept global investors nervous.

US markets were marginally lower this week. The European markets fared worse as major auto stocks were under pressure following the Volkswagen fiasco. The Chinese markets continued to remain weak.

Indian markets, on the other hand, ended the shortened week with gains following the Reserve Bank of India's (RBI) surprise decision to cut the benchmark repo rate by 0.5%.

Key world markets during the week


Among the sectoral indices, stocks from the consumer durables and real estate were the top gainers, while banking stocks closed in the red.

BSE indices during the week


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

The big economic development this week was the RBI's decision to cut the repo rate by 0.50% in its monetary policy meeting on 29 September 2015. The central bank has chosen to frontload its action due to falling inflation rate (measured by the CPI).

As reported in a financial daily, the Indian commerce and industry ministry released data on core sector growth for the month of August 2015. Reportedly, the index of eight core industries registered growth of 2.6% YoY, for the month. This is higher compared to the 1.1% YoY growth reported for the month of July 2015. Out of the eight sectors, five sectors registered a growth above 5% YoY for the month. However, the growth in the three sectors viz coal, natural gas, and steel declined in the month of August. While the growth momentum has improved recently, we believe, given the poor performance of the three sectors the prospects are moderate.

As per an article in Economic Times, domestic steel producers could increase prices by up to Rs 1,500 per tonne to offset a hike in the safeguard duty. Earlier this month, the government imposed a provisional safeguard duty of 20% on imports of certain hot rolled fat steel products with a view to protect domestic producers. As reported, government spending on public projects coupled with the industrial activity could lead to a pick up in the second half of this fiscal. These factors along with a depreciating rupee against the US$ could provide a good opportunity for the steel producers to raise prices. This would help improve their realizations. In all, a stabilizing impact on domestic prices and demand-supply equation could be on the cards.

The Reserve Bank of India (RBI) has allowed companies to raise up to US$750 million from overseas markets under the automatic route, through rupee-denominated bonds. With this announcement on Tuesday, the banking regulator has also allowed real estate investment trusts (REITs) and infrastructure investment trusts (IITs) to raise funds under this route. The proceeds from these, as stated by the RBI, can be used for all purposes except for equity investments domestically, real estate activities other than for development of integrated township or affordable housing projects. These bonds will come with a minimum maturity period of five years. This could help some realty players ease their liquidity position.

As per an article in Livemint, the Indian drug regulator is set to draft an amendment to existing pharmaceutical manufacturing laws pertaining to manufacturing practices. The Drug Controller General of India (DCGI) will move a proposal within the next six months to amend the Drugs and Cosmetics Act, 1940. Consequently, the controller general could revisit the existing laws. Reportedly, these efforts are on to bridge the gap between Indian manufacturing practices and the World Health Organisation's (WHO) good manufacturing practices (GMP). The number of Indian drug manufacturers following the WHO's GMP norms is currently 10%-15%. The GMP norms consist of certain standardisation of various aspects in manufacturing. This includes factors such as sanitation and hygiene, qualification and validation, self-inspection, quality audits, suppliers' audits, etc. According to the sources, the new regulations will require additional investment of Rs 50 million per facility. This means the new law could increase the costs of the pharma companies whose facilities are not compliant as per the WHO norms.

Movers and shakers during the week

Company23-Sep-151-Oct-15Change52-wk High/Low
Top gainers during the week (BSE-A Group)
Lanco Infratech3567.1%8/2
HDIL647212.9%143/54
Lupin1,9212,0999.2%2,112/1,307
IDBI Bank73798.6%85/52
Britannia2,8863,1248.3%3,435/1,302
Top losers during the week (BSE-A Group)
IDFC13860-56.2%188/60
Core Education54-16.2%14/4
Vedanta9584-11.9%277/77
Motherson Sumi247226-8.2%396/228
HCL Tech928858-7.5%1,058/725

Source: Equitymaster

Now let us move on to some of the key corporate developments of the week gone by.

As per a leading financial daily, eight public sector banks, including State Bank of India (SBI), Punjab National Bank (PNB) and Bank of Baroda, have allotted equity shares on preferential basis to the government against capital infusion of Rs 139.5 billion. Further, Bank of India, Canara Bank, Dena Bank, Corporation Bank and Andhra Bank are among the other lenders that have received capital infusion from the government. The most recent capital infusion is a part of the government's program to infuse a total of Rs 700 billion of equity into PSU banks over four years up to 2018-19. It will help shore up their capital base for meeting Basel norms. Earlier in August, the government had said that it would infuse Rs 200.8 billion in 13 PSU banks in about a month. That said the rest of the amount is likely to be infused in the last quarter of 2015-16.

