Global Volatility Continues

Sat, 6 Feb RoundUp

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The European markets were the biggest losers this week. Stock markets in Germany and France fell as much as 5.2% and 4.9% respectively. The fall was triggered when the European Commission downgraded its economic growth projections.

US stocks declined broadly on Friday, led by a rout in technology shares. The slide followed a mixed report on the US labor market. Jobs growth slowed in January, and the unemployment rate fell slightly.  This weak job data dragged down the US as well as the European markets. Benchmark indices in the US ended the week down 1.6%.

Asian markets ended the week on a mixed note. Stock markets in China were up 1% ahead of the Lunar New Year. The stock markets in China will be closed for a week starting from 8 February. Japan ended the week on a dismal note with its benchmark indices falling around 4%.

Back home, the BSE Sensex ended the week down 1%. The earnings season did not cheer the investor's on the Dalal Street, dragging down the benchmark indices. The upcoming budget session will be the key to drive the growth in the economy.

Majority of the sectoral indices ended the week on a negative note. Stocks in the power, oil & gas and realty sectors were the biggest losers. However, stocks in fmcg space witnessed buying interest.

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

According to an article in The Economic Times, the government is looking to raise about Rs 60 billion by getting Coal India Ltd to buy back a fourth of its paid-up share capital at a premium. Following the buyback, the government's stake down is likely to drop from 79.65% to 76%. Reportedly, the buyback will be followed by an additional divestment that would lower the government's stake below 75%.

Reportedly, Coal India may not be able to comply this by August which likely implies that the government won't be able to use this money to cover the shortfall from disinvestment proceeds for FY16. The Securities and Exchange Board of India (Sebi) has stipulated that the public should hold 25% of state-owned listed companies by August 2017. Also, according to the reports, CIL has been asked to direct its eight wholly owned subsidiaries to buy back their shares from the parent.

In other news, Coal India is planning to acquire coal mines in South Africa in partnership with local government amid falling prices of assets globally. The company, which accounts for over 80% of the domestic coal production, has targeted one billion tonnes of dry fuel output by 2020. It is set for a record production of 550 million tonnes this fiscal.

After much deliberation and delay, the Mines and Minerals (Development and Regulation) Act, 1957 has been revised and the government has passed the Mines and Minerals Amendment Bill, 2015. In our recent edition of The 5 Minute Wrap Up Premium, we look at the impact of the Act on various mining and metal companies (Subscription Required).

As per a report by India Ratings and Research (Ind-Ra), plant load factors (PLFs) of the companies in the power sector are unlikely to improve in the next fiscal. This is because the demand growth of electricity is likely to stay muted in spite of improved fuel supply.

The report stated that PLF's are unlikely to improve in 2016-17 from 61.7% in the first nine months of 2015-16. One shall note that all-India thermal PLFs have been consistently declining and have fallen 21.5% since the peak of 78.6% in 2007-08. PLF is the ratio of the actual output of a power plant over a period of time and its output at full capacity.

Further, Ind-Ra expects that the electricity demand will grow by 4-5% and power generation by 5-6% in 2016-17, with deficit remaining low at 3-4%. However, for this to be sustained there should be a pick-up in demand in industrial activity. This is because a significant chunk of electricity sales goes to commercial or industrial consumers. As per Ind-Ra, industrial demand growth is expected to stay muted at 4-5% in 2016-17.

Ultimately, power is critical for the growth of infrastructure and manufacturing industries and the sooner the government does something constructive about it, the better the Indian economy will be.

Now let us have a look at some quarterly results that were announced in the week gone by.

Infrastructure giant Larsen & Toubro reported its results for the quarter ended December 2015. The company's net profits grew by 19.4% YoY to Rs 10.3 billion. Further, net sales too grew by 7.6% YoY to Rs 253.8 billion. The rise in the public investments was one of the factors that helped the topline growth.

However, company's operating margins fell by 1.8% to 10.3% as compared to the year ago period. Even its, operating profits declined by 8% YoY to Rs 26.5 billion. Nevertheless, company garnered fresh order worth Rs 385.2 billion taking the consolidated order book to Rs 2,600 billion.

Reportedly, the company management has stated, the current developments are positive. Further, the company has not seen better macroeconomic conditions than at present in the past three years. Pickup in the private as well as public investments will be the key things to watch out for going forward.

Private sector lender Yes Bank reported its results for the quarter ended December 2015. The bank's net profit shot up 25% to Rs 6,757 million on a year on year (YoY) basis. This was on the back of strong net interest income, other income and operating profit growth. Net interest income, the difference between interest earned and interest expanded, grew by 27% YoY during the quarter. The management of the bank has stated that the steady increase in net interest income was driven by improvement in retail franchise net interest margin, return on assets and overall preservation of asset quality.

