Brazil Leads Global Market Rally on Hopes of Political Reform

Sat, 27 May RoundUp

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Brazilian stocks bounced back after the massive sell-off last week. The selloff came after new bribery allegations surfaced against Brazil's president, Michel Temer. Brazilian President Michel Temer hopes to slide the growing political unrest by bringing in political reforms.

In December 2016, Temer tabled a proposal to overhaul the country's costly pension system. His plan aimed at restoring the fiscal balance by increasing the retirement age to 65 years for availing full retirement benefits. The proposal cleared another hurdle in Congress last week clearing the way for a final Senate vote. The Brazilian market closed the week up by 2.3%.

The US stock markets posted record highs after a report showed U.S growth to be higher than earlier estimates. The U.S economy grew at 1.2% in the first quarter against the earlier estimate of 0.7%. The market was led by consumer staples index after Costco reported strong quarterly numbers on Thursday. Healthcare stocks and real estate stocks declined. US Markets ended 1.3% higher this week.

Back home, Indian share markets continued their positive momentum on expectations of a good monsoon and the impending GST implementation. FMCG stocks and Automobile stocks rallied as they expect to benefit the most from GST implementation. After the demonetization hurdle, these sectors are expected to have improved earnings in the upcoming quarters. Pharma stocks continued to struggle due to pricing pressure in global and domestic markets. Indian Pharma companies expect FY2018 to be a difficult year in terms of growth prospects due price erosion across geographies. The Indian stock market ended the week higher by 1.8%.

Key World Markets During the Week

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

Finance Minister Arun Jaitley headed Goods and Services Tax (GST) Council has decided to place services under four slabs - 5%, 12%, 18% and 28% compared to the current uniform 15% levy on all eligible services.

Also, greater certainty about a July 1 rollout of the GST regime has supported the positive bias.

Owing to the above development, sectors such as FMCG, utilities, and metal are witnessing buying interest today.

BSE Indices During the Week

In our view, implementation of the GST promises to transform India into a single common market and there are many sectors which will gain immensely from this transition.

The tax regime is expected 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. This will provide a level playing field to organized players that face significant competition from the unorganized segment.

The above shift could be a positive for stock market participants too, as it will lead to a value migration from unorganised players to organized players. And companies with solid fundamentals and a competitive moat will capture most of this value.

Aided by government's various initiatives to improve ease of doing business, Foreign Direct Investment (FDI) flow into India increased 8% in fiscal year 2016-17 to touch a new high. According to the statistics released by Ministry of Commerce and Industry, FDI increased to US$60.1 billion in fiscal year 2016-17 from previous high of US$55.6 billion in fiscal year 2015-16.

The Commerce and Industry Ministry has said that during the last three years, the government eased foreign investment norms in 21 sectors covering 87 areas.

It also said that the country has now become an attractive destination for foreign investment, noting that the FDI flows increased by 62% to US$ 99.7 billion as compared to US$ 61.4 billion during the previous 30 months (April 2012 to September 2014), on the back of 'Make in India' initiative.

FDI is considered crucial for economic development of a country and to attract maximum FDI into the country, the government has been relaxing the foreign investment norms in various sectors. At present, the government is mulling easing FDI policy on construction, print media and retail sectors. Meanwhile, India needs around US$1 trillion to overhaul its infrastructure sector such as ports, airports and highways to boost growth.

In other news, the government has initiated the work for shifting the financial year to January, from April.

The step is aimed at aligning the financial year with the agriculture production cycle.

Prime Minister Narendra Modi had backed the above idea of January-December financial year last month.

Mr Modi had said that in a country where agricultural income is exceedingly important, budgets should be prepared immediately after the receipt of agricultural incomes for the year.

Supported by the government's various initiatives, India has surpassed Japan to become the second leading steel producer in the world. According to data released by the International Stainless Steel Forum (ISSF), the country has registered a growth of about 9%, making 3.32 million tonnes of steel in 2016 as against 3 million tonnes in 2015. China remained the world's leading producer, while the U.S. ranked fourth in production at 2.48 million tonnes.

