Global stock markets close on a mixed note

Sat, 27 Jul RoundUp

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The global stock markets showed a mixed performance. The US markets were on a cautious footing with indices remaining staid ahead of major economic announcements to be made next week. Statement by the Federal Reserve's policy-setting committee, US second quarter GDP figures and Labor Department's monthly job's report are slated for release in the coming week. The International Monetary Fund (IMF) has said that while the Federal Reserve had a range of tools to manage the normalization of monetary policy, there were risks and challenges in the unwinding of the stimulus the central bank has lent the economy.

The major European markets remained depressed. The markets in UK and Germany fell by around 100 basis points each on speculations of a looming German sovereign credit rating and weakness in the US markets. However, markets in France were up by 1.1% during the week.

Barring India and Japan, all the other Asian stock markets indices ended in positive territory for the week. Japan's benchmark index fell by a steep 3% as yen appreciated against the dollar. Even the Indian markets ended in the red in anticipation of the Reserve Bank of India (RBI) policy review on July 30. In order to curb volatility in the rupee, the RBI had earlier tightened liquidity through stringent rules on gold imports and stricter norms for borrowing and Cash Reserve Ratio (CRR) requirement for commercial banks. The Indian markets were down 2% for the week.

Source: Yahoo Finance

There was a spate of quarterly result announcements by companies. However, RBI policy measures had a major bearing on the performance of sectoral indices. Barring IT, shares in all the other sectors ended in the red for the week. The capital goods index was the worst performer, down 10.2%. Stocks from metal and banking sector were down 6.7% and 4.7% respectively.

Source: BSE

Now let us discuss some of the economic developments of the week gone by.

In order to reduce the current account deficit and reduce rupee volatility, the Reserve Bank of India (RBI) has imposed stricter restrictions on gold imports by making them dependent on export volumes. However, RBI has also offered relief to domestic sellers by lifting restrictions on credit deals. The move aims to curb rising demand for gold fuelled by falling gold prices. The central bank has said that 20 % of imports must be used for overseas sales - giving exporters guaranteed supplies. The restrictions are also applicable to unrefined gold. This takes care of a loophole in import duty which was hiked to 8% but only on refined gold. The RBI said importers need to retain 20% of the gold they import in customs-bonded warehouses. Also, they will only be able to buy more after exports equivalent to 75 %of the retained amount have been shipped.

The Reserve Bank of India has also tightened liquidity norms for commercial banks to curb volatility in the rupee. Under the new norms, banks can borrow only upto 0.5%, as against 1% earlier, of the net deposits and time liabilities under the Liquidity Adjustment Facility (LAF). Additionally banks will be required to hold cash equivalent of at least 99% of the Cash Reserve Ratio (CRR) on a daily basis as compared to 70% earlier. This measure is expected to reduce the bank's LAF borrowings. In case of fund needs, banks will have to borrow under marginal standing facility at a higher interest rate.

Many companies reported their quarterly earnings during the week. Let us take a look at the performance of some of them.

Hindustan Unilever, the FMCG behemoth, announced results for the first quarter ended June 2013. HUL saw a 7% rise in revenues due to a mere 6% growth in its core Home & Personal Care business. Even its underlying volume growth remained tepid at 4%. However, the company has been able to improve operating margin by 0.7% as savings in input costs offset higher ad-spends and other expenses (all as a proportion of sales). Net profit fell by 23% due to high exceptional income generated in the year-ago quarter from the sale of properties. Profit after tax but before exceptional items grew by 4% to Rs 8.9 bn during the quarter.

For the June 2013 quarter, ITC recorded a 10.5% rise in revenues led by over 10% growth in the non-cigarette FMCG and agri business segments. The company's operating margin expanded by 2.3% during the quarter on the back of a 2% fall in other expenses. Raw material costs remained stable during the quarter. Among business segments, only cigarettes and paper businesses posted incremental margins. Net profit increased by 18% aided by higher operating profit and other income earned during the quarter.

