Global Markets End the Week Higher Tracking French Polls; US Fed Keeps Rates Unchanged

Sat, 6 May RoundUp

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Global financial markets ended the week on a positive note with a boost from European share markets. French indices remained upbeat over the week due to the Presidential elections and were among the top global gainers. The French financial markets had already rallied over 4% in the past week over news that centrist Emmanuel Macron had triumphed over far-right candidate Marine Le Pen in the first round of France's presidential election. Market participants saw the above development as market-friendly as many anticipate Macron's presidency to reduce the risk of Brexit-like shock. Market participants are now looking forward to the final round of the presidential election on Sunday. French Markets ended 3% higher this week. Major global markets including Germany's Dax and Japan's Nikkei225 too surged by 2.2% and 1% during the week on the back of French polls.

US markets ended the week marginally higher by 0.2% this week. The US Federal Reserve kept its interest rates unchanged in its two-day monetary policy meet this week. The central bank downplayed weak first quarter economic growth and emphasised the strength of the US labour market.

The Fed signaled that it's still on track for two more interest rate increases this year. The Fed had raised its benchmark rate by 25 basis points in its March policy meeting to a target range of 0.75 to 1%.

Key World Markets During the Week

Back home, Indian stock markets closed lower by 0.2% over the last week. The markets saw a record closing high during the week but profit booking later in the week trimmed weekly gains. Banking stocks rallied during the week after the Union cabinet and the President approved an ordinance to help curb the non-performing assets menace faced by the country's lenders.

BSE Indices During the Week

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

In news from the Indian economy. India's services sector growth came close to stalling in April as a challenging macro environment hampered growth in the segment, according to the Nikkei Services Purchasing Managers' Index (PMI) survey by Markit.

The Services PMI is the reading of the country's services sector output and is updated monthly. A reading above 50 indicates expansion, while any score below the mark denotes contraction.

The services PMI for April fell to three month lows and finished at 50.2, just above the mark that separates expansion from contraction.

Services PMI dropped from 51.5 in March to 50.2 in April, signaling a slowdown in the services sector.

Although a rating above 50 still indicates expansion, it is the pace of expansion that has slowed down

April PMI data for the Indian service sector shows how jittery the current economic environment is, igniting concerns among some businesses, despite remaining in growth territory.

In the news from the banking sector, President Pranab Mukherjee approved the ordinance facilitating amendment in the Banking Regulation Act, 1949. The ordinance deals with the banking sector's non-performing loans and will pave the way for a new framework to deal with the non-performing asset (NPA) menace currently plaguing the banking industry.

The new ordinance is expected to give more power to the Reserve Bank of India (RBI) to tackle mounting bad loans.

Earlier this week the Union Cabinet approved promulgation of an ordinance to amend the Banking Regulation Act for resolution of the NPA crisis.

The RBI India and the government may soon initiate a joint action plan to resolve stressed assets in the banking sector that involves pushing state-run firms to take over some failing assets and allowing banks to take necessary haircuts through overseeing committees (OCs).

Although, RBI through earlier measures like strategic debt restructuring was trying to solve this very issue of rising NPAs. The current move will allow RBI to act as a mediator between the banks and defaulters to solve the issue of bad loans.

India is going through a severe bad loan problem. Major banks have reported poor numbers in the recent earnings season.

The problem of bad loans is indeed quite severe and when we compare it with other global peers it looks daunting.

Out of the ten major economies facing NPA problems, India is ranked seventh.

The overhang of bad debts has not only hit the bank's profitability, but has also restricted their loan book growth.

The current push by the government and the RBI would go a long way to solve the crisis the country's lenders now find themselves in. A significant reduction in the number of NPAs will help banks grant new loans and spur the investment cycle.

The Union Cabinet gave its approval to the National Steel Policy 2017. The policy aims to achieve 300 million tonne of steel-making capacity which will require an additional investment of Rs 10 trillion by 2030-31.

The Cabinet has approved the policy for providing preference to domestically manufactured iron and steel products on government procurement. Indian steel makers who import raw materials or intermediate products can claim the benefits of the domestic procurement provision if they add a minimum of 15% value to the product.

The National Steel Policy 2017 aims to make India self-sufficient in steel production. It projects crude steel capacity of 300 million tonnes (mt), production of 255mt and per capita consumption of 158kg of finished steel by 2030-31, as against the current consumption of 61kg.

But the bigger concern is weak consumption growth. 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.

We do not think the trend is sustainable in the steel industry. Unless domestic consumption picks up, steel producers may have to take price cuts to utilize their capacities.

In news from India's manufacturing sector. The manufacturing sector continued its rebound from the notebandi induced downturn. Indian manufacturing activity expanded for a fourth consecutive month in April, as buoyant domestic demand coupled with sustained growth of new orders from abroad boosted the upturn in total new business received by Indian manufacturers in April, according to the Nikkei Purchasing Managers' Index (PMI) survey by Markit.

The PMI is the reading of the country's manufacturing sector output and is updated monthly. A reading above 50 indicates expansion, while any score below the mark denotes contraction.

