Global Markets Close the Week on a Mixed Note

Sat, 4 Mar RoundUp

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The global markets ended on a mixed note in the week gone by. While markets in the developed economies ended in green, the indices in the emerging economies fell.

The US stock markets closed out their sixth straight week of gains. However, markets witnessed some correction on the last trading of the week, after Janet Yellen comments. Yellen signaled the Federal Reserve will increase interest rates this month if employment and other economic data hold up. The Fed meet is scheduled on March 14-15.

Major European stocks closed the week on a firm note. The UK indices witnessed volatility during week gone, though index closed up by 1.8% marking its best weekly gain in last 3 months. Service data was released during the week. The reported growth in the service sector was below the expectations, pointing slowing British economic growth.

Back home, Indian indices closed the week on a flattish note down (0.2%). The GDP data released during the week, surprised the experts and market participants. The markets neared the two year high levels during the week gone by. However, the benchmark indices snapped five-week long gaining spree and closed in red. The investors preferred to book profits ahead of the US Federal Reserve's policy meet.

Key World Markets During the Week

On the sectoral indices front, metal and IT stocks led the gainers this week. On the other hand, stocks from oil and gas and power witnessed selling pressure.

BSE Indices During the Week

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

The Central Statistical Office (CSO) surprised the nation when it released advanced estimates of Gross Domestic Product (GDP) growth for the October-December quarter. India's economic growth of 7% has sparked a debate on how output grew so fast at a time when the country was facing it's biggest-ever cash crunch, after demonetisation weeded out 86% of the currency notes in circulation.

Vivek Kaul, has been extremely vocal about it. The currency in circulation had crashed during demonetisation. Given the bulk of transactions in India being carried in cash, he is extremely skeptical of the high private consumption levels during the December quarter.

Here's Vivek.

• Demonetisation essentially rendered 86.4 per cent of the currency in circulation useless overnight. This made consumer transactions very difficult to carry out. While, the government did replace the money rendered useless with new money, but initially only Rs 2,000 notes made it to the financial system. These notes were very difficult to use because people found it difficult to give change, when almost no new Rs 500 notes were available. Hence, they were as good as useless for most of November and December 2016.
  
  In this environment, how did private consumption expenditure grow by 10.1 per cent, the second fastest since June 2011, is a question worth asking?

You can read the complete article in his diary here.

In news from India's manufacturing sector. The manufacturing sector continued its rebound from the notebandi induced downturn. The sector expanded marginally in February as a rebound in export demand contributed to a stronger expansion of total new orders, according to the Nikkei Purchasing Managers' Index (PMI) survey by Markit. Having deteriorated in December for the first time in one year, the health of India's manufacturing economy showed signs of improvement in January 2017.

The manufacturing PMI recovered from 49.6 in December 2016, to 50.4 in January 2017 and continued moving upwards marginally to 50.7 in February. The Manufacturing PMI is an indicator of manufacturing activity. A reading above 50 indicates expansion, while any score below the mark denotes contraction. The indicator suggests an upturn in the manufacturing activity in February, charting a steady rise since January.

Manufacturing activity in December was hit due to notebandi induced liquidity crunch, lower orders and muted outputs. February is the second straight month in which the manufacturing sector improved after the notebandi move.

The main factors contributing to the marginal PMI increase in February were a strong export demand and a rise in output and orderbook. However, the latest reading was much weaker than the long-run series average of 54.2, largely reflecting sub-par growth for output and new business. Confidence among Indian manufacturers was relatively subdued in February.

Higher commodity prices resulted in increased cost burden facing manufacturers. The sharp rate of inflation seen in February was the most pronounced in two-and-a-half years and led factory charges to be raised at the quickest pace in 40 months. A surge in inflation is likely to cause demand from price-sensitive consumers to fall and potentially jeopardise the economic recovery.

It is evident from the above chart that the manufacturing activity is nowhere near the pre-demonetisation levels noted in October 2016. However, manufacturing is seen to steadily pick up from the notebandi blues. The PMI has potential to chart a steady rise, especially after the budget announcements favoring the manufacturing sector.

According to a leading financial daily, National Association of Software and Services Companies (NASSCOM), the domestic IT services and BPO industry body expects the IT industry to grow at 8-10% next financial year. Although, the association will come out with a final projection in May.

The association's chairman believed nothing had changed since November 2016 to change the projection. He further noted that many domestic IT companies may change their business strategies and regroup themselves owing to newer trends such as increasing automation, artificial intelligence, analytics, and digital disruption. He added that the current growth rate would support 8-10% growth, which may be revised after analyzing the fourth quarter (2016-17) numbers. So, the industry body will comeback in May with forecast after a better understanding of primary data.

Further, on the falling hiring trends, he said that the current trend suggests that job accretion will be at best half of its growth in recent years. The previous twelve months have seen some of the biggest names in technology and e-commerce ranging from Microsoft and Cisco to Infosys and Flipkart taking decisions to downsize their workforce.

