Global Financial Markets Remain Cautious

Sat, 25 Mar RoundUp

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Most of the global financial markets ended the week on a negative note. Major global markets were cautious over the week over concerns of the Trump administration's ability to push out reforms. US markets snapped their bull run and ended 1.5% lower as compared to last week. This was the biggest decline since the US presidential election.

European indices gained on the back of the French presidential debate, but soon reversed gains jitters about U.S. President Donald Trump's ability to push through reforms overshadowed the positive development. Market participants were closely watching the progress in the US parliament for the introduction of a new healthcare reforms bill. Republicans pulled their bill to overhaul the U.S. healthcare system due to a shortage of votes, dealing a blow to U.S. President Donald Trump.

All European indices closed on a negative note in contrast to the rally earlier in the week. The UK indices closed the week down by 1.2%, while the German and French indices ended the week on a flattish note with losses of 0.3% and 0.2% respectively. An attack on the UK parliament during the week added to the caution.

Key World Markets During the Week

Back home, Indian share markets too fell over global cues. Positive news from the tabling of GST bills, and the Finance Minister's comments regarding a policy decision for solving India's bad loans problems, helped the indices pare the losses. The BSE Sensex was down by 0.8% for the week.

BSE Indices During the Week

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

Finance Minister Arun Jaitley promised a solution to the growing NPA problem within the next few days. The Finance Minister said the resolution being worked out with the RBI will put enough pressure on borrowers to settle the dues. He blamed the bad loans of public sector banks on just 30-50 companies, saying accounts of these will have to be fixed to resolve the issue.

The government and the central bank have been debating many measures to tackle the bad debt problem including the creation of a private asset management company which will work out a feasible resolution plan for a stressed company as well as a national asset management company with a minority government stake for companies that are more stressed.

Gross NPAs of public sector banks have gone up to Rs. 6.06 lakh crore in December 2016 from Rs. 5.02 lakh crore at the end of March 2016. Rising to the menace of bad debts, the Reserve Bank of India is pondering initiating tough measures against willful defaulters.

While RBI's proactive measure to tighten NPAs is proactive, banks need to take their share of blame. In our recent The 5 MinWrapUp edition, we had highlighted how the banks return ratios had deteriorated due to its profits written off on account of NPA provisions.

Market participants in the domestic stock markets cheered the GST Bill that was tabled in the Lok Sabha last week. So far, the Bill has received nod from the Union Cabinet for four legislations namely the Central, State, Union Territory and Integrated GST, along with the Compensation Bill. All these legislations are said to be taken up for discussion in the Parliament this week.

All the above developments have set the stage for implementing the landmark tax reform by 1 July 2017.

We believe that Goods and Service Tax (GST) is one of the key reforms that has the potential to bring about a structural change in the Indian economy. The implementation of the same is bound to bring more companies under the new tax regime, thus providing a level playing field to organized players that face huge competition from the unorganized segment, especially in the small cap space.

Players from the footwear, plywood, textiles and sanitary-ware sectors are likely to be strong beneficiaries of the above tax legislation. Battery as well as paint and adhesive manufacturers are likely to gain from this move as well.

In news from the PSU sector. The government is set to meet its divestment target for the first time in many years as it moves closer to its target of Rs 455 billion from its divestment program by the end of this fiscal.

The initial divestment target of Rs 565 billion earmarked in the last years Union Budget, was subsequently revised to Rs 455 billion.

Officials estimate that disinvestment would bring in receipts of at least Rs 440 billion, if not the full targeted amount.

The Centre's total receipts from disinvestment are also estimated to be at an all-time high this fiscal.

As it stands, the government raised over Rs 393 billion in the current fiscal, through minority share sale by way of offer for sale, share buyback and CPSE ETF so far.

Instead of opting the traditional way of going for pure disinvestment issues such as listing, follow on offers and strategic sales that were expected to improve the functioning of public sector units (PSU), the Centre has relied more heavily on share buybacks and the PSU exchange traded fund.

Aiding this would be the share buyback announcements by public sector Oil India Ltd and Engineer's India Ltd that are expected to raise Rs 15.2 billion and Rs 6.6 billion respectively.