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 sector continued its upward move, as PMI rose to 52.5 in March, registering the fastest upward move since October 2016. At 52.5 in April, the PMI remains unchanged from, yet signifying expansion in the manufacturing sector.

Global ratings agency Fitch Ratings has retained 'BBB-' ratings - the lowest investment grade - with a stable outlook for India citing weak fiscal position and difficult business environment. The agency forecast real gross domestic product (GDP) growth to accelerate to 7.7% in both 2016-17 and 2017-18, compared with 7.1% in 2015-16. It also expects India's current-account balance to narrow to -0.9% in FY17, and foreign reserves to build up to 8.4 months of current external payments.

The ratings agency indicated that its India's sovereign ratings balance a strong medium-term growth outlook and favorable external balances with a weak fiscal position and difficult business environment. However, the business environment is likely to gradually improve with the implementation and continued broadening of the structural reform agenda.

It also noted that it's "not likely" that the Indian government's budgeted Rs 700 billion capital injection into public-sector banks, struggling with huge stressed assets, in the four years through 2018-19 will be sufficient. "India is not immune to external shocks, but the country's strong external finances make it less vulnerable than many of its peers, but weak public finances continue to constrain India's ratings.

Fitch expects structural reforms to increase growth, along with higher real disposable income supported by implementation of the seventh pay commission recommendations and an average monsoon.

As per a report by ratings firm ICRA, the two-wheeler industry is estimated to have incurred a loss of Rs 6 billion due to the three-day discount offered to customers after the Supreme Court ordered a ban on sale of BS-III vehicles.

A major chunk of the above loss is expected to be borne by the Original Equipment Makers (OEMs).

The apex court on March 29 banned the sale and registration of BS-III category vehicles or those not compliant with Bharat Stage IV (BS IV) emission norms from April.

This will impact the revenues and profitability of Indian auto players and auto ancillaries.

The decision by the SC left automobile companies saddled with a large inventory of BS-III vehicles estimated to be worth Rs 60-70 billion

To minimise the damage, companies diverted the vehicles to export markets. Likewise, they also offered higher discounts to clear the inventory.

This was the second major blow for the automobile industry from the SC in the past 15 months. In December 2015, the SC had imposed a ban on sales of diesel vehicles with an engine of 2,000 cc and above in the National Capital Region. This ban was lifted in August 2016.

Among all this volatility and uncertainty, we'd like to remind of you of a rather sobering quote from superinvestor Warren Buffett:

The future is never clear; you pay a very high price in the stock market for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values.

Remember that and focus on the fundamentals and long term moats of companies before deciding to invest in them.

Talking of superinvestors, do you know who the super investors of India are?

Not just who they are...but how they are pick stocks? Which stocks they are picking?

My colleagues Rohan and Kunal have made getting access to all of these insights easier than ever.

They've compiled all of their interviews for the Superinvestor Project into a special report called The Superinvestors of India.

The report will make a wonderful addition to your value investing library.

Click here for a free copy.

Movers and Shakers During the Week

Company	28-Apr-17	05-May-17	Change	52-wk High/Low
Top Gainers During the Week (BSE Group A)
Coromandel International	348.35	394.35	13.2%	409/215
Canara Bank	354.75	394.55	11.2%	415/171
Union Bank	170.9	186.95	9.4%	205/105
Federal Bank	107.5	116.4	8.3%	120/48
LIC Housing	668.4	720.85	7.8%	727/432
Top Losers During the Week (BSE Group A)
Tata Communications	721.85	640.75	-11.2%	784/419
IPCA Labs	598.25	537.85	-10.1%	656/402
Reliance Communications	34.5	31.2	-9.6%	57/31
Jain Irrigation	112	101.7	-9.2%	120/62
Adani Power	32.95	30	-9.0%	46/23

Some of the key corporate developments in the week gone by.

In the week gone by, Tata Steel UK completed the sale of its Specialty Steels business to Liberty House Group for a total consideration of 100 million British Pounds.

Reportedly, the acquisition is going to protect 1,700 jobs at three major sites at Rotherham, Stocksbridge and Brinsworth in South Yorkshire, smaller sites in Bolton, Lancashire and Wednesbury in the West Midlands and two distribution centres in China.

The purchase comes after Tata started a wholesale disposal of its loss-making UK steel businesses, including the giant Port Talbot plant - last year as the crisis in the UK steel industry resulted in thousands of job losses. Tata later did a U-turn, instead deciding to hive off parts of the business piecemeal.

Further, Liberty said it will invest up to 20 million British Pounds in new plant and equipment in the first year, which is being relaunched as Liberty Speciality Steels. Liberty House Group has been on an acquisition spree for a while. The company also has plans to make an investment in India though it has not zeroed down any asset so far, the reports noted.

Notably, Tata Steel has invested about British Pound 1.5 billion in its UK business since acquiring Corus in 2007. As per Mr. Tata, in every situation, the capital allocation decisions are always based on maximizing long-term shareholder returns, viz. return on capital employed, return on equity and free cash flows.

