Global Markets Remain Volatile

Sat, 30 Apr RoundUp

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US Federal Reserve kept its benchmark interest rate unchanged in its meeting on Wednesday. The prime reason for maintaining a status quo was the slow growth in the US economy. The benchmark indices in US ended the week lower by 1.3%.

Asian markets too ended the week on a disappointing note. Benchmark indices in Japan and Singapore ended the week lower by 5.2% and 3.5% respectively. Bank of Japan declined to boost its stimulus measures. This came in as a surprise to the market, which reacted negatively to the news. For the month of April, the dollar dropped 5.1%, while its year-to-date decline stretched to 11.5%. This may prove to be a concern for the Japanese exports.

Back home, the S&P BSE Sensex index ended the week lower by 0.9%. Corporate earnings will act as a key trigger for the market going forward.

Key World Markets During the Week

Source: Yahoo Finance

Barring stock in the realty sector, major sectoral indices ended the week on a negative note. Maximum selling pressure was witnessed in power, and consumer durable stocks.

BSE Indices During the Week

Source: BSE

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

Moody's Investors Service has opined that a prolonged worsening in asset quality at PSU banks is the main threat to India's sovereign credit profile.

The firm stated that the main threat to the sovereign credit profile would be via a significant and prolonged worsening in asset quality at state-owned banks. Along with this caution, the firm stated that the capital infusion by the government in PSU banks is likely to be larger than anticipated.

Also, Moody's made a case for the government bearing some of the cost of cleaning up balance sheets.

One shall note that the rising bad loans has been a serious concern for Indian banks, especially for the PSUs. According to RBI's website, the Indian public sector banks account for 72% of total banking sector assets, but they accounted for only 42% in total profits during 2014-15.

The government is doing all it can to bring down the level of these bad loans.

Finance Minister Arun Jaitley earlier this year announced that the government will provide sufficient funds to recapitalise public sector banks (PSUs) to ensure that they play a significant part in boosting growth. The announcement made in the Union Budget 2016-17 was an allocation of Rs 250 billion towards the recapitalization of PSU banks. Apart from this, Rs 100 billion each is going to be infused in 2017-18 and 2018-19 by the government for the recapitalisation of PSU banks.

Further, earlier this month the Reserve Bank of India (RBI) stated that it plans to put in place a supervisory enforcement framework wherein action against banks would be taken for non-compliance of RBI instructions. This move was initiated to standardize bad loan recognition across all banks and to put an end to decade-old volatility in banks' earnings. The framework is said to be formalised by June this year.

So it can be said that the government is using its mandate as a great opportunity to unlock the untapped value from its PSU assets. If the government succeeds, then PSU shareholders could multiply their wealth in such stocks. Only time will show what such reforms finally bring.

Let's have a look at some quarterly results announced by companies this week

HDFC Bank reported its results for the quarter ended March 2016. The company's net profit grew by 20% YoY during the quarter to Rs 33.7 billion. The healthy growth was on account of improving loan demand from the individuals and mid-sized companies.

Net Interest Income (NII), considered to be the core income of the bank grew by 24% to Rs 74.5 billion. The strong growth was on account of a rise in loan disbursals coupled with healthy NII margins which stood at 4.3%.

The loan disbursals grew by 27.1% YoY in the fiscal year 2016. Reportedly, retail loan growth outpaced that of the corporate borrowers. The retail loan book grew by 29.7%, while that of corporate borrowers grew at the pace of 27.3%. Within HDFC Bank's retail loan book, the fastest growth came from personal loans which expanded 44%. Credit card outstanding grew 27%.

Coming to asset quality, the Gross non-performing assets (NPA) as a percentage of total advances were 0.94% in the quarter ended 31 March, down marginally from 0.97% in the previous quarter. Despite, the steady asset quality the company has been increasing its provisions and contingencies which reported an increase of 15% from a year ago. Even though asset quality of HDFC Bank is one of the best in the industry, the same needs to be closely assessed going forward on account of a rise in the provisions.

Axis Bank too reported its results for the quarter ended March 2016. The net profits reported a decline of 1.2% to Rs 21.5 billion. The decline was on account of rising provisions as the company set aside money to provide for bad loans. The provisions increased by around 63% to Rs 11.6 billion on a sequential basis.

Fresh slippages during the March quarter totalled Rs 14.7 billion, nearly double the level as seen in the year-ago period. Interestingly, this time the company has given a 'watch-list' of the loans totaling to Rs 226.2 billion. This watch-list indicates that there could be a further stress from this pile. The watch-list accounts for 4% of the company's total loan book and 13% of its corporate loan book. To add to the woes, the bank expects 60% of loans from this pile, or about Rs 130 billion, to turn bad over eight quarters.

However, net interest income (NII), considered to be the core income of the bank increased by around 20% to Rs 45.5 billion. Further, the loan book expanded by 21% to Rs 3.39 trillion as of 31 March 2016. Within the total advances, the retail segment clocked 24% growth and corporate loans grew by 22%. The asset quality will be the key things to watch for going forward.