Announced as part of the capital restructuring guidelines for state run firms in May 2016, share buybacks by PSUs including Nalco, NMDC and Coal India Ltd have already helped bring in Rs 156 billion.

Earlier this fiscal, the government had also raised about Rs 7.9 billion through share buyback of MOIL

According to data with the Department of Investment and Public Asset Management, it has raised Rs 393.6 billion this fiscal as disinvestment proceeds including stake sale of SUUTI holdings in L&T and ITC.

With direct tax collections slightly subdued, meeting the disinvestment target would also provide significant relief to the Exchequer in bridging the fiscal deficit that is estimated at 3.5% of the GDP in 2016-17.

Moving on to news from realty sector. India is expected to witness nearly US$ 4.2 billion new capital in the realty sector in 2017 with India emerging as a preferred investment destination.

As per the reports, new capital available for global real estate investment in 2017 is estimated at US$ 435 billion, out of which India is expected to get nearly US$ 4.2 billion.

The report further states that the total global wall of money in 2017 has fallen by 2% compared to 2016's peak of US$ 443 billion, but is the second highest figure recorded since 2009. India's attractiveness as a global investment destination has strengthened on account of the country's political will to attract and protect investment growth.

Indian realty owes its concrete foundations to private equity. Investment capital from uber-rich individuals and institutions - or private equity (PE) financing now makes up 75% of the funds propping up India's property market, compared with just about a fourth in 2010.

Total funding in the real-estate sector increased 40% to US$ 5.4 billion in 2016 from US$ 3.8 billion in 2011. This includes fund flows from private equities, non-banking financial companies and capital markets.

Banks used to account for anywhere between 50%-57% of the sector's institutional funding requirement until 2014. In the past two years, bank credit to the realty sector has slumped to about 26%.

Vivek Kaul, Editor of Vivek Kaul's Diary, recently wrote an article as to why Indian property prices haven't crashed after Notebandi. You can know all about it here.

In news from the steel sector. According to an article in The Business Standard, India's major steel companies are considering a Rs 1,000 a tonne hike in steel prices from 1 Arpil.

With iron ore prices on a rise and domestic demand likely to pick up by mid-April, steel producers have already raised product prices by Rs 1,000 per tonne from 15 March and are gearing up for another hike by the same amoiunt from April.

Domestic steel companies have raised prices by about 70% since imposition of minimum import price in February 2016.

Though prices were raised by Rs 3,000 per tonne in Janurary, most companies could not sustain the hike and had to roll it back in the following month either partially or completely. The market was unable to absorb the revision due to subdued demand.

However, steel companies are now confident that consumers will be able to digest higher prices.

Steel industry is seeing a demand pick up post UP elections mainly in the construction segment along with auto and white goods sectors which were hit due to notebandi.

The consumption data over the past few months clearly show that there are no takers for domestic steel. So, steel makers have been forced to export more, with overseas shipments up by 78% YoY in the fiscal till February.

In the last few months, as domestic steel demand failed to pick up and producers had to export the alloy in order to maintain margins and maintain the raised capacity utilisations. Average capacity utilisation of domestic steel industry has moved to 85% from 75% earlier.

In news about the economy, the government has made a fresh proposal to limit cash transaction at Rs 2 lakh. The intention here is in line with the proposed Budget measure aimed at discouraging black money through restriction on cash transactions to Rs 2 lakh from Rs 3 lakh.

The above proposal was among 50 amendments moved by the government during the weekto give effect to Budget announcements as Parliament took up discussion on the Finance Bill.

It also forms a part of the government's fight against black money, of which Notebandi formed a key element.

The above move also comes in line with the government's push to boost digital transactions and to make them attractive than cash transactions.

The government expect India to move in the direction of becoming a cashless economy. However, we must question: Will it be in India's best interest to move towards a cashless society?

We don't think so.

The fact is that India is not ready to go digital. We had pointed out some challenges to India's digitisation. Also, Vivek Kaul, in his recent entry in the diary, explains how digital transactions have fallen since December 2016 and why Indians are going back to cash after the demonetisation exercise.

We don't know how the above developments will play out. The move towards a cashless society could mean a positive development for India. It will lower costs, improve transparency in transactions, save time, and open up opportunities for some companies. However, we must pause to consider the other side of the coin, and be ready to deal with challenges.