Larsen and Toubro (L&T) has announced its first quarter results for FY14. Net sales on a standalone basis grew by a mere 5% YoY. Poor performance of power and metallurgical and material handling segments adversely impacted the sales growth. Operating profit fell by 1.2% YoY as total expenses grew by a faster 5.6% YoY. Resultantly, operating margin contracted by 0.5% to 8.5% YoY in 1QFY14. Net profit of the company declined by 12.5% YoY as a result of poor operating performance, decline in other income and a slight increase in tax rate. The company received fresh orders worth Rs 251.6 bn during the quarter, recording a healthy growth of 28% YoY. The order backlog increased by 8% YoY to Rs 1653.9 bn.

Automotive major Maruti Suzuki declared its results for the quarter. The automotive giant saw its net profit surge by 49% YoY over the same quarter last year. However, the total income was lower by 5% YoY. Notwithstanding falling revenues, the bottomline has risen sharply on the back of cheaper imports made possible due to decline in the value of yen. Thus, forex gain and cost reduction led to an improvement in export realizations.

Ambuja Cements, one of India's largest cement firms, announced its results for the quarter ended June 2013. On a standalone basis, its net sales fell by 8.6% during the quarter due to poor offtake. Operating profits fell further registering a fall of 32.1% YoY. Operating margins declined from 28.3% in 2QCY12 to 21% in 2QCY13. On account of sluggish sales and weak operating performance, the company's net profits fell by 30.9% YoY. Consequently, the profits for the first half fell 4% YoY on the back of a 6% fall in topline.

The company's Swiss-based parent firm Holcim has planned a complex restructuring for its Indian operations. Currently, Holcim holds a little over 50% in both Ambuja Cements and ACC. Post the restructuring exercise, Ambuja Cements is set to become the flagship company for its Indian operations. A series of transactions within the group involving cash and stock swaps will raise Holcim's equity stake in Ambuja to 61.3%. At the same time, Ambuja would buy Holcim's 50.1% stake in ACC, thus making the latter its subsidiary. However, both companies will reportedly continue to operate as listed entities with their existing brands and go-to-market strategies.

Movers and shakers during the week

Company	19-Jul-13	26-Jul-13	Change	52-wk High/Low
Top gainers during the week (BSE-A Group)
Idea Cellular	151	164	8.6%	165/74
Tech Mahindra	1,131	1,217	7.6%	1225/705
Jet Airways	370	396	7.0%	689/321
Hexaware Technologies	107	114	6.5%	142/72
Bajaj Holdings & Investment	775	819	5.7%	1016/712
Top losers during the week (BSE-A Group)
Gitanjali Gems	110	85	-22.7%	650/85
Jaiprakash Associate	50	42	-16.0%	106/40
Canara Bank	319	269	-15.7%	528/261
Syndicate Bank	111	94	-15.3%	137/86
United Breweries	826	702	-15.0%	1023/475

Source: Equitymaster
Now let us move to some news from the corporate world.

National Thermal Power Corporation (NTPC) has chalked plans to invest Rs 89 bn for development of its own mines. The company wants to bring down the share of imported coal in its total consumption to 10%. Currently, imported coal forms about 21% of the state-run firm's total coal consumption. With the new investments, NTPC will be able to meet nearly 17% of its coal requirement from its own mines by 2017. Its coal imports will drop from 24 million tonnes this year to 13 million tonnes by 2017. This will also lower the company's dependence on its largest fuel supplier Coal India Ltd (CIL) from 81.7% to 72% by 2017. As per the company, it has so far spent about Rs 14 bn in developing 6 mines that have been allotted to it. The balance Rs 7,500 will be spent over the next four years.

Steel Authority of India Ltd (SAIL) plans to start the next phase of expansion to raise its capacity to 50 mtpa by 2022 with Rs 1200 bn investment. Currently the company is ramping up capacity 14 mtpa to 24 million tonnes per annum (mtpa). Most of the planned expansion would be carried out through brownfield expansions in existing five steel mills, barring one proposed at Sindri in Jharkhand. By the end of this year, SAIL capacity will be 19 mtpa. By next year, its capacity will rise to 24 mtpa. SAIL will start work on expanding the next-phase capacity addition as soon as the completion of the current phase of expansion.

The global stock markets remain in a wait-and-watch mode as major economic data releases by the US markets are expected in the coming week. Even the Indian markets remained depressed as RBI monetary tightening could not make headway in the already gloomy investment climate. Going ahead, global cues and the RBI monetary policy review on July 30 will set the tone for the future course.