Global Markets End the Week on a Firm Note

Fri, 12 Aug RoundUp

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Global indices ended the week on a positive note. At the time of writing, Japan (up 4.1%) and Germany (up 3.3%) were among the leading gainers. The Japanese index closed higher for the week, primarily driven by the strong U.S jobs data during the week and supported by the Bank of Japan, which continued its purchases of exchange traded funds.

According to latest macro data, China's economic activity has slowed in July as the world's second-largest economy continued to fight the painful restructuring of its industrial sectors. The pace of fixed-asset investment slipped to 8.1 percent in January-July 2016 from 9 percent in the January-June 2016 period. This is the third consecutive month of growth below 10 percent and the weakest year-to-date growth since December 1999, suggesting that the government driven stimulus is now fading.

The Bank of England stated in a report that it sees signs of Britain's vote to leave the European Union is adversely affecting the UK economy. Its latest report, warns that many firms expect capital spending, hiring and turnover to suffer. Last week the bank slashed interest rates and restarted its QE program to boost the economy.

The central bank of Mexico held its borrowing costs steady citing weaker growth while stating that uncertainty around the U.S. presidential election might cause deeper peso losses that could fan inflation. The Banco de Mexico left its key lending rate at 4.25 percent after a 50-basis-point hike in June to keep a weak peso from hitting consumer prices.

The central banks over the world seem to be riding the bandwagon of monetary policy easing. With interest rates at record lows and no recovery in sight for the global markets, the central bankers are now a perplexed lot. With the monetary policy easing failing to stimulate both inflation and economy. We think this behavior is akin to central bankers flogging a dead horse.

The US stocks closed flat for the week. With the U.S. labor market firming up according to payrolls data last week, this strong growth trend in employment will help provide a fillip to consumer spending thus in turn boosting the economy.

Back home, the Indian indices closed marginally higher over the week. The BSE Sensex was up by 0.3% for the week. In his last monetary policy review, the Reserve bank governor left the repo rate unchanged.

Key World Markets During the Week

On the sectoral indices front, FMCG and Banking stocks led the gainers this week. On the other hand, stocks from Pharma and Realty witnessed selling pressures.

BSE Indices During the Week

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

The Reserve Bank of India decided to leave the repo rates untouched in its third bi-monthly monetary policy review this week. It kept the repo rate unchanged at 6.5% and Cash Reserve Ratio (CRR) at 4%. A recent increase in food prices and a pick-up in economic growth led RBI to stay put on any reduction in repo rates.

In his policy statement, RBI Governor Raghuram Rajan stated that he expects inflation to stay within the RBI's target zone. However, the risks to inflation target of 5% by March 2017 continue to be on the upside. He suggested that the formation of the Monetary Policy Committee (MPC) will modernize India's monetary policy framework and build a platform for strong and sustainable growth. Some of the collateral benefits it will offer, over and above low inflation will be a currency that is not depreciating constantly, higher real returns earned by savers, and lower nominal interest rates, including inflation risk premia, paid by borrowers. We believe the Reserve Bank of India was in good hands under Raghuram Rajan's leadership. His strong views on targeting inflation and maintaining real interest rates helped stabilize the economy. So, his exit from RBI next month will be a big loss for the country.

After getting a thumbs-up in the Rajya Sabha last week, the Lok Sabha this week unanimously passed a constitution amendment bill that enabled the Goods and Services Tax (GST) Bill or GST. The Bill will now be sent to states assemblies for ratification. Notably, all the 443 members present in the Lower House of the parliament voted in favor of the Bill. Speaking in the discussion in the Lok Sabha, Prime Minister Narendra Modi stated that GST is a major step ahead that will end tax terrorism. He further noted that the implementation of GST will incentivize traders to maintain clean accounts, make informal bills a thing of the past and empower the customer.

Having said that, the tax reform is far from a done deal yet. Half the states still need to approve the legislation. Along with this, the GST council, a very important part of the process, will also need to be set up. It is this entity that will determine the GST rate and institute a dispute resolution mechanism. The word is that the GST will be implemented from April 1, 2017. With the excitement around GST, Vivek Kaul, writes of things you probably have not heard about GST from the mainstream media.

The recent clearance of Real Estate Bill, the Insolvency and Bankruptcy Code and now GST indicates that reforms are gradually taking place at the central level. However, for those reforms which aren't seeing the light of the day such as Land Acquisition and Labour Laws, the need of the hour remains for the State governments to push these forward.

Movers and Shakers During the Week

Now let us move on to some of the key result announcements during the week.