Movers and Shakers During the Week

Company	17-Mar-17	24-Mar-17	Change	52-wk High/Low
Top Gainers During the Week (BSE Group A)
NLC India Ltd	96.65	109.9	13.7%	123/68
Oriental Bank	128.05	144.35	12.7%	149/77
Multi Commodity	1,117.2	1,215.5	8.8%	1,420/814
IPCA Labs	549.1	586.9	6.9%	643/402
MRF Ltd	55,438.7	59,184.14	6.8%	59,650/30464
Top Losers During the Week (BSE Group A)
Divis laboratories	763.2	623.1	-18.4%	1,380/612
Idea Cellular	107.9	90.85	-15.8%	128/66
Jindal Steel & Power	129.95	119.75	-7.8%	132/56
Indian Bank	283.2	262.4	-7.3%	310/85
GSK Consumer	5,532.55	5,206.15	-5.9%	6,584/4,650

Source: Equitymaster

Some of the key corporate developments in the week gone by

In news from stocks in the IT sector. Infosys decided to not apply for visas for employees with under four years of experience.

The company has decided to not raise visa requests for systems engineers and senior systems engineers, among the lowest rungs in the Infosys corporate ladder.

Earlier this year, US Congressmen have proposed a bill raising the minimum wage on the H-1B visa to over US$ 130,000, more than double of what is mandated today. The increased rhetoric around outsourcing has also made some Infosys clients wary of being serviced by more employees on the work visas Indian IT firms have long been dependent on the work visa, but a rising tide of protectionism means they are beginning to adjust their business models to reduce their reliance on the visa.

Infosys is in talks with clients about offshoring more work to India, and the work done by junior employees could be brought to India.

Large Indian IT companies on an average generate more than 50% of their revenues from the US. Current protectionism trends in the US immigration policy have raised fears over these firms losing a chunk of their revenues.

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.

That said, Indian IT companies will also need to rise to Trump's challenges. But fortunately, most were already gearing up for this. Trump may have only accelerated their defense.

The board of HCL Technologies has approved a buyback plan aggregating to Rs 35 billion.

The company plans to buy back 35 billion equity shares at a price of Rs 1,000 per share. The equity shares represent 2.48% of the fully paid-up equity shares of the company as on 31 March 2016. The offer size of Rs 35 billion is 13.62% of the company's free reserves as on 31 March 2016.

IT companies are under increasing pressure from investors to utilize the huge cash pile on books either through a share buyback or generous dividend.

Notably, HCL Tech's buyback follows those by larger rivals Tata Consultancy Services and Cognizant. Infosys has asked shareholders to approve an amendment to its articles of association to allow it to buyback shares.

The cash on the books of large Indian IT firms is legendary. At the end of 2016, the top three firms - Infosys, TCS, and Wipro - had cash and current investments of Rs 304.8 billion, Rs 386.7 billion, Rs 331.6 billion. That's a lot of cash! And the pile grows every year. This seems to be a good problem to have.

Idea Cellular announced that its board approved Vodafone-Idea merger.

Vodafone will hold 45% in the combined entity. Idea promoters will hold a 26% in the combined entity, the reports noted. The merger will create India's largest telecom player both in revenues and subscribers, taking on the likes of market leader Bharti Airtel and Reliance Jio.

The stellar debut of Avenue Supermarts on Indian indices was talk of the town in the week gone by. This comes as shares of Avenue Supermarts were listed at Rs 604.40 on BSE, thereby marking a 102% premium over its issue price of Rs 299 apiece.

The IPO, the biggest since PNB Housing Finance's Rs 30 billion offer in October last year, was subscribed more than 104 times earlier this month.

Rohan Pinto, our Research Analyst, released the Equitymaster IPO note recently. In this detailed report, Rohan not only evaluates the company's business performance, but answers the crucial question about valuations. Find the entire report here (requires subscription).

In news from stocks in the banking sector. State Bank of India (SBI), which approved plans to merge with five of its associate banks, announced plans to shut down almost half the offices of these banks, including the head offices of three of them. This process will start from April 24.

