Global markets cheer Japan's stimulus boost

In a surprise move, the Bank of Japan has accelerated the purchase of Japanese government bonds while tripling its purchase of exchange-traded funds and real estate investment trusts. This step comes as fresh move to invigorate markets, particularly after the Federal Reserve has announced an end to its massive quantitative easing program. Through three rounds of bond-buying since 2008, the Federal Reserve had pumped trillions of dollars to stimulate the American economy. Therefore concerns of fall in liquidity post withdrawal of the bond-purchase by US, spread of Ebola and volatility in oil prices were more than quelled by higher stimulus measures by Japan. Resultantly the global stock markets rejoiced and climbed higher for the week gone by.

The Japanese index was the biggest gainer posting a rise of 7.3%. Indices of other developed economies such as US, UK and Germany were up by more than 2.5%. In the Asian markets, both China and India rose by more than 3%.

Key world markets during the week
Source: Yahoo Finance

The Indian markets witnessed a rally across the board. Among the sectoral indices this week, Information technology, capital goods and metal stocks were clearly the top performers. On the other hand FMCG and consumer durable stocks registered modest gains during the week.

BSE indices during the week
Source: BSE

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

With an aim to provide a fillip to the construction sector, the Government has relaxed the rules for foreign investment by allowing inflows into projects spread over a smaller area. It is noteworthy that while 100% FDI in construction is allowed, the rules regarding minimum area requirement and exit of investors were restricting overseas participation. The minimum floor area requirement for construction and development has been reduced from 50,000 square meters to 20,000 square meters. For "serviced plots", there is no minimum limit now versus 10 hectares earlier. This move is likely to drive demand in smaller towns where the need of large top-of-the line office or residential complexes is limited. Further, the Union cabinet also decided to ease the rules for investors to exit the project and repatriate profits.

The Finance Ministry has announced a number of austerity measures to cut fiscal deficit and non-plan expenditure. The government has barred bureaucrats and government officials from travelling first class on airlines for overseas visits. They have been asked to use video conferencing as much as possible. The ministry has also barred officials from holding meetings in five star hotels. Further, it put on hold fresh appointments and on filling up posts lying vacant for over 1 year.

Movers and shakers during the week
Company23-Oct-1431-Oct-14Change52-wk High/Low
Top gainers during the week (BSE-A Group)
Piramal Enterprises69680315.4%835/483
Suzlon Energy121314.9%37/8
Andhra Bank768411.2%110/54
Top losers during the week (BSE-A Group)
Financial Technologies196176-10.3%404/136
Biocon Ltd.480450-6.3%554/340
Pipavav Defence4139-6.1%74/31
Jubilant Foodworks1,3301,263-5.0%1390/939
Indraprastha Gas413396-4.2%444/239
Source: Equitymaster

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

In a drive to double its refining margins Bharat Petroleum Corporation Ltd (BPCL) is expanding and upgrading its Kochi refinery. The company is targeting to expand the capacity from 1.9 lakh barrels per day (bpd) to 3.1 lakh bpd by May 2016. The expansion will enable the company to reduce its fuel intake from private refiners such as Reliance Industries and Essar Oil. BPCL would be refining only high sulphur crude at its Kochi refinery for which the plant has been set up. Reportedly, crudes with higher sulphur content are cheaper and refineries with speciality processing units can lower feed costs and expand margins. Besides bettering margins post upgradation and expansion, the refinery will also be equipped to produce Euro IV compliant gasoline and diesel in line with the government's plans to implement mandatory usage of Euro IV by August 2017 and Euro V in some cities by 2020.

Tata Motors has raised funds to the tune of $750 m through the sale of dual tranche bond issue to Asian and European investors. The issue has been oversubscribed six times at $4.5 bn. The proceeds from the issue will be utilized to fund external commercial borrowings, capital expenditure and for general corporate purposes.

Latin American (LatAM) countries such as Brazil and Mexico have implemented regulatory changes, pertaining to generic drugs that will benefit the domestic pharma companies. As per the changed regulations, the governments in Brazil and Mexico have made use of bio-equivalent drugs mandatory. Bio-equivalent drugs are pharmacological replicas of the innovator drugs and offer similar efficiency. Bio-equivalent drugs are already a regulatory must in the US with India supplying 40% of the country's generics requirement. The pharma companies in the LatAM markets had been selling branded non-bioequivalent drugs called similar drugs so far. The new regulatory requirement will help domestic pharma companies in tapping the new markets. As per IMS, the total pharmaceutical opportunity in LatAM is estimated at $60 bn and the market will grow by 14%-15% annually. Domestic pharma companies such as Glenmark Pharmaceuticals, Dr Reddy's Laboratories, Natco Pharma and Lupin together presently have a small market share of 2-3% in the LatAM region.

Let's move on to some of the key corporate results that were declared during the week...

FMCG major Hindustan Unilever (HUL) posted a 10.8% revenue growth on a tepid 5% volume growth. Segment wise, the personal care business grew by 9.9% YoY, while its largest segment - soaps and detergents grew by 11% YoY. Sales of beverages segment grew 7.5% YoY while packaged foods business grew 13.4% YoY. Backed by lower ad-spends and controlled other expenses, operating margin improved by 0.5% during the quarter. However, at the net level, margin has contracted by 0.3% due to higher tax outgo.

Another FMCG company Nestle India posted a tepid 9% YoY topline growth with the largest domestic segment posting 10% growth arising from better realizations. Export sales declined by 3.9% mainly due to lower coffee exports. The operating margin dipped by 0.2% for the quarter due to steep rise in price of milk and its derivatives in India. At the net level, margin was intact at 12.1% due to 98% fall in interest charges.

Dr Reddy's Laboratories clocked a topline growth by 7% YoY led by growth in India and RoW markets. The US formulations grew by just 7% YoY during the quarter. The operating margins declined by 2.4% to 22.7% during the quarter. Due to the poor performance at the operating level and higher taxes; the net profits declined by 16.8% YoY for the quarter.

Ranbaxy Laboratories turned in the black during the quarter. Total income for the quarter grew 16% YoY. The bottomline for the quarter stood at Rs 4.8 bn, as compared to a net loss of Rs 4.5 bn in the corresponding period last year. This was the first time in last six quarters that the company has posted a profit. This was mainly on account of strong business in India and West Europe; apart from gains from the launch of the generic version of Novartis AG's blood pressure drug Diovan in the US market.

Maruti Suzuki's net sales increased by 17.4% YoY to Rs 119.9 bn in 2QFY15. Maruti sold 321,898 units during 2QFY15 recording a jump of 16.8% YoY. Sales in the domestic markets stood at 287,687 units while exports sales were up to 34,211 units during the quarter. The company's profits grew at a faster pace of 28.7% YoY to Rs 8.6 bn during the quarter. Strong domestic sales and cost reduction initiatives helped the company to boost its bottomline growth.

International markets breathed a sigh of relief after liquidity concerns were addressed by Japan's accelerated stimulus package. However, slowdown in world economy and Europe's debt woes will continue to weigh down going ahead. The Indian markets have been in buoyant mood after a clutch of reforms announced by the government. In such a scenario, investors should not lose sight of fundamentals and follow a bottom up approach to investing.