Praising the great development of the industry, the Indian Stainless Steel Development Association (ISSDA), India's apex stainless steel industry association said that country's sustained efforts in collaboration with industry has made this possible and has urged the government to continue the policy support to take the Indian stainless steel industry to newer heights.

ISSDA has further expressed optimism over recently launched National Steel Policy, noting that it will give impetus for long term benefits. It added that several government initiatives like 'Make in India', smart cities, focus on improving sanitation and waste management facilities, building new infrastructure etc is likely to give a strong push to the stainless-steel industry in future.

The government's proposal to give domestic steel makers a preference in government projects should protect them from cheaper imports. But in the meanwhile, the steel makers are chasing imports out by ramping up production. In February, domestic steel output rose by 12.9% YoY, as large private steel producers such as Tata Steel and JSW Steelramped up output. Imports during the first eleven months of FY17 dropped by 39% YoY.

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.

In news from the Banking sector, Reserve Bank of India (RBI) said that it will increase the number of members in the oversight committee which presides over the restructuring proposals.

The central bank, in its action plan to implement the Banking Regulation (Amendment) Ordinance, 2017, also said that it will expand the scope of the committee beyond the so-called scheme for sustainable structuring of stressed assets (S4A).

The RBI, however, delayed the decision on which cases will be taken to the bankruptcy courts, instead saying that it will constitute a panel comprising mostly of its independent board members to advise in the matter.

One shall note that the above measures are initiated to solve the rising menace of bad debts and willful defaulters.

According to an article in Livemint. The bad loans of public sector banks jumped by over Rs 1 trillion during the April-December period of 2016-17. The gross NPAs of PSU banks' in the first nine months of the current fiscal increased to Rs 6.1 trillion by December 31, 2016, from Rs 5 trillion during 2015-16.

For private sector banks, gross NPAs rose to Rs 703.2 billion by December 31, 2016, from Rs 483.8 billion as on March 31, 2016.

The government and the Reserve Bank of India (RBI) have taken cognizance of the matter and have begun measures to address the looming crisis.

Earlier this month the government through an ordinance provided the Reserve Bank of India (RBI) with greater powers to intervene in the resolution of non-performing loans (NPLs). If nothing else, the ordinance is an acknowledgement that the bad loan scenario is far more worrying than what the government and the RBI portrayed it.

The RBI, earlier this week released an action plan to implement the Banking Regulation (Amendment) Ordinance 2017, which includes the option of rating assignments being determined by the RBI and increasing the size and scope of the oversight committee (OC).

The RBI will increase the number of members in the oversight committee which presides over the restructuring proposals and also expand the scope of the committee beyond the so-called scheme for sustainable structuring of stressed assets (S4A).

At present, the OC comprises of two Members. It has been constituted by the Indian Banks Association in consultation with the RBI. However, the RBI did not say how many members the revamped OC would include.

The RBI is also planning for larger role for credit rating agencies. In order to prevent credit shopping or conflict of interest, RBI is proposing to assign cases to ratings agencies itself.

Further, the RBI is also working on setting up a framework for the disposal of cases under the Insolvency and Bankruptcy Code (IBS). The central banker has already sought information on the current status of the large stressed assets from the banks. And would be constituting a committee comprised majorly of its independent board members to advise it in this matter.

The regulator has made swift moves to start the necessary clean up in the country's banking sector.

However, The RBI has an enormous task at hand if it plans to remedy the crisis PSU banks now face. According to the Economic Survey, about 33 of the top 100 stressed debtors would need debt reductions of less than 50%, 10 would need reductions of 51-75%, and no less than 57 would need reductions of 75% or more.

Banks have been reluctant to resolve NPAs through settlement schemes or sell bad loans with hair cut to asset reconstruction companies for fear regulation and investigation.However, with the ordinance giving a wide range of powers to the RBI and the apparent will of both the regulator and the government, a path towards resolution of the NPA crisis would well be underway.