So, there has always been, and will continue to be, a strong alignment of interests between the company and the minority shareholders

In news from the software sector. Tata Consultancy Services (TCS) was selected by one of Europe's largest utilities companies - Vattenfall - to provide IT services across multiple European operations including Sweden, Germany and the Netherlands.

The managed services agreement is a multi-year partnership in which TCS will be responsible for the development and maintenance of many applications.

In another development, Infosys will reportedly hire about 10,000 locals in the US over the next two years and set up four technology and innovation hubs there, as part of its efforts to tide over visa-related issues.

As per a Times of India report, Infosys will also focus on enhancing its play in new technology areas like artificial intelligence (AI), machine learning, user experience, cloud and big data through these new hires and centres.

The plan includes an US$8.7 million investment to lease and equip office space in the Indianapolis area to accommodate 2,000 new workers by the end of 2021.

The Indiana center will be the first of four facilities the company plans to open in the US and will be focus on developing emerging technologies like artificial intelligence and cloud computing.

In news from pharma sector,  The US Food and Drug Administration (USFDA) issued a form 483 to Lupin Ltd's Goa facility.

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 does not meet the USFDA's expectations, a warning letter may be issued.

The USFDA cited three observations related to violation of good manufacturing practices following an inspection of the site between 27 March and 7 April this year.

The US drug regulator observed that the company failed to review and investigate unexplained discrepancy and out of specification components of a product batch at the facility.

The regulator also observed that Lupin did not have written procedures for production and process controls to assure quality of the product is as it is supposed to be as well as any established control procedures to monitor output of those manufacturing processes that cause variability in the characteristics of the drug.

On the face of it the observations seem to be strictly procedural in nature, and the company shall be able to resolve them in a few quarters at the most.

In the past, Lupin's Goa unit was inspected in July 2015 and February 2016. The July 2015's Form 483 was cleared in July 2016 and the latter in November 2016.

The Goa facility is an important unit for the company as its accounts for 30-40% of US sales. In the quarter ending in December 2016, Lupin's US sales grew 53.4% to US$ 316 million.

Moving on to news from stocks in the auto sector. Tata Motor's subsidiary Jaguar Land Rover (JLR) reported a fall in sales for April.

In April, JLR recorded retail sales of 40,385 units, which was down 2.3% compared to the same month a year ago.

According to the company, the decrease in sales was seen due to two factors. In the UK, customers purchased vehicles before the increase in vehicle tax on 1st April. In addition, the run-out of the previous Discovery model accounted for a year-on-year decrease in Land Rover sales.

On geographical basis, retail sales were seen up in North America (32.5%), China (10.1%) and Europe (2.7%) on year-on-year (yoy) basis. Decline was witnessed in United Kingdom (UK) and other overseas markets which by 34.6% yoy and 19.7% yoy respectively.

Sales from Jaguar stood at 12,310 vehicles, growing by 54%, as compared to the same month last year, led by continuing strong sales of the F-PACE, XE and the long wheel base XFL from the China joint venture.

Meanwhile, retail sales of Land Rover were at 28,075 vehicles, down 15.8% as compared to April last year.

However, the company expects sales to pick up from the next month onwards as the all-new Discovery model continues to go on sale across the world, particularly in China and North America, two of Jaguar Land Rover's biggest markets.

Coal India Ltd (CIL) is considering a listing on the London Stock Exchange (LSE) and has had early discussions with the LSE.

In this regard, CIL is holding overseas roadshows as part of plans to dilute a 10% stake. The cabinet committee on economic affairs had agreed to the plan in November 2015.

The development comes ahead of the listing of NTPC's masala bonds at LSE and Singapore Stock Exchange this month. A listing by Coal India would be a boost for the LSE as it looks to attract companies following Britain's vote to leave the European Union, the reports noted.

However, CIL is looking at spending Rs 85 billion on capital expenditure in the ongoing fiscal. The PSU has taken various measures for full utilisation of capex during 2017-18 financial year. Further, Coal India accounts for over 80% of the domestic coal production and is eyeing 1 billion tonnes of production by 2020.

In one of our editions of The 5 Minute WrapUp, we have spoken about how Indian firms are looking to tap cheap funds from the overseas market through masala bonds. With firms increasingly looking to tap funds through masala bonds, the success of these bonds is likely to come to the rescue of these firms stuck in a debt trap. This, in turn, will provide the much-needed leg-up to investments in the country.

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

The Nifty 50 Index traded on a volatile note during the week. On Tuesday, it opened the session 36 points gap up but could not sustain up for long and slipped to close the session marginally higher. The index traded in a similar fashion on Wednesday. It opened gap up and slipped lower to end the session flat. On the next day, the index witnessed some buying interest and closed the session 48 points up. But the selling pressure continued on the last day of the week. After opening gap up, the Nifty slipped sharply by 75 points on Friday and ended the weekly session with a 0.20% cut. As indicated in the rollover note last week, the index is losing momentum but the 8,950 - 9,000 level remains a strong support zone. You can read the detailed market update here...

Nifty 50 Index Ends Marginally Lower

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