India's fourth largest software firm, HCL Technologieshas given a pre-quarter revenue warning. It indicated the reported US dollar revenues for the September 2015 quarter could be impacted up to multiple factors. These include a sharp depreciation of basket of currencies against the US dollar as well as client-specific issues. The company also stated that as a matter of prudence it is considering reserving up to US$20 million this quarter for a client disengagement process, regarding a custom application development project. The company also stated that revenues would be impacted due to changes in transition timelines for some infrastructure management projects.

Housing Development Finance Corporation (HDFC) Ltd, India's largest mortgage lender will be raising Rs 50 billion through non-convertible debentures (NCDs) and warrants to qualified institutional buyers (QIBs). The company will use the proceeds from the issue to boost lending operations and meet its future capital needs. HDFC has been able to post healthy growth in loan book and maintain net interest margin over the past few quarters. The entity's capital adequacy ratio and gross NPAs stood at 15.8% and 0.7% respectively at the end of June 2015. It is commendable that the housing finance company has been able to keep asset quality in check despite the overall slowdown. Going ahead as the economy picks up and with the government's strong focus on smart cities and affordable housing, credit offtake for housing loans is likely to grow at a robust pace.

Leading Indian pharma company Sun Pharmaceutical Industries has announced the commencement of a tender offer for acquisition of all outstanding shares of InSite Vision. The offer has been commenced through the company's indirect wholly owned subsidiary - Thea Acquisition Corporation. The acquisition of outstanding shares of InSite Vision will be for US$0.35 per share in cash, without interest and less any required withholding taxes. To recall, Sun Pharma had on 16 September 2015 announced its intention to acquire InSite Vision.

As per an article in Economic Times, Hero MotoCorp has unveiled two scooters named 'Maestro Edge' and 'Duet'. Duet is a full metal body scooter. The 110 CC Maestro Edge will compete directly against Honda Activa. The launch is scheduled for 13 October 2015. The scooter is priced at Rs 49,500 before local levies and insurance in Delhi. The launch of Duet will follow thereafter. Hero currently has two scooters in its portfolio - 'Pleasure' and 'Maestro'. Both the models were developed using Honda's technology. The new models have been developed in-house. Hence, it would be interesting to see how well the company is able to garner market share with its own technology.

L&T Infotech Ltd has filed documents for its initial public offering (IPO). The company is the software service arm of Larsen and Toubro (L&T). L&T will sell 17 million shares as a part of the issue. The firm intends to raise Rs 15 billion by selling shares to the public. L&T Infotech's revenue rose 2.15% on a YoY basis for the year ended 31 March 2015. However, the net profit declined by 14% to Rs 7.74 billion during the same period. The move is in line with the chairman's statement at the annual general meeting (AGM) to unlock the value from its IT services business.

Going forward, global factors as well as the result season will influence the markets. More volatility cannot be ruled out. However, long-term investors will do well to focus on the company fundamentals and ignore short-term price movements.


Indian markets end on a flat note
Closing

After opening the day's proceedings on a positive note, Indian markets lost some ground and remained range bound for the majority part of the day, closing the day above the dotted line. While BSE-Sensex was seen up by 72 points, NSE-Nifty closed higher by 2 points. The mid and small cap indices too finished in the green. The S&P BSE Midcap and the S&P BSE Smallcap indices ended the trading day up by 0.2% each. Sectoral indices closed the day on a mixed note with healthcare and consumer durables sector leading the gains while power and realty sectors lead the losses.

Asian stock markets finished broadly higher today with shares in Japan leading the region. The Nikkei 225 is up 1.92%, Hong Kong's Hang Seng up 1.28% and China's Shanghai Composite is up 0.48%. European markets too opened higher today with shares in London leading the region. The rupee was trading at 65.55 against the US$ in the afternoon session.

Automobile stocks ended the trading day with moderate losses with Maruti Suzuki and Mahindra & Mahindra bearing majority of the brunt. According to a leading financial daily, Maruti Suzuki India has registered a rise of 3.7% in its total car sales for the month of September 2015 at 113,759 units as against 109,742 units in 2014. The company's domestic sales rose by 6.8% YoY in 2015 at 106,083 units as against 99,290 units in corresponding month last year. Of the total, the company has sold 87,916 units of its passenger cars during last month, up by 7.9% as against 81,447 units in 2014. The company's sales of vans decreased by 0.2% to 11,836 units as against 11,863 units in 2014. Moreover, the company's sales of its utility vehicles rose by 5.9% to 6,331 units from 5,980 units in 2014. Meanwhile, the company's exports have decreased by 26.6% to 7,676 units as against 10,452 units in 2014. The scrip of Maruti Suzuki ended the trading day down by 2.2% on the BSE.