Movers and Shakers During the Week

Company	19-May-17	26-May-17	Change	52-wk High/Low
Top Gainers During the Week (BSE Group A)
VOLTAS	415.65	498.6	20.0%	501/287
JINDAL STEEL & POWER	111.8	124.7	11.5%	135/61
HPCL	521.25	567.45	8.9%	584/287
TATA MOTORS	442.95	480.75	8.5%	599/396
ITC LTD	285.9	308.7	8.0%	313/222
Top Losers During the Week (BSE Group A)
VIDEOCON INDUSTRIES	100.45	47.3	-52.9%	115/47
BANK OF INDIA	178.5	148.65	-16.7%	197/83
RELIANCE COMMUNICATIONS	30.6	25.8	-15.7%	55/25
LUPIN LTD	1314.9	1111.9	-15.4%	1750/1099
SUN PHARMA	652.45	568.55	-12.9%	855/565

Source : Equitymaster

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

In news from stocks in the software sector. TCS entered strategic partnership with Swissport, the world's largest provider of ground and cargo handling services in the aviation industry, for a major IT infrastructure and technology transformation initiative.

The partnership with TCS will see Swissport invest in an extensive improvement and enhancement of its technology infrastructure capabilities to ensure its core systems can support these objectives.

Meanwhile, as per an article in The Livemint, TCS, Infosys and Wipro are struggling to generate revenue from new businesses such as data analytics even as demand for old services weakens. As a result, companies are grappling with falling revenue per employee and operating margins.

Declining revenue per employee and profitability are key reasons behind Indian software companies planning to cut their existing workforce as employee costs account for over half of their total operating expenses.

Over the past decade, faster computing power and higher internet usage across the world has made Fortune 1000 companies look at newer technologies like data analytics to run their business better. Offering solutions by using data-crunching technologies command a high price even as automation tools are fast changing the way outsourcing companies traditionally did business of either managing computers or offering customer support to clients and client-run businesses.

Moving on to the news from stocks in pharma sector. Lupin announced that it has received approval for Bepotastine Tablets from the Central Drugs Standard Control Organisation (CDSCO). Lupin will commence promoting the product in India shortly.

Bepotastine is a new second generation antihistamine medicine to be introduced into the Indian Pharmaceutical Market (IPM) which could benefit patients suffering from allergic symptoms.

Reportedly, Bepotastine is approved by PMDA Japan and is actively marketed in Japan and other South East Asian countries. The current market for plain antihistamines is estimated to be around Rs 8.6 billion growing at 14%, as per IMS MAT March 2017.

Sun Pharma's overseas arm Taro Pharmaceuticals Industries Ltd reported weak earnings in the March quarter. Reportedly, the decline in Taro's earnings was due to increasing competitive intensity and pricing pressure. Taro reported 26% decline in its revenue from a year ago and 11% fall quarter-on-quarter to US$196 million.

In another development, it was reported that Natco Pharma has received environment clearance (EC) for its Rs 4.8 billion expansion project in Telangana that would generate 1,500 jobs.

The proposal is to increase the production capacity of 66 Active Pharmaceutical Ingredients (APIs) and API intermediates at a time with research and development activity from 115.5 tonnes per annum (TPA) to 645 TPA.

As per the proposal, the cost of the expansion project is estimated to be over Rs 480 crore and will provide direct employment to 1,200 and indirect jobs to 300.

Notably, as per a report by The Hindu Business Line, in spite of the prevailing challenges in the Indian pharma sector is expected to grow up to 45% by 2025 and 58,000 additional employment opportunities are likely to be created in the industry amid the job crisis in India.

Despite the capping of prices, notebandi and GST implementation, all of which are perceived to impact the pharma sector adversely, the industry will continue to grow. In fact, by 2020, the pharma market will be touching US$ 55 billion, with a CAGR of about 15.9%.

Moving on to news from the FMCG sector. ITC got a boost after the GST council announced various tax rates, which were viewed as favorable for the company.

ITC had witnessed months of pain on the back of an uncertainty in the GST tax rates on cigarettes. However, with the tax slabs fixed in the range of 5-28%, coupled with a cess cap of 15%, taxation on cigarettes are set to be lower.

