Global Markets Shaken by Chinese Turmoil

Sat, 9 Jan RoundUp

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Majority of global markets ended the week on a dismal note as the meltdown in Chinese stock markets took most of the headlines this week. Trading halted twice this week after the Shanghai Composite Index hit the lower circuit breaker limit of 7% on two occasions. The first crash occurred on Monday, while the second happened on Wednesday.  The fall was led by a downward adjustment to the yuan. The adjustment also created a lot of spur in currency markets.

US and European markets followed the trend in China with markets in Germany and US falling as much as 8% and 5.2% respectively during the week.

Further, the Nikkei's Manufacturing Purchasing Managers Index (PMI) fell to a 28 month low of 49.1 in December from 50.3 in the month of November. A reading below 50 indicates a contraction in the manufacturing activity. To add to the woes, flow of new orders fell for the first time in more than two years.

Concerns over China coupled with weak manufacturing data dragged the Indian Indices down by 4.7%.

Majority of the sectoral indices ended the week deep in red. Auto, capital goods and banking sectors were the biggest losers for the week.

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

The Indian Government is looking to prepone the implementation of Bharat Stage-VI emission standards by a year to April 2020. The decision comes a day after Supreme Court refused to lift the ban on diesel vehicles above 2,000 cc capacity. Currently, India is implementing BS-IV emission standard. Government has decided to skip the BS-V emission standard and move on directly to the BS-VI. Upgradation to BS-VI will lead to reduction of particulate matter by 80% in addition to reduction of nitrogen oxide level by 83%, a move that would significantly to reduce pollution levels.

Reportedly, the adoption of new emission standards will also lead to increases in vehicle prices. An estimated increase of Rs 1 lakh for diesel vehicles and Rs 20,000 for petrol vehicles is expected with the switch. Appropriate modifications in the engines will have to be carried out by the automobile companies to make them suitable for the new standard. Auto firms, part makers and oil refiners will have to spend anywhere between Rs 700 to Rs 900 billion in order to be compliant with the BS-VI standard.

Auto majors have raised apprehensions regarding this government order and stated that it would neither be technically possible nor advisable to skip BS-V or advance the onset of BS-VI, before the earlier schedule of 2023.

Moving on to developments in the metal world. Iron-ore prices rebounded 13% to US$ 43.11 per tonne as compared to US$ 38.3 per tonne on 11 December 2015. Prices had depreciated to seven year lows in December 2015. However, they surged upwards on account of bargain hunting by traders and small steel mills.

Iron-ore producers have cut output globally. However, the impact of the same is yet to be witnessed in prices. Not to mention that iron-ore producers are sitting on a huge pile of stock. States like Odisha and Jharkhand are sitting on an inventory of 128 million tonnes of stock.

It is likely that huge piles of stocks coupled with subdued demand from steel manufacturers will not allow iron prices to move up for long.

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

Government is planning to pare its stake in IDBI Bank. Consequently, the bank has hired investment bankers to help them to raise funds through the Qualified Institutional Placement (QIP) route. Reportedly, at current market capitalization the QIP placement will result in a dilution of around 15-20% of the governments shareholding in the bank. Currently, it directly holds 76.5% stake in the bank. Additionally, the government holds 13.88% through public sector entities like Life Insurance Corporation (LIC).

The Minister of State Finance, Mr Sinha had stated that the government is planning to transform IDBI Bank on the lines of Axis Bank. Currently, it holds around 29.54% stake in Axis Bank through Specified Undertaking of Unit Trust of India (SUUI) and LIC. However, Axis Bank operates as a private owned entity.

Weak demand continues to add to the woes of the players in the cement space. Poor demand in cement has led to a decrease in the cement prices across the geographies in the country. Barring Telangana and Andhra Pradesh, cement prices have declined in most parts of the country. Government's activism in the above states has led to an increase in the cement prices in this region. Reportedly, the development with respect to infrastructure projects has been taking at a healthy pace, resulting in better demand for cement.

The steepest decline in the cement prices is seen in the northern region partially contributed by the excess capacities built up in the state of Rajasthan. Reportedly, prices are down by about Rs 15-20 per bag (50 kilogram).

A pick up in infrastructure activities and housing demand will be the key things to watch out for, in order to see a revival in this sector.

In other news from the cement space, Jaiprakash Associates has signed an agreement with Shree Cement to divest its stake in the 2.1-million tonne Bhilai Jaypee Cement for an enterprise (BJCL) value of Rs 21-22 billion. Jaypee Cement has loans of Rs 6 billion and is expected to realize a net value of around Rs 16 billion, after adjusting the debt.

Of this, Jaiprakash Associates is expected to net around Rs 12 billion, which will be used for paring its loans from banks. Reportedly, banks are pushing the company to divest a substantial portion of its cement and power generation assets to reduce its debt. The company is the third largest cement manufacturer in the country with a capacity of around 33 million tonne. Shree Cement has a capacity of 23.6 million tonne.

According to an economic daily, power regulator Central Electricity Commission (CERC) has initiated a suo-moto probe on Tata Power's alleged irregularities in commissioning of four of five units of its Mundra ultra mega power project (UMPP).The regulator is acting on complaints received from a retired engineer of the Madhya Pradesh Electricity Board. The complaints are regarding non-compliance of provisions of power purchase agreement (PPA) by Mundra mega power project leading to excess billing of Rs 50 billion by the company.

Tata Power has denied these allegations.

While long-term investors may want to salivate at the prospect of buying solid stocks cheap after the market decline in the week gone by, it is suggested that all possible risks should be taken into account. One should stick to the bottom up approach towards stock picking.

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