Global Markets Continue to Remain Buoyant

Sat, 14 Jan RoundUp

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Global markets remained upbeat in the week gone by with a majority of the indices ending in the positive territory. Brazil was the biggest gainer up 3.2% for the week on the back of recovery in oil and commodity prices that will aid in easing recessionary pressures. Backed by the recovery in commodity markets, the World Bank stated that the global economy will grow by 2.7% this year, better than last year's 2.3% growth. The Bank also said that growth in advanced economies is expected to rise to 1.8% in 2017, against an estimate of 1.6% in 2016. Emerging and developing economies growth is expected to accelerate from 3.4% in 2016 to 4.2% in 2017.

Among developed economies, all the European indices reported gains for the week. However, the US markets were marginally down by 0.4%. In the latest economic data, U.S. retail sales rose 0.6% in December, less than had been expected, while holiday sales were up a better-than-expected 4%. Separately, producer prices were up 0.3% while business inventories rose 0.7%. The US Federal Reserve reiterated support for existing regulations on banks and said the U.S. economy faces no serious short-term obstacles.

The Chinese market was the biggest loser after exports last month, fell by 6.1%, more than expected. Even the Japanese index was off 0.9%. But the other Asian indices ended the week on a strong note with Singapore up the most at 2.1%.

Back home, the BSE-Sensex ended in the green and was up by 1.8% on the back of a benign macroeconomic climate. The Index of Industrial Production posted a growth of 5.7% in November after a 1.9% contraction in the preceding month. The growth has come despite a note ban announced in November. Meanwhile, exports continue to increase for the fourth straight month in December, registering a growth of 7.8% in rupee terms. The cumulative exports till December were up by 4.4% in rupee terms. Even retail inflation eased off a bit in December.

The earnings season for the 3QFY17 kick-started with TCS reporting better than expected December 2016 earnings. But the results were clouded by concerns over management after CEO Natarajan Chandrasekaran departed to take over as Tata Sons chairman. Even pharma stocks were hit after Donald Trump's comment that drug makers were "getting away with murder" in what they charge the government for medicines, and promised that would change.

Key World Markets During the Week

On the sectoral indices front, metal, power and banking stocks led the gainers this week. On the other hand, stocks from <>pharma and telecom witnessed maximum selling pressure.

BSE Indices During the Week

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

India's factory output, measured by the Index of Industrial Production (IIP), witnessed a turnaround and registered a robust 5.7% growth in November 2016 after a 1.9% contraction in October 2016. The robust industrial growth runs contrary to retail sales data showing slide in household spending and muted corporate investment hit by an economy-wide cash-crunch due to demonetisation.

The contradiction can however, be explained by the base effect - a statistical phenomenon that makes even tiny changes look large. The index plunged dramatically by over 4.6% in November 2015, the result of post-Diwali blues, which explains the very positive base effect.

The best way to strip away the base effect, therefore, is to consider the fall in the index from the previous month, or October 2016, to reflect the impact of demonetisation. Even after doing so, the manufacturing index shows a contraction of a mere 1.3% from October 2016, which can be attributed to resilient growth in capital goods production in November.

There are expectations that the actual impact of demonetisation on factory output would be known once December IIP figures are announced. It is worth noting that December 2015 saw a huge rise in IIP and therefore, there will be a strong negative base effect in December 2016.

According to data released by the Society of Indian Automobile Manufacturers (SIAM), vehicle sales across categories registered a decline of 18.7% last month at 12,21,929 units, from 15,02,314 units in December 2015.

This is the highest decline across all categories since December 2000, when there was a drop of 21.8% in sales. Sales of two-wheelers and three-wheelers, which are mostly paid for in cash, posted the sharpest decline in monthly sales in some 18 years. Their sales declined 22% and 36.2%, respectively.

