A Mixed Week for Global Markets

Sat, 27 Feb RoundUp

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Global markets moved indecisively this week. The European markets continued their rally from last week. The benchmark indices in the U.K, France, and Germany rallied by 2.4%, 2.2%, and 1.3% respectively. The markets are factoring in further stimulus measures by the European Central Bank (ECB). The European markets seem completely unfazed by the possibility of a Brexit i.e. Britain leaving the EU.

The US markets too ended higher for the second consecutive week. The Dow Jones Industrial Average (DJIA) was up by 1.5%. However, the Dow is still down 4.5% year-to-date. The S&P 500 ended higher by 1.6%. Markets cheered news that US GDP growth for the last quarter of 2015 was revised higher to 1% from 0.7% earlier.

In Japan, the BoJ has already implemented negative interest rate policy (NIRP). The Japanese market was up 1.4% this week. However, stock markets in India and China bucked the trend and ended the week lower by 2.3% and 3.2% respectively. The Chinese central bank has hinted at fresh stimulus measures but this did not enthuse the Chinese market.

Back home, the BSE Sensex ended the week lower by 2.3%. The key short-term trigger for the markets will be the Union Budget on Monday 29th February.

All sectoral indices ended lower for the week. The biggest losers were Power and Banking stocks.

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

The Reserve Bank of India (RBI) has clarified that bonds issued under discom package Ujwal Discom Assurance Yojana (UDAY) will not hit the markets and would be private placements. Further, it was stated that the RBI is open to give further relaxations on these bonds, such as allowing them to be held till maturity. This will mean that the investors do not have to incur market-to-market losses every quarter in valuing them in their books.

The announcement came in as a relief for the bond markets that have been seeing bond yields tightening every passing day. The bonds, to be issued by the electricity distribution companies (discoms) as non-SLR grade have been a major concern for the bond market.

It should be noted that about Rs 600 billion of UDAY bonds are expected to be issued during this fiscal year (2015-16). Further, an additional bond issue of Rs 300-400 billion is scheduled for the next fiscal year.

The UDAY scheme was brought up by the government to bring a turnaround in the State Electricity Boards (SEBs) that have been caught up in a vicious cycle of high debt and operational losses. The scheme allows power distribution companies (discoms) in select states to convert their debt into state bonds.

The above rescue package for discoms bodes well for health of SEBs. Having said that, one shall have to watch out for further steps that government takes to make the scheme successful.

Further, Reserve Bank of India (RBI) has also announced certain changes to the strategic debt restructuring scheme (SDR). According to the scheme banks were allowed to convert loans into majority equity shareholding (at least 51%) in case of a default by the borrower.

Once loans were converted into equity, banks had to dilute the majority shareholding and find a new buyer within a period of 18 months. However, it was challenging for the banks to dilute such a big portion of shareholding within the specified time of 18 months.

Considering this, RBI revised the guidelines and stated that banks can upgrade an asset to the standard asset category if they divest at least 26% of the stake to the new promoter within the specified period of 18 months. The balance equity shareholding could be divested at a later stage. Reportedly, this is a significant departure from the norms released on June 2015, when the regulator had asked banks to divest their entire 51% holding within the same time-frame. This may give some relief to banks as they will get additional time to find the right buyer.

As per an article in Economic Times, exports of over half of the sectors out of the 30 closely monitored by the Commerce Ministry were in the negative territory in the month of January 2016. According to the data, outbound shipments of as many as 17 sectors dipped last month. The fall was witnessed due to a fall in global prices and demand. The top two sectors - engineering and petroleum products contracted 27.6% and 35.2%, respectively in January 2016.

Further, agro-products, which constitute over 10% of the country's total shipments, too recorded a negative growth during the month under review. Overall, 8 out of 13 main agriculture products slipped into negative territory. Exports of rice, cashew and oil meals fell 34%, 25% and 78%, respectively.