UltraTech Cement Ltd reported its results for the quarter ended March 2016. The company's net profit grew by 10% YoY during the quarter to Rs 7.2 billion. The net sales too grew by 5% to Rs 68 billion.

In volume terms, the company reported a 15% YoY growth in cement sales at 13.20 million tonnes (mt) for the quarter. The volume growth came in largely from the infrastructure sector. However, the average realizations declined as compared to 4QFY15. The average realizations were down by 9% to Rs 4,609 per tonne. The price realizations declined both sequentially and on a YoY basis.

Capacity utilization improved during the quarter. The company reported a 5% YoY rise in capacity utilization at 84% for the fiscal year 2016. The company expects its cement demand to grow by 7-8% in the fiscal year 2017.

Ultratech has recently signed a deal with Jaiprakash Associates to purchase it's 21.2 mt cement assets. The deal is valued at Rs 159 billion. Reportedly, the acquisition will be financed through domestic term loans for a 20-year tenure and a five-year moratorium on the principal amount. A pick-up in the road and housing sector will be the key things to watch out for to assess the cement demand going forward.

Ambuja Cements too reported its results for the quarter ended March 2016. The standalone net profits declined by 4.4% to Rs 3 billion for the quarter ended March 2016. The decline was mainly on account of lower price realization, additional provision towards contribution to the District Mineral Foundation and increased advertisement and promotional expense.

Further, net sales remained flat during the quarter. The net sales declined by 0.25% to Rs 24.1 billion. Earnings before interest, tax, depreciation and amortization (EBIDTA) for the quarter too declined by 11.8% to Rs 4.5 billion.

However, other income grew by around 43% to Rs 1.3 billion. Reportedly, the higher other income was due to certain write-backs of provision for interest on income tax related to earlier years. The pick-up in the infrastructure and housing demand will be the key things to watch for going forward.

Maruti Suzuki reported its results for the quarter ended March 2016. The company's net profit declined by 11.7% YoY to Rs 11.3 billion during the quarter. The decline was on account of higher tax outgo and production loss from the unrest near its factory. The company paid tax at a higher rate of 33% owing to fewer benefits on research and development (R&D) and smaller tax free income.

However, the net sales grew by 12.5% YoY to Rs 149.2 billion during the quarter. Rural sales accounted for 35% of the total volumes in the fiscal year 2016. This ratio has advanced by 9% as compared to a year ago. The sales were boosted on account of traction from new models such as Vitara Breeza and Baleno.

Further, gross margins improved by 2.5% to 34%, which in-turn led to Earnings Before Interest Tax Depreciation Amortization (EBITDA) margins expanding by 0.6% to 15.4%. Operating margins increased on account of lesser discounts and sale of premium vehicles like Boleno and Breeza which command a higher selling price. Discount reduced by an average of Rs 4000 per unit as compared to the previous quarter.

Reportedly, the company's Gujarat plant, which is part of a contract manufacturing agreement with the parent Suzuki Motor Corp, will open in January 2017. Going forward, the response from new models will be the key things to watch out for.

Bharti Airtel reported its results for the quarter ended March 2016. Company reported a sales growth of 8.4% YoY. The net profit on a consolidated basis grew by 2.8% YoY, while sequentially profits grew by 15.5%. The growth was on account of healthy volume growth in the data as well as the voice business. Further, even the troubled Africa business reported steady revenue and improvement in margins. The earnings before interest, tax, depreciation, and amortization (EBITDA) grew by 14.3% YoY to Rs 91.8 billion.

Reportedly, in the Indian mobile business, EBITDA grew by 13% YoY on the back of strong volume growth from the voice as well as data business. The voice traffic on the company's network grew by 10.8%. Reportedly, this is the first time the company has reported double-digit in voice traffic growth in at least the last 12 quarters. Further, data volumes too grew at a steady pace of 70%. The data volumes have grown at a similar pace in the preceding three quarters. Further, with the recent acquisition of spectrum purchases, the company is well poised to take on its rival Reliance Jio Infocomm Ltd.

The company also announced a buyback through the tender offer route, which is essentially a tax-efficient manner to return cash to shareholders. The maximum buyback price of Rs 450 per share is at 24% premium against Tuesday's close of Rs 364 on the BSE.

Idea Cellular reported its results for the quarter ended March 2016. The consolidated net profits declined by 39% YoY to Rs 5.7 billion for the quarter ended March. The decline was on account of higher financing cost and spectrum fees of its 4G network.

However, total revenues grew by 12.6% YoY to Rs 94 billion during the quarter. Even while comparing on a sequential basis, total revenues grew by 5.3%. The revenues were higher on account of a rise in the voice and the data realisation. As reported in Mint, both data and voice realisations improved in the range of 2.9-4.4% over the December quarter.