The public sector lender plans to retain only 2 of the 5 head offices. Three head offices of the associate banks will be unbound along with 27 zonal offices, 81 regional offices and 11 network offices of the associate bank

The five associate banks that will merge with SBI are: SBBJ (State Bank of Bikaner and Jaipur), SBM (State Bank of Mysore), SBT (State Bank of Travancore), SBP (State Bank of Patiala) and SBH (State Bank of Hyderabad).

There are currently 550 SBI offices while its associate banks have 259. The target for the number of controlling offices after the merger is 687 -- a reduction of 122 offices.

The bank explained its decision by saying it is intended to avoid overlapping offices in the same area, avoid duplicity, and maintain a leaner controlling structure.

While the SBI merger was a step to consolidate the banks' revenues and to strengthen SBI's position. Other public sector banks do not have this option.

If one does a SWOT analysis for Indian economy, bad debts and precarious position of banks would be the number one threat.

Hindustan Zinc was in focus this week on the back of massive dividend announced by the company. The company has announced a special one-time interim dividend of 1,375% or Rs 27.50 on its equity share with the face value of Rs 2. The same is going to cost the company Rs 139 billion including dividend distribution tax(DDT).

This, along with the special golden jubilee dividend of 1,200% paid in April 2016 and the interim dividend paid in October 2016, the aggregate dividend being paid by Hindustan Zinc during this financial year stands around Rs 271 billion including DDT. This is recorded among the largest dividend outflows by any company in India in a single financial year.

As far as our views on dividend investing are concerned, investing in a stable dividend-paying company can be a good bet against stock market volatility and economic cycles. The business will generate a steady passive income. The more stable the business, the higher the share of profits that can be distributed.

But that does not mean you should jump into stocks with the highest dividend payout ratio. If a company pays out all its profits as dividends, it may not always be a good sign. It could imply that there's no chance of investing the profits back into the business at a decent return. So rather than arbitrarily investing in dividend stocks, what one should do is to buy the most solid, consistent, and fastest-growing dividend companies - something that we like to call 'Dividend Multibaggers'.

But what exactly are these dividend multibaggers? How do you find them? What price should you pay for them?

In the Hidden Treasure Steady Income Small Cap Premium, we bring you our best bets in dividend investing, without compromising on fundamentals. To know more about these stocks, click here.

Pharma stocks saw the ire of the USFDA in the week gone by. The was down by 0.8% over the week.

Divi's Laboratories share price fell almost 20% following an import alert issued by the USFDA on products manufactured at its Visakhapatnam unit.

Separately, Dr Reddy's Laboratories share price also slipped to its 52-week low after it said the US drug regulator issued a Form 483 with 13 observations for the company's formulation manufacturing facility at Duwada, Visakhapatnam.

In another development, a class-action suit is filed in a Pennsylvania federal court last week against Sun Pharmaceutical Industries Ltd in the US for colluding with Mylan for conspiring to raise the price of generic asthma medicine.

The complaint stated that Sun Pharmaceuticals and Mylan had raised their prices for albuterol sulfate over 3,000 per cent between October 2013 and April 2014.

On the positive end of the spectrum, The USFDA granted tentative approval to Glenmark Pharma for Fingolimod Capsules, 0.5 Mg.

The tablet is a generic version of Gilenya Capsules of Novartis Pharmaceuticals Corp. These capsules are used in the treatment of adult patients with relapsing forms of multiple sclerosis.

As per IMS Health sales data for the 12-month period ended January 2017, Gilenya capsules 0.5 mg had annual sales of approximately US$ 2.03 billion.

Glenmark's current portfolio consists of 112 products authorized for distribution in the US marketplace and approximately 65 ANDA's pending approval with the USFDA

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

The Nifty 50 Index traded on a negative note during the week. On Monday, it opened the session higher but could not sustain up for long and slipped to close the session 33 points down. The selling pressure continued with the index opening gap down on Wednesday taking cues from global markets. Towards the end of the week, the index bounced strongly after taking support at 9,000 level. But finally, it closed its weekly session with a 0.57% loss. The 8,950-9,000 level remains a strong support zone for the index. You can read the detailed market update here...

Nifty 50 Index Ends in the Red

 

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