India's merchandise exports, extending its decline for the fourteen months in row, plunged by 13.6% in January 2016 at US$ 21 billion as against US$ 24 billion in January last year. Decline in these exports has dragged down India's overall merchandise exports. Due to continuous dip, the total merchandise shipments are expected to reach a figure of US$ 270 billion in 2015-16.

Exporters' body - Federation of Indian Export Organizations (FIEO) regarding this said that in order to boost the shipments, the government should announce incentives in the Budget. It said that the inverted duty structure in respect of various items may be given due consideration in the Budget as it not only affects exports but also the manufacturing sector. Some respite was sought from the exports of pharmaceuticals, plastic, carpet, tea and coffee which recorded positive growth in January 2016.

It should be noted that India has aimed at taking exports of goods and services to US$ 900 billion by 2020 and raising the country's share in world exports to 3.5% from the present level of 2%. While hopes are set high, the present situation suggests that the exports based economy is vulnerable and highlights the need for further diversification. And to address that, the government needs to clear structural bottlenecks in the Indian economy.

As per a leading financial daily, government is considering a proposal to permit 49% FDI (foreign direct investment) through automatic approval route in the insurance sector. The same is being done with a view to attract more overseas inflows (subscription required). Many are expecting that the government will announce this decision in the forthcoming Budget as the move would also help in improving ease of doing business.

Presently, FDI up to 26% is permitted through automatic approval route for the insurance sector. In order to raise it to 49%, the approval of Foreign Investment Promotion Board is required. As of now, as many as 10 proposals, including that of ICICI Prudential Life, ICICI Lombard General Insurance and Aviva Life Insurance, are pending at different stages of clearances.

There are 52 insurance companies operating in India. Of this, 24 are in the life insurance business and 28 in the general insurance. State-owned General Insurance Corporation (GIC), in addition, is the sole national reinsurer. It should be noted that, in order to deepen the re-insurance market, Insurance Regulatory and Development Authority (IRDAI) permitted UK-based Lloyds to set up business in India.

Source: Equitymaster

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

As per a leading financial daily, the Centre's green panel has given a clearance to the state-owned Oil & Natural Gas Corporation (ONGC) for its Rs 17.5 billion project in Gujarat's Cambay Basin. The project involves drilling of 406 development wells in oil fields and the proposed drilling is expected to be undertaken at the company's Ahmedabad asset located in Gandhinagar, Ahmedabad, and Kheda districts.

This asset currently produces 3,725 tonnes per day crude oil and 5.8 lakh cubic meters of natural gas on a daily basis. The cost for the ONGC's drilling project is estimated at Rs 17.5 billion and the depth of the drilling wells will be in the range of 800 - 2,000 meters.

ONGC is India's largest oil and gas exploration and production company. It produces around 70% of India's crude oil (equivalent to around 25% of the country's total demand) and around 60% of its natural gas. With a market capitalisation of over Rs 2 trillion, it is one of India's most valuable publicly-traded companies. We believe that the above clearance will increase production levels and improve the fundamentals of the company.

Dabur India has signed a licence pact with the government to produce two new ayurvedic drugs, Ayush - 64 for treatment of malaria and Ayush- 82 for management of diabetes. The company is also planning to commercially produce the two drugs within six months and they will be available in various formats.

Reportedly, the company has also signed a memorandum of understanding with the Central Council of Research in Ayurvedic Sciences (CCRAS), an apex research body under the Ministry of AYUSH, for collaboration and cooperation in the pharmaceutical R&D for different novel dosage forms and drug development in ayurveda. The ayurvedic formulations for both medicines were developed by CCRAS. Also, the company has launched a sales training program for the rural youth which seeks to provide free technical training and skill development to improve employability of young people from villages.

As per an economic daily, Tata Power has received approval from Regional Empowered Committee (REC) of the Union Environment Ministry for setting up of a 52.50 megawatt (MW) wind power project in Koppal district, Karnataka.