Domestic car sales were at 1,58,617 units last month as against 1,72,671 units in December 2015, down 8.14%. It was the lowest rate since April 2014 when sales declined by 10.15 per cent. The decline in car sales means that the Indian passenger vehicle industry is unlikely to post double-digit growth for yet another financial year. SIAM had expected sales to grow 12% in the year to March. Between April and December, sales increased 8.6% year on year. Except for the light commercial vehicles segment, which saw a growth of 1.2% at 31,178 units, all the other categories of the industry saw decline in sales in December.

Retail inflation measured by the Consumer Price Index (CPI) eased to 3.4% in December 2016, as compared to 3.6% in November 2016. The current CPI of 3.4% is a 25-month low for the index, and implies frozen spending in the economy. The decline in headline CPI inflation was mainly due to softening of food prices. Prices of vegetables and pulses slipped month-on-month- the former by 11.7% and the latter by 1.6%.

Going ahead, expectations are that CPI or retail inflation would see an increase but is likely to remain under RBI's projection. The central bank and the government set a retail inflation target of 4% for the next five years with an upper limit of 6% and lower limit of 2%. Going forward, whether RBI goes for a repo rate cut at its next monetary policy review due in February 2017 will be the key thing to watch out for.

The World Bank has pared India's GDP growth forecast for FY17 to 7.0% from 7.6% earlier. The World Bank attributed the downgrade in forecast partly to the demonetisation exercise.

Along with the World Bank, the government of India has also pitched for a 7.1% GDP growth in FY17. This estimate is below the 7.6% growth recorded in FY16.

Here is what Dr Jim Walker, founder and chief economist of Asianomics Group, had to say about the government's estimates in his latest Asianomics Macro update:

• The government's new growth forecasts are not only optimistic but downright bizarre. The market is concerned that even with the new (still optimistic) growth forecast of 7.1%, the government's budget deficit target of 3.5% of GDP will be overshot.

A while back, in an interview with Vivek Kaul and Rahul Goel, CEO of Equitymaster, Dr Jim Walker had shared his views on a variety of topics including the Indian and Chinese economies. It's worth revisiting.

Finance Minister Arun Jaitley yesterday said the Centre is still aiming to roll out Goods and Services Tax (GST) regime from April 1. As per Mr Jaitley, there are a few critical issues that are pending and expected to be sorted out in the next few weeks.

The minister also said that implementing GST before September 16 is a necessity if it doesn't get implemented in April. Presently, the rollout of GST is stuck because of differences between the Centre and states on its implementation. As per the Constitutional Amendment passed by Parliament for the GST implementation, some of the existing levies would expire after 16 September 2017.

Last year, the government finalised the tax rates for GST. This came as the GST Council decided upon a multi-layered tax rate system. The Council finalised a four-tier tax structure, with the tax rate on items of mass consumption at 5%. Other slab rates are 12%, 18%, and 28%. To get a detailed view on the Goods and Services Tax (GST), you can read Vivek Kaul's report, GST & You: What the Media DID NOT TELL YOU about the GST.

Movers and Shakers During the Week

Now let us move on to the quarterly results announced in the week gone by

TCS the country's largest IT services provider said its third quarter profit increased 2.9% sequentially to Rs 68 billion, driven by the strong digital business. It touched US$ 1 billion mark in profit for the first time. Revenue during the quarter increased 1.5% to Rs 29.7 billion and dollar revenue growth was 0.3% at Rs 43.8 billion compared with previous quarter. Constant currency revenue growth for the quarter was at 2% with volume growth of 1% on sequential basis.

Despite beating market expectations, investors remained wary about the managerial changes as it was under the outgoing CEO's guidance that the company was able to continue to perform even when facing strong headwinds.TCS named its chief financial officer, Rajesh Gopinathan, to succeed N. Chandrasekaran the chief executive officer. And appointed NG Subramaniam as president and COO of the company.

The erstwhile TCS CEO, Chandrasekaran was named chairman of Tata Sons Ltd - the holding company of all the Tata Group companies, roughly three months after the former Chairman Cyrus Mistry was ousted. He will take charge from February 21.