Deposits during the quarter increased by 23% YoY and CASA (current account-saving account) jumped 45% YoY. Corporate banking accounted for 67% of the advances portfolio, while retail & business banking constituted 32.8%. Other income (non-interest income) surged 39% YoY in the quarter gone by. Provisions for bad loans stood at Rs 1,479 million for the quarter, up 42% over preceding quarter and 111.8% YoY.

Tech Mahindra reported its results for the quarter ended December 2015. The company's sales grew by 1.2% QoQ in constant currency terms. Demand from telecom business, which generates about half of Tech Mahindra's revenue remained subdued. This vertical previously contributed 52.9% to the overall revenues, has now come down to 51.3%. According to the company management, the revenues were impacted due to furloughs and project ramp downs.

However, on the brighter side there was an improvement in cash flows as well as operating margins. The cash flows improved significantly on the back of reduction in the debtor days. The debtor days reduced to 104 days in the current quarter as compared to 108 in the previous quarter. Further, margins too improved by 0.3% to 16.9% owing to lower expenditure. Reportedly, the management will be taking cost controlling measures to improve the margins. However, net profits of the company dropped 3.7% QoQ as the current quarter did not have the benefit of exceptionally higher other income that the September quarter witnessed.

Tata Steel reported its results for the quarter ended December 2015. The consolidated revenues fell by 16% to Rs 280.4 billion. The net revenues fell on the back of cheaper imports from China. Steel exports from China are flooding the Indian as well as European market, dragging down the steel prices.

Further, the company posted a net loss on a consolidated basis of Rs 21.3 billion as compared to net profit of Rs 1.6 billion a year ago. The loss was mainly on account of a one-time charge in relation to restructuring and other provisions on account of its European assets. Reportedly, this one-time item was pegged at Rs 7.2 billion.

Steel demand in India is on an uptrend; however majority of the incremental demand is met with cheaper imports from China. The same situation is being faced in Europe. It's high time the government brings in some anti-dumping duty measures to protect the domestic players in the steel industry. Implementing anti-dumping duty measures will not only safeguard the steel industry but it will also help the banking sector which have a considerable exposure to the steel sector.

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

As per a leading financial daily, auto major Mahindra & Mahindra (M&M) has completed sale of its entire 71.19% stake in Swaraj Automobiles (SAL) for Rs 248 million to b4S Solution. The development comes as the company during the last year had entered into an agreement with b4S Solutions for the sale of its entire stake in SAL. Under the agreement, the company had fixed the price at Rs 145.5 per equity share.

One shall note that M&M had acquired stake in SAL through open offers when it bought 43.3% in Punjab Tractors, which held shares in the company.

As per an article in leading financial daily, recently released car sales data indicates tepid performance for the month of January. This was after 14 consecutive months of positive growth. The overall car sales was dragged down due to flat sales from Maruti Suzuki, that enjoys a 47% market share. Maruti Suzuki reported a low single digit growth of 0.8% in the month of January. The company attributed the decline to lesser number of working days in the month on account of holidays. Further even, Tata Motors reported a decline of 18% in the domestic sales of its passenger vehicles for the month in consideration.

However, Mahindra and Mahindra (M&M) posted a good set of numbers with volumes increasing by 13%. The growth was led by the increasing sales from TUV300 and the recently launched KUV100. The company posted a double digit growth inspite of facing a recent setback from Supreme Court's decision to ban diesel vehicles above 2000cc capacity.

Sun Pharmaceutical has launched the generic version of Gleevec in the US market. The company holds 180 days of exclusive rights to sell the drug in the US market. This will give the company a first mover advantage. Further, it will boost the US business which has been hit by fewer approvals as well asregulatory compliance issues. Reportedly, Gleevec generates sales of around US$ 2.5 billion from the US.

However, there were certain headwinds in launching this drug. The company had applied for the product launch from its Halol Plant. However, as this facility was facing regulatory headwinds, the company had transferred the manufacturing of this drug to another plant.

On the other hand, Lupin too has launched the generic version of a diabetic drug named 'Glumetza'. The company too has received 180 days of exclusive rights to sell this drug in the US market. Reportedly, 'Glumetza' had sales of US$ 450 million in the US market.

The Indian companies have been facing several challenges recently, and delay in approvals from the US regulators has been a big concern. The recent launches under 180-days exclusivity are positive for both the companies.

We believe global markets are likely to remain under pressure going forward. None of the concerns of global investors are likely to go away anytime soon. Indian markets too will continue to experience the fallout of this turmoil. However, long term investors need not be too concerned. Times like these could offer good opportunities to enter good quality stocks at reasonable valuations.

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

Once again, Friday brought a glimmer of hope and smile to the face of bulls. The index ended up almost 100 points after a rough week. The index is currently trading in the middle of a 250-point range from 7,350 to 7,600. The consolidation and choppy activity is likely to continue as long as the index moves out of this range. You can read the detailed market update here...

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