According to a leading financial daily, Crompton Greaves has bagged an order worth Rs 4.1 bn from an Indonesian government owned corporation PT PLN for the manufacture and supply of power transformers. The scope of work includes design, manufacture, supply, construction and installation of power transformers in the range of 30 Mega Volt Ampere (MVA) to 268 MVA. They will be installed in Java, Sumatra, Kalimantan and Makassar islands of Indonesia. The project is aimed at enhancing the performance of PT PLN's transmission grid. Crompton Greaves has approximately US$ 93 m worth of orders already booked in the first half of the current year.


Pharma stocks lead the gains
01:30 pm

After opening the day on a firm note, the Indian Indices continued their positive trend in the post noon trading session. Sectoral indices are trading on a positive note with stocks from the pharma and capital goods sectors leading the gains.

The BSE-Sensex is trading up 99 points (up 0.4%) and the NSE-Nifty is trading up 23 points (up 0.3%). The BSE Mid Cap index is trading up 0.6% and the BSE Small Cap index is trading up 0.4%. Gold prices, per 10 grams, are trading at Rs 25,774 levels. Silver price, per kilogram is trading at Rs 34,650 levels. The rupee is trading at 65.58 to the US$.

Stocks in the automobile sector are trading mixed with gains led by Ashok Leyland and Eicher Motors. As per a leading financial daily, Hinduja group flagship company Ashok Leyland has sold shares worth Rs 1.65 billion of IndusInd Bank Ltd. The company in a BSE filing stated that it has sold 18 lakh equity shares of Rs 10 each held in IndusInd Bank in the open market between September 25th and 29th at a net price of Rs 918.76 per share. The company has been selling its non-core assets in order to bring down its debt level. It earlier sold its US-based Defiance Testing and Engineering Services. It also divested its 48.5% stake in Ashok Leyland Wind Energy Ltd (ALWEL) as a part of sale of non-core assets of the company. The debt-equity ratio of the company stood at 2.6 as on 31st March, 2015. Scrip of Ashok Leyland is trading up by 2.2% on the BSE.

Pharmaceutical stocks are also trading firm with Novartis and Pfizer leading the gains. As per an article in Economic Times, GlaxoSmithKline Pharmaceuticals (GSK India) has completed its transaction with Novartis Healthcare. By this GSK India had acquired Novartis vaccines business and divested its marketed oncology portfolio to Novartis Healthcare. This follows a global transaction between GSK plc, UK (GSK) and Novartis AG, Switzerland which was completed in March 2015. The transaction will enhance GSK's vaccines portfolio and by harnessing its expertise in virology, bacterial infection and technological platforms, the company will be able to deliver a reliable supply quality of vaccines. Stock of GSK is presently trading marginally down.


Markets trade in the green
11:30 am

After opening on a firm note, the Indian markets continued to trade in the green. Sectoral indices are trading on a mixed note with stocks from the pharma and capital goods sectors leading the gains. However, auto stocks are witnessing selling pressure.

The BSE-Sensex is trading up 70 points (up 0.3%) and the is trading up 12 points (up 0.1%). The BSE Mid Cap index is trading up by 0.3% while the BSE Small Cap index is trading up 0.4%. The rupee is trading at 65.62 to the US dollar.

Most of the PSU banking stocks are trading on a negative note with Allahabad Bank and Syndicate Bank leading the losses. As per a leading financial daily, eight public sector banks including State Bank of India (SBI), Punjab National Bank (PNB) and Bank of Baroda have allotted equity shares on preferential basis to the government against capital infusion of Rs 139.5 billion. Further, Bank of India, Canara Bank, Dena Bank, Corporation Bank and Andhra Bank are among the other lenders that have received capital infusion from the government. The most recent capital infusion is a part of the government's programme to infuse a total of Rs 700 billion of equity into PSU banks over four years up to 2018-19. It will help shore up their capital base for meeting Basel norms. Earlier in August, the government had said that it would infuse Rs 200.8 billion in 13 PSU banks in about a month. That said the rest of the amount is likely to be infused in the last quarter of 2015-16.