TCS is the single largest revenue generator for Tata Sons, contributing about 90% to its coffers but has faced headwinds in the last two years as the IT landscape changed abruptly. The company grew at a rapid pace between 2009 and 2014 but has since slowed due to its inability to build a stronger consulting practice.

It remains to be seen how the new management steers the company going forward. With the United States looking to restrict the usage of H-1B visas, Indian companies such as TCS may have to hire more in the US, which may increase costs.

Tata Steel reported a 27% increase in Q3FY17 sales to 2.9 million tonne (MT) compared to 2.3 MT in Q3 FY16. On a sequential basis, the company saw sales jump 14% in the third quarter this year over Q2FY17 due to ramp up in capacity at Kalinganagar.

The company's quarterly sales performance was boosted by a 20% increase YoY in auto grade steel, a 13% rise in branded products sales and a 37% jump in value added products.

The company has posted a 13% rise in sales in April-December 2016 to 7.7 MT up from 6.8 MT in the same period in 2015 led by a surge in automotive steels and branded products in its portfolio and contribution from its new greenfield steel plant at Kalinganagar in Odisha.

Some of the key corporate developments in the week gone by.

US President-designate Donald Trump's strong remarks on the pricing of medicines has indicated a tougher working environment for Indian drug (Subscription Required) firms in the US, going forward. Trump said that the US will create new drug-bidding procedure.

Although US is a big export market for many Indian drug companies, but Indian companies are unlikely to be impacted due to pressure on bringing down prices of innovative drugs. Indian Pharma companies provide low cost generic drugs, keep the prices of drugs low in the US. But what could hurt Indian companies are issues such as Medicare negotiating, bidding for government contracts, the reports noted. If Indian pharma companies are supplying these products to the US markets and if there are no US suppliers, which is mostly the case, this doesn't affect the Indian pharma companies.

India's largest biopharmaceuticals firm Biocon Ltd and its US partner Mylan announced that the US Food and Drug Administrator (USFDA) has accepted the biologics license application for its biosimilar drug to treat breast cancer. This would enable the company to sell the drug in the US market.

The drug, a proposed biosimilar to branded trastuzumab, will be used to treat breast cancer. The companies expect a decision from the USFDA by 3 September. This proposed biosimilar trastuzumab is also under review by the European Medicines Agency. This development positions Biocon and Mylan among the first companies to be able to address the critical need of US patents for a high quality biosimilar to treat certain HER2-positive breast cancers in the near future.

Lupin Limited announced that it has received final approval for its Desoximetasone Cream USP, 0.05% and Desoximetasone Cream USP, 0.25% from the United States Food and Drug Administration (USFDA).

The cream is a generic equivalent of Taro Pharmaceuticals' Topicort LP Emollient Cream, 0.05% and Taro Pharmaceuticals, Inc's Topicort Cream, 0.25%. It is used for treatment of skin disease. As per IMS MAT September 2016 data, Topicort LP emollient cream had US sales of US$33 million, while Topicort cream had US sales of US$17 million.

India's largest power generator NTPC, is set to take over Rajasthan's 1000 megawatt (MW) power plant in an asset-for-equity deal. A statement from the Rajasthan government said that eventually two more units of 660 MW each will be transferred to NTPC after their completion. The transfer is set to improve power generation efficiency in the Chhabra plants, and eventually reduce tariff rates. The deal was given effect through a tripartite agreement among NTPC, Rajasthan Rajya Vidyut Utpadan Nigam Ltd, the state government's power generation utility, and power trading firm Rajasthan Urja Vikas Nigam Ltd.

According to the state government, the four units of the Chhabra power plant with a total capacity of 1000 MW project were commissioned between 2010 and 2014 at a cost of Rs 58 billion. The two 660 MW projects to be transferred have an estimated cost of more than Rs 79 billion.