The industry body has not made any forecast for fiscal 2018, citing political uncertainties in the US and Europe, which has slowed down decision-making in the technology sector.

In news about the economy, the maximum rate of tax under the new Goods and Service Tax (GST) regime may go up to 40% after the GST council proposed raising the peak rate in the Bill to 20%, from the current 14%.

The proposed change comes with a view to prevent the need for approaching Parliament for any change in rates in future. The model Goods and Services Tax Bill will replace the clause which states the tax rate "not exceeding 14%", with "not exceeding 20%" when it comes up for debate in Parliament during the second phase of Budget session beginning next week.

The change in the peak rate will not alter the 4-slab rate structure of 5, 12, 18 and 28% agreed upon last year for the moment, but is only a provision being built into the model law to take care of contingencies in future. The revised draft of model GST law, which was made public in November 2016, provides for a maximum rate of tax under the new regime at 14% (14% central GST and an equal state GST, taking the total to 28%).

If the GST council has its way, the rate will be revised to 20%, taking the total to 40%. The Centre plans to introduce in Parliament the CGST Bill in the second part of the Budget session beginning March 9. After its approval by the Council, states will introduce the SGST Bill in their respective legislative assemblies.

The government is looking at GST rollout from July 1.GST, when implemented will bring in a host of regulations to enable transparency in the tax regime. This will no doubt lead to added costs for implementation of regulations. Unorganized players may bear the brunt of added costs of compliance with the GST norms and thereby lose their competitive position against the well-established organised players.

The implementation of GST is bound to bring more companies under the new tax regime, thus providing a level playing field to organized players in sectors having a high proportion of the unorganized segment.

Movers and Shakers of the Week

Company	24-Feb-17	3-Mar-17	Change	52-wk High/Low
Top Gainers During the Week (BSE Group A)
Jaypee Infratech	11	13	18.3%	14/5
Nalco	68	78	15.0%	79/37
Hindalco	180	199	10.2%	200/78
Central Bank	85	93	9.8%	112/65
GMR Infra	15	16	6.2%	17/10
Top Losers During the Week (BSE Group A)
BPCL	633.25	708	11.8%	735/393
Jaiprakash Power	5.73	6.23	8.7%	7/4
HPCL	521.33	559.7	7.4%	584/239
Jaiprakash Asso	15.25	16.22	6.4%	17/5
NTPC	155.8	165.15	6.0%	178/124

Source: Equitymaster

Some of the key corporate developments in the week gone by

In news from stocks in the pharma sector, Cadila Healthcare share price announced that the company received three observations from The US Food and Drug Administration (USFDA) for its formulation facility at Baddi, Himachal Pradesh. The drug major further clarified that the observations were related to a pre-approval inspection (PAI) for a specific product filed.

The product in question is yet to be manufactured or marketed in the US. USFDA inspected the facility from 20 February to 1 March, 2017 and issued a Form 483 with five observations. Form 483 relates to certain critical observations issued to a company at the end of an inspection if there were any violations of the Food Drug and Cosmetic Act and other related acts of the US Government.

Companies that receive its observations must respond in writing with a corrective action plan and implement it quickly. If the company fails to meet the USFDA's expectations, a warning letter may be issued. Cadila said it is already in the process of responding to the PAI observations.

The company clarified that apart from product related observations, there were no observations related to current good manufacturing practices. Cadila recently cleared a USFDA re-audit for its Moraiya plant in Gujarat without observations indicating a successful resolution of the warning letter.

Hindalco share price was in focus during the week, as the company embarked on a fundraising process to raise approximately Rs 33 billion through a qualified institutional placement (QIP). The Aditya Birla Group firm, which is India's biggest aluminum producer, launched a share sale to institutional investors in what could be the year's biggest equity capital markets offering so far, to take advantage of a liquidity driven market rally.

The company has set the floor price at Rs 184.45 per share for raising funds through QIP issue which opened on 2 March 2017. Bank of America-Merrill Lynch, Citigroup, JM Financial, SBI Capital Markets and Axis Capital are the lead managers to the issue.

QIP is a capital-raising tool, whereby a listed company can issue equity shares, fully and partly convertible debentures, or any securities other than warrants which are convertible to equity shares to a qualified institutional buyer.

The company had last attempted to raise equity capital through a QIP in 2014. The share sale is coming after two and half years when the company postponed its capital raising plans at the last minute in July-August 2014 due to poor market sentiment. The Supreme Court cancelled coal blocks allotted to the company and a downturn in the commodity cycle forced the management to call off the share sale in 2014.

Hindalco will use the proceeds of the transaction to cut burgeoning debt in the company's books. Hindalco's consolidated net debt stands at Rs 555 billion. It's net debt-to EBIDTA ratio is at 4.3 times.