Stocks in the software space are trading mixed with TCS and Wipro leading the gains. Shares of HCL Technologies has witnessed selling pressure today as the company gave a pre-quarter revenue warning. It indicated the reported US$ revenues for the September 2015 quarter could be impacted up to multiple factors. These include a sharp depreciation of basket of currencies against the US$ as well as client specific issues. The company also stated that as a matter of prudence it is considering reserving up to US$ 20 million this quarter for a client disengagement process, regarding a custom application development project. The company also stated that revenues would be impacted due to changes in transition timelines for certain complex engagements in infrastructure management services. Stock of HCL Technologies is trading lower by around 10%.


Indian markets open firm
09:30 am

Barring Singapore market (down 1.8%), all the major Asian stock markets have opened the day on a firm note. Japan market (up 2.1%) and Hong Kong market (up 1.4%) are leading the pack of gainers. Major equity indices in Europe and US too closed their yesterday's trading session on an encouraging note. The rupee is currently trading at Rs 65.74 to the US dollar.

The Indian share markets have opened on a positive note. The Sensex today is higher by around 222 points (0.9%), while the NSE-Nifty is higher by about 51 points (up 0.63%). The mid cap and small cap stocks have also opened in green with S&P BSE Midcap index and S&P BSE Smallcap index up by 0.6% and 0.7% respectively. Among the sectoral indices, barring stocks from consumer durables, all the sectors are witnessing buying interest. Stocks from healthcare and power are in maximum demand.

As reported in a financial daily, the Indian commerce and industry ministry released data on core sector growth for the month of August 2015. Reportedly, the index of eight core industries registered growth of 2.6% YoY, for the said month. This growth is much higher compared to the growth reported for the month of July 2015, which stood at 1.1%. Out of the eight sectors, five sectors registered a growth above 5% for the month. However, the growth in the three sectors viz; coal, natural gas, and steel declined for the month of August. While the growth momentum has improved for the month August, however, given the poor performance of the three sectors the growth could moderate in the coming months.

Housing Development Finance Corporation (HDFC) Ltd, India's largest mortgage lender will be raising Rs 50 bn through Non convertible debentures and warrants to Qualified institutional buyers (QIBs). The housing finance company will use the proceeds from the issue to boost lending operations and meet its future capital needs. HDFC has been able to post healthy growth in loan book and maintain net interest margin over the past few quarters. The entity's capital adequacy ratio and gross NPAs stood at 15.8% and 0.7% respectively at the end of June 2015. What is commendable is that the housing finance company has been able to keep asset quality in check despite the overall slowdown. Going ahead as the economy picks up and with the government's strong focus on Smart Cities and affordable housing, credit offtake for housing loans is likely to grow at a robust pace.


Can the rate cut alone stimulate growth?
Pre-Open

The Reserve Bank of India (RBI) cut the benchmark repo rates in its monetary policy meeting on 29 September by 0.5%. However RBI has also slashed its output growth projections by 0.2% to 7.4%. The cut in the growth projections clearly states the poor demand scenario prevailing in the country. The current rate cut is mainly intended to provide support to the economy rather than to boost the same as the demand scenario is getting worse. This does indicate that the RBI may be worried about the current economic scenario.

There have been instances wherein the central bank has stated that the demand scenario is improving. One of their earlier reports cited instances of improvement in consumer durable production and consumer lending by banks. However, RBI stated very specifically that looking ahead the macroeconomic demand appears to be subdued.

Further, certain countries such as Brazil and Russia are already in recession. The Eurozone and Japan are struggling. The Chinese manufacturing gauge fell to the lowest in six and a half years. China's Purchasing Managers Index (PMI) came at an all time low of 47 for the month of September. The index is an indicator of the economic health of the manufacturing sector.

Global slowdown will dampen the exports from India. Back home, decline in rural consumption, shrinking pipeline of new projects, persistent capacity under-utilization, muted exports, structural weakness in the core sectors indicates the difficulty the Indian economy is going through. Probably the rate cut by the RBI has come at a time when India really needed it to support the economy.

Further, slowing inflation also provided some accommodation to the RBI to slash the interest rates. As per projections the inflation would not only be less than its 6% in January 2016 target, but moderate to around 4.8% by March 2017. Provided things move according to the estimates, RBI may still cut the interest rates sometime next year.

However, the RBI's action will be meaningless if the banks don't pass on the reduction in the interest rates to their customers. Further, rate cut will not solely be enough to stimulate the economy. Government reforms are equally important. Currently, the pace with which the reforms are moving forward is not encouraging. The government needs to fix the country's fragmented tax system, push land acquisition and labour reforms. These changes will be the key drivers of growth going forward.