Going forward, addition of capacity is a key to earnings for power companies. NTPC is also planning to sell foreign currency denominated bonds worth at least 500 million euros within the next two weeks. NTPC is expected to spend as much as US$8 billion on capital expenditure over the next two years as it gears up to bid for ultra-mega power plants.

The bonds will be offered as part of a programme to borrow US$4 billion to meet funding requirements. Also, with bond yields falling in line with policy rate changes, raising funds via NCDs has become a cheaper source.

Our team has written a detailed report on how NTPC can leverage its capabilities and convert them into higher revenues and profits. Do give it a read (subscription required).

Bharat Petroleum Corporation Ltd.'s (BPCL) indirect wholly owned subsidiary BISPL (BPRL International Singapore Pte. Ltd.) has launched an issue of US$600 million in the international debt capital markets. The Notes, which are of 10 years' tenor carry a coupon rate or 4.375% per annum payable semi-annually.

The total demand for BPCL's bonds were at US$1.7 billion from about 160 global investors. Of these, 75% of the investors were from Asia and 22% from Europe. This was the first foreign bond offering by an Indian corporate in 2017. Also the rate of interest was the lowest in the last 11 years when measured in terms of spread over 10-year US government bills.

The funds raised will be used by BPCL to repay high-cost loans it had taken to buy assets in Russia, jointly with Indian Oil and Oil India.

Bharti Airtel's subsidiary - Airtel Payments Bank, has commenced national operations with its services now live in all 29 states of India with a total investment of over Rs 30 billion. This makes Airtel Payments Bank the first off the block to launch the new model of banks aimed at taking financial services to the millions who are outside the banking system. Bharti Airtel holds an 80% stake in the bank, while the rest is held by Kotak Mahindra Bank. Airtel Payments Bank got the payments bank license in April 2016 and became the first among such niche banks to start operations.

The company plans to tap into its telecom customer base and sign up as many as 100 million of them initially for the services, giving it a large base to keep off competition from digital wallet players and others set to enter the segment.

Airtel is planning to offer an interest rate of 7.5% per anum initially to woo new customers, who can deposit up to Rs 100,000 in their accounts. The interest rate however, is only an introductory offer will go down over time. Customers will be able to operate their accounts with the help of a mobile application, USSD, or IVR and withdraw and deposit money at authorised retail outlets.

The fully digital and paperless bank aims to take basic banking services to the doorstep of every Indian by leveraging Airtel's vast retail network, an official statement said. The only catch is that the payments banks, which do not offer loans and several other facilities offered by full-fledged rivals, are not allowed to accept deposits beyond Rs 100,000 in bank accounts.

The company said it had already on-boarded 1 million merchants and aimed to develop a nation-wide digital payments ecosystem with over 5 million merchants, by March this year. Merchants including kirana stores, chemist shops and many others would be able to download the merchant app of Airtel Payment Bank.

Going ahead, the US Fed policy on interest rate hikes are likely to impact emerging markets, including India. In addition, the domestic stock markets will seek direction from the ongoing earnings season, the upcoming Union Budget as well as the long awaited implementation of the GST reforms. However, instead of getting bogged down by these developments, investors should instead focus on companies with strong fundamentals and available at attractive valauations.

And here's an update from our friends at Daily Profit Hunter...

The Nifty traded on a positive note during the week. The index remained in a tight range at the start of the week. Then, on Thursday, it opened gap up and continued to show strength throughout the day. Yesterday, the index again opened on an upbeat but couldn't sustain there for long. Towards the end of the session, it witnessed some selling pressure and ended the day down 30 points. The Nifty managed to end the week with a 0.70% gain. The index is facing stiff resistance from 8,250-8,300 levels provided by its recent high and 200 EMA. A sustained close above these levels will help gain positive momentum for the index. You can read the detailed market update here...

Nifty Struggling Near Resistance zone of 8,250-8,300