In news from stocks in the auto sector. Tata Motors launched BS-IV compliant trucks in Tamil Nadu.

The company announced the launch of 20 new trucks BS-IV ready trucks.

One must note that Tata Motors had some unsold BS III commercial vehicle inventories as on 20 March 2017, which it had to liquidate before 1 April 2017 following the Supreme Court directive on 28 March 2017.

However, the company already had planned to export the inventory outside India, where the ban does not apply. Tata Motors expects to ship at least 15% more trucks and buses this financial year as it hopes to export at least half of the banned BS-III inventory.

Also, Bharat Forge reported better than expected earnings in the March quarter.

The auto components major reported a 25% increase in standalone net profit at Rs 2,075 million for the fourth quarter ended March 2017, as compared to a net profit of Rs 1,655.7 million in the same quarter a year ago.

For the entire fiscal, the company reported a net profit of Rs 5850 million as compared to Rs 6976.2 million in the 2015-16 fiscal.

Revenue of the company rose 11.6% at Rs 11.8 billion versus Rs 10.6 billion. The management noted that the increase in sales was broad-based across all segments and geographies.

The operating profit (EBITDA) was up 4.9% at Rs 3,200 million, while EBITDA margin was down at 28.4%.

Looking ahead into FY18, the company expects its performance to be better than the underlying market demand, driven by improvement in North American market across sectors.

Bharat Forge's board recommended a final dividend of Rs 5 per share for the year ended March 2017.

Moving on to news from the banking sector. Bank of India reported a net loss of Rs 10.45 billion in the fourth quarter of last fiscal.

The state-owned bank had in contrast reported a net loss of Rs 35.87 billion in the January-March quarter of the previous fiscal, 2015-16. Total income during January-March quarter of 2016-17 was higher at Rs 123.35 billion, from Rs 113.84 billion in the year-ago period.

The bank's gross non-performing assets (NPAs) or bad loans were restricted to 13.22% of the gross advances as at the end of March 2017, against 13.07% year ago.

In news from oil & gas sector, as per a leading financial daily, Gas Authority India (GAIL) has signed a first-ever time-swap deal to sell some of its US liquefied natural gas (LNG) as it rejigs the supply portfolio in line with domestic demand.

Moreover, the company is yet to receive LNG from its shale gas project in US from March next year. It has however time swapped some of the supplies.

Under the agreement, it will get 15 cargoes or about 0.8 million tonnes of LNG from an unnamed trader this year. In return, GAIL will sell 10 cargoes or about 0.6 million tonnes next year from Sabine Pass on the US Gulf coast.

GAIL posted a 69% fall in fourth-quarter profit. The company reported a Rs 2.6-billion net profit for the fourth quarter of the financial year 2016-2017 lower than the Rs 8.32 billion-net profit in the same quarter of 2015-2016 on account of impairment of investment in Ratnagiri Power plant.

The company provided for an impairment loss of Rs 7.83 billion out of carrying value of investment of Rs 9.74 billion in the joint venture entity of Ratnagiri Power plant. The power plant has been running lower than its 2,000 MW generation capacity. This is due to the high cost of power produced from gas-based generation facilities. The lower off take and generation were some reasons for the investment impairment, the reports noted.

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

Yesterday, the Indian stock market ended the May futures and option series. Let us see how the markets performed during the expiry.

The Nifty 50 Index started the May expiry on a dull note, trading sideways for the first week. But it resumed its uptrend rising 240 points to hit a high of 9,523 during the midpoint of the expiry. The index then traded negatively to erase 165 points until the day before expiry. On the last day of the May expiry, the index recovered smartly and aimed for a new life high gaining 149 points to end the May series 1.79% up.

The negative divergence indicated by the RSI indicator brought a decent correction in the index. The indicator found support from the 50 level as indicated by green line in the chart below. As a result, the index rose to resume its up move.

But are rollover data supporting the resumption of the uptrend or the index rallied only on short covering? Click here to see what the rollover and other derivative data has to say. You can read the detailed market update here...

Nifty Index Touches Record High Levels

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