However, the gains from rising realization were partly offset by the falling volumes. Compared with 17-18% growth in the previous four quarters, voice traffic on the Idea Cellular's network increased just 9% over the year-ago quarter. Growth in data volume slowed further to 51%, from 76% in Q3, 83% in Q2 and 93% in Q1.

On a sequential basis, the earnings before interest, tax, depreciation and amortization (EBIDTA) grew by 16.4% to Rs 3.3 billion. While the EBIDTA margins too improved by 3.4% to 35%. However, it would be interesting to see if the margins sustain at these levels as the competition heats up on account of Reliance Jio Infocomm entry later this year.

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

L&T Realty, the realty arm of Larsen and Toubro is set to sell a million square feet of retail space to Blackstone Group Lp. The sale is with regards to the company's Seawoods project in Navi Mumbai. Reportedly, the value of the deal is pegged at around Rs 14.5 billion.

The project is built around the railway station of Seawoods-Darave in Navi Mumbai. Earlier, in September 2015, the company had exited its real estate business in North India when it sold its commercial real estate projects in Chandigarh for Rs 17.8 billion.

Reportedly, the company now plans to focus on projects in Bengaluru, Mumbai, Navi Mumbai, Chennai and Hyderabad. The sale will help the company to free up its blocked capital.

Oil and Natural Gas Corporation (ONGC) is planning to explore as many as 17 shale gas and oil wells in both east and west coasts. The company is going to invest around Rs 7 billion for the same.

This is recorded as the first time that the company has taken up shale gas exploration on such a big scale in the Krishna-Godavari basin.

Furthermore, the company has sought permission for drilling 11 exploratory wells for shale oil/shale gas in Cambay basin at Mehsana, Ahmedabad and Bharuch districts of Gujarat, one well in Cauvery basin at Nagapattinam in Tamil Nadu and five wells in KG Basin at East and West Godavari districts of Andhra Pradesh.

Hero MotoCorp is setting up a factory at Andhra Pradesh. The estimated investment on this plant is pegged at Rs 30 billion. This plant will have an annual capacity of 1.8 million units.

Presently, the company has three manufacturing facilities. In addition to this factory in Andhra Pradesh, the company is also setting up two more facilities in Rajasthan and in Gujarat. This will take their total count to six. The facility will cater both to the domestic as well as exports market. For this new facility, the state government has allocated around 600 acres of land to the company.

This new facility will take Hero's overall capacity to 12 million units. The demand for two-wheelers has remained subdued on account of two consequent years of deficit rainfall. The upcoming monsoon season will be a key trigger to watch out for the company going forward.

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. The corporate earnings will be the key trigger for the markets in the short term. Times like these could offer good opportunities to enter good quality stocks at reasonable valuations.

By the way, we are in a celebratory mood. On 22nd April 2016, we commemorated Equitymaster's 20th Anniversary!

Our founder, Ajit Dayal, recently wrote about what this achievement and your continued support means to all of us at Equitymaster. Please do read the note Ajit penned for our 20th birthday.

Also, Ankit Shah, in a recent edition of The 5 Minute WrapUp, interviewed Ajit to get some colour on Equitymaster's 20-year journey.

Ajit gave a fascinating glimpse into the long-term vision behind the launch of Equitymaster...and the early stumbling blocks, including the event that nearly killed the company!

Here's a snippet:

We were part of the evolution of the capital markets. We always wished to be the thoughtful, sensible unemotional view on what was happening in the Indian economy, the global economy, or company earnings and its eventual impact on share prices. We were trying to protect the retail Indian investor from their own emotions of fear and greed and from a well-trained army of financial foot soldiers who were out to grab their wallets.

We believed then that a better informed investor, a well-educated investor, can make sensible returns on their investments in stock markets. We still believe that but with one modification. There is a saying that you can lead a horse to water, but you cannot force it to drink.

In a similar way, I believe that there are many people out there who wish to stay thirsty: They have no desire to learn and understand. They work hard, they save money, then - at some dinner party - they are sold some story and they give away their savings to a smooth-talking financial intermediary. And their wallet is gone. In a bad world, Equitymaster is an open oasis: Those who wish to seek shelter and shade are welcome.

This is just a taster. If you have not read this interview already, we urge you to do so right away...

Our Special 20th Anniversary Gift!

Last but not the least, as we celebrate two decades of guiding investors to smarter investments, we have an exceptional gift for you...

In fact, it is something we've never offered before...

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Do click here to know what this gift is all about.

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

The index opened the week on a slightly bearish note, moved up in the middle and slipped back again in the end. It ended the week with a loss of 0.63%. During the week the level of 8,000 again acted as a resistance. On the lower side, it found support around 7,800. This range seems to be holding up the index for the time being. We will have to wait and watch which way the index turns... You can read the detailed market update here…

Indian Indices Witness Volatility

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