Tata reported a 1.9% increase in total sales in February at 47,573 units compared to 46,674 in the same month last year. Domestic sales of Tata Motors' commercial and passenger vehicles were at 42,679 units in February as against 41,532 units in the same month last year, up 2.76%.

The commercial vehicles sales however dropped 1% to 30,407 last month over the same period a year before. Tata Motors also exported lesser number of vehicles in February (4,894) as compared to the same month last year (5,142). The cumulative number of exports was 13% higher though -- from 51,679 to 58,362.

The company's bus sales continued to grow by 30% in February 2017, driven particularly by State Transport Undertaking (STU) orders, supported by intercity and staff application segments. Demand from schools is also gaining momentum, the company said in a statement.

Improved consumer sentiments, waning effect of notebandi and aggressive push by the market players has led to recovery of Small & Light Commercial Vehicles (S&LCV) segment volumes, this month, it added. The volumes were mostly driven by a positive buyers' sentiment couple of months out of notebandi, and investments ahead of the feared price rise in the new fiscal.

According to a report in a leading financial daily, IDBI Bank has acquired its 323 million shares from Jaiprakash Power Ventures under the strategic debt restructuring scheme by its lenders. Reportedly, IDBI Bank's holding in the company stood at 5.39% of the company's total 5996 million equity shares.

Before this acquisition, the bank held 0.13% of the equity in the company. Following the allotment, financial institutions will have 51% equity share in the Jaypee group firm. In the meanwhile, it was reported that, the government is set to bail out IDBI Bank with a Rs 30 billion capital infusion to help it maintain a healthy capital-adequacy ratio and pursue credit growth.

The government has already said it is still open to bring down its stake in the bank to below 50%. The finance ministry is looking to rework its strategy on stake sale in IDBI Bank, which also involves valuation of its real estate assets. The government has budgeted Rs 250 billion towards bank capitalization this fiscal, of which it has allocated Rs 229.1 billion.

Reportedly, there are projections that in the last quarter of this fiscal there will be a jump in bad loans for IDBI. On the other hand, IDBI Bank's lending portfolio is mostly in corporate segment and that is one of the major reasons for surge in its bad loans.

Additionally, IDBI Bank has valued its non-core assets at Rs 60 billion, more than double the capital it received from the government last year. However, after the bank posted a historic loss of Rs 22.5 billion in the third quarter ending December 2016, it decided to freeze big-ticket lending and open new branches and focus on recoveries of bad loans. The move is aimed towards conserving capital, the buffer banks are mandated to keep against any losses.

Shares of IT companies were in focus during the week after he US President Donald Trump's first speech to US congress softened his stand on immigration and was seen more restrained than the harsh anti- immigration rhetoric seen during his pre-election speeches.

The US President too softened his stance on immigration a bit and there were no negative talks of emerging economies including India. The speech did not have any comment on visa issues that may hit domestic IT firms. Instead the US President said the US immigration should be based on a merit-based system, rather than relying on lower-skilled immigrants. Trump also said a broad immigration reform plan was possible if both Republicans and Democrats in Congress were willing to compromise.

Many Indian IT companies are also feeling the brunt of the proposed H1-B visa and immigration reforms. Large Indian IT companies, on an average generate more than 50% of their revenues from the US clients. They have built a strong client base over the years in the US market. If the suggested changes for immigration get cleared, the cost component for the Indian IT companies will go up.

The need to reduce their US exposure and move to other geographies is a given. However, we believe that it is unlikely that the companies will substantially bring down their focus on the US. Instead companies may look out for other means to reduce costs or protect margins.

How the US goes ahead with its immigration reforms will have a substantial effect on Indian IT companies. Fortunately most of them have been anticipating these changes and have been gearing up. However, uncertainties continue to loom over the Indian IT sector.

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The global markets have so far reacted favorably to the US election outcome. But investors are expecting credible regulatory and tax reform sooner than later. Thus a raft of announcements made by Donald Trump will also impact the global market sentiments.

On the other hand, Fed stance on interest rate would also impact the markets. Quite obviously domestic factors will continue to impact the markets. Investors should utilize the opportunity in cherry-picking fundamentally strong stocks with robust growth potential.

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

The Nifty 50 Index witnessed volatility near its 52-week high. It started the week on a negative note. It slipped sixty points in the first two days of the week. On Wednesday, the index opened gap up and erased the previous two-day losses to close 66 points up. The positive momentum continued until the next afternoon when the index hit a new 52-week high. But the buying interest could not sustain for long and the index slipped on the same day to cut 112 points from the day's high. Finally, on Friday, the selling pressure continued and index ended its weekly session with a 0.47% loss. The Index broke down from its uptrend channel after finding resistance at 9,000, a level to watch in coming week.  You can read the detailed market update here...

Nifty 50 Index Resisted from 52-Week High

 

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