Marico reported its results for the quarter ended June 2016. The net profits of the company grew by 17.2% to Rs 2.6 billion during the quarter. The profits grew on the back of soft commodity prices and a recovery in the volumes of its core brands Safola and Parachute. Volumes for Parachute and Safola grew by 7% and 11% during the quarter as compared to a year ago. However, the sales grew marginally by 0.6% YoY to Rs 17.5 billion during the quarter on the back of pricing pressures. The recovery in the rural consumption will be a key driver for the growth of the company. Two years of deficit rainfall has dampened the rural wages and incomes, thus impacting discretionary spends and creating pricing pressures. The increasing threat from light hair oil category coupled with rural recovery will be the key things to watch out for going forward.

Lupin reported its results for the quarter ended June 2016. The consolidated net profits of the company grew by 55% YoY to Rs 8.8 billion during the quarter. Further, revenues grew by 41% YoY to Rs 44.3 billion during the quarter. The sales grew on the back of strong performance from the generics business in North American geography, which contributes to more than half of the Lupin's revenues. The revenues from this geography grew by 83% YoY to Rs 21.8 billion during the quarter.

The strong performance was largely due to the significant contribution of two diabetic drugs Glumetza and Fortamet. The business from India, which contributes to a fifth of its revenues, grew marginally by 5.2% YoY during the quarter. The subdued growth was due to increasing drugs, getting covered under the price control mechanism. While, the company's revenues from Japanese business grew by 30.9% YoY to Rs 4.2 billion during the quarter. The company has completed a significant portion of work with regards to its Goa facility which was under the scanner of the US Food and Drug Administration (USFDA) for non-compliance with certain manufacturing standards. Lupin has built a lucrative pipeline, some key products like Azithromycin, Glumetza, Aripiprazole Wellbutrin, Nexium, Welchol and Sevelamer will offer decent opportunities to the company going forward. Over and above, Lupin also expects to ramp up the sales of products from the recently acquired business Gavis.

And here are some of the key corporate developments in the week gone by.

The Competition Commission of India (CCI) has approved the deal between UltraTech Cement and Jaiprakash Associates for the former to buy the latter's cement assets. The deal is pegged at a valuation of Rs 161.8 billion. The deal will give UltraTech an access to 21.1 million tonne of Jaiprakash Associates cement assets. Reportedly, the consummation of the transaction is expected to take nine to twelve months. Jaiprakash Associates is seeking to reduce its debt which stands at Rs 582.5 billion at a consolidated level as at 31 March 2016 and the passage of the deal is of utmost importance to them.

The situation pertaining to bad loans of public sector banks has worsened. Recently, Indian Overseas Bank reported its results for the quarter ended June 2016. Reportedly, a fifth of its gross loans have turned bad. Gross NPAs as a ratio of gross advances were 20.48% at the end of June, higher than the 17.4% reported for the March quarter. The bank's capital adequacy ratio- a measure of banks financial strength has fallen to 9.47%, below the limit of 9.62% set by the Reserve Bank of India (RBI). Further, UCO and United Bank of India too reported Gross NPAs of 17.19% and 14.29% during the June quarter. Vivek Kaul is of the opinion that despite the cleanup of the public sector banks, the basic problem will still remain.

Idea Cellular Ltd and Vodafone India Ltd will look to outbid their rivals in the spectrum auction scheduled on 29th September. The current market leader Bharti Airtel holds 769.9 megahertz (MHz) of spectrum across the 22 circles into which India's telecom geography is divided. Reliance Jio, which is yet to launch its operations commercially, is also comfortably placed with 595.8MHz of spectrum across India. In contrast, Vodafone has 301.8MHz and Idea 270.7MHz. Spectrum worth Rs 5.63 trillion at the base price and 2,354.55MHz of spectrum will go under the hammer in India's largest auction of mobile airwaves. The government expects telecom companies to bid aggressively in the auction as they seek to improve the quality of their service. The telcos themselves are likely to be cautious on account of the debt on their books. As per the reports, Airtel and Idea had net debt of Rs 834.9 billion and Rs 376.57 billion, respectively, on their books as of the quarter ended 30 June.

The boards of AB Nuvo and Grasim have decided to go for a merger in a complex restructuring exercise. The deal is expected to be completed before year end. While addressing a press conference, Kumar Mangalam Birla said that the demerger and listing of financial services will help unlock value for the shareholders. Business restructuring will also help simplify the group ownership.

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

Nifty traded with a negative bias for first three days of the week but managed a comeback in the remaining two. It ended the week with nominal loss of 0.31% at 8,656. It seems like the index is trapped in a very tight range of 200 points between 8,500 to 8,700. It needs to breakout from this range for a clear trend to emerge. You can read the detailed market update here...

Nifty Logs Marginal Losses

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