The panel gave its clearance for diverting forest land of 36.27 hectare instead of proposed 39.10 hectare in the Hanamasagara protected forest in Koppal district.

The company has been asked to use the existing roads inside the forest land for this project, thereby limiting the requirement of forest land to 36.27 hectare. The proposed project is expected to cater to the power requirement of the state and likely to generate employment opportunity.

Tata Power is India's largest integrated power company with a growing international presence. The company together with its subsidiaries and jointly controlled entities has an installed gross generation capacity of 9,100 MW and a presence in all the segments of the power sector. The company has identified four geographies for driving growth in the future. These geographies are Africa, South East Asia, Middle East and South Asian Association for Regional Cooperation (SAARC).

Glenmark Pharmaceuticals Inc., USA, has been granted final approval by the United States Food & Drug Administration (USFDA) for Norgestimate and Ethinyl Estradiol Tablets USP, the generic version of Ortho Tri-Cyclen Lo Tablets of Janssen Pharmaceuticals, Inc.

According to IMS Health, sales data for the 12-month period ending December 2015, the Ortho Tri-Cyclen Lo Tablets market achieved annual sales of approximately US$503.9 million.

The company's current portfolio consists of 107 products authorized for distribution in the US market and 62 ANDAs pending approval with the USFDA. In addition to these internal filings, the company continues to identify and explore external development partnerships to supplement and accelerate the growth of its existing pipeline and portfolio. The stock price of Glenmark has witnessed sharp correction quite recently. The company's performance (Subscription Required) has been severely impacted by global headwinds.

Apart from the US, Indian pharma companies have steadily expanded exports across some key emerging markets including Russia, Brazil, Romania, South Africa, and Venezuela. Improving healthcare affordability in the emerging markets, governments encouraging the expansion in healthcare, and low-cost manufacturing by Indian companies have been the key to Indian Pharma's increased presence in the emerging markets. But growth from emerging markets has come under pressure recently (Subscription Required).

State owned Punjab National Bank has declared 904 borrowers as willful defaulters as at 31 December 2016. The willful defaulters cumulatively owe a mammoth sum of Rs 108.7 billion to the bank.

The bank has added 140 companies as willful defaulters over the last quarter. A company is considered as willful defaulter when it has defaulted on repayments to a lender in spite it has ability to meet its financial obligation. The term is also applicable to borrowers who divert loans sanctioned for a specific purpose to other avenues, those who siphon off loan money and dispose of assets pledged as collateral.

Reportedly, PNB plans to sell up to Rs 30 billion worth of bad loans to the asset restructuring company (ARCs) in the current quarter. The company's asset quality deteriorated to 8.47% of gross advances as against 5.97% a year ago.

PNB's earnings have been hit sharply in the December 2015 quarter. This was on account of escalation in bad loans in line with intensive asset quality review conducted by RBI. Going forward too, the loans and provisions are likely to remain bloated for the March 2016 quarter too and thus keeping profits depressed.

Asset quality concerns have led to a sharp plunge in the bank's stock price. PNB's market cap has eroded by approx. 48% in the last three months. But with most of the slippages already factored in by the end of FY16, we believe that the pressure on account of rising bad loans may start easing from FY17 onwards. This is also likely to put PNB's networth and capital adequacy on a firmer ground.

The key trigger for the Indian markets will be the budget on Monday 29th February. However, we believe once the budget analysis is behind the markets, stocks will once again be driven by FII flows. However, we recommend investors should not be influenced by short-term trends. Instead they should pick up fundamentally strong businesses when they are selling at attractive valuations.

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

The index managed to break out above the resistance level of 7,200 but couldn't sustain above those levels for long. It dropped by 125 points on Tuesday and has entered back in to the trading range of 6,900 to 7,200. The Nifty could trade choppily until it decisively breaks out on either side of this trading range. Traders would probably wait and take cues from the Union Budget before taking any positions. You can read the detailed market update here...

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