Global markets hit by yuan devaluation

Fri, 14 Aug RoundUp

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The global markets took a hit on fears of a protracted slowdown after China devalued its Yuan currency by around 4% earlier this week. As China is one of the biggest consumer of commodities, the recent devaluation is likely to result in inventory pileup and depress global commodity prices further. Consequently metal prices have fallen sharply whereas demand for safe haven assets have resulted in falling bond yields in US and Europe. The US crude fell to a six and half year low of US$ 41.35 a barrel on worries of growing global glut. Moreover export competitiveness of other countries would also be adversely impacted as a weaker Yuan is likely to make Chinese imports relatively cheaper in global markets.

Barring China and US, all the indices ended in the negative territory for the week gone by. The US markets managed to end with a marginal gain of 0.2% on the back of strong US retail sales data that help allay fears of deferment in the interest rate hike by the Federal Reserve. Germany and France were the biggest losers down 4.4% and 3.6%, respectively during the week.

Back home, the Indian stock markets recorded a marginal fall of 0.6% for the week. Low inflation numbers stoking expectations of a rate cut helped markets recoup losses towards the end of the week.

Source: Yahoo Finance

Source: BSE

In a positive development, the wholesale price index (WPI) inflation has contracted further to -4.05% in July from -2.4% in June. The decline was led by fall in food inflation and commodity prices. This is the ninth month in a row during which the inflation has fallen. Even the consumer price index inflation has fallen sharply in July. This in turn has bolstered expectations of a rate cut by Reserve Bank of India even before 29th September when the next monetary policy review is due.

The automobile industry has seen a smart revival in the demand for passenger cars.  The cars sales witnessed a rise of 17.5% YoY during the month of July. At 1.62 lakh units, this was the highest level in three months. Also, this marks the ninth consecutive month of domestic sales growth for passenger cars. However, the sales of motorcycles and light commercial vehicles (LCVs), which primarily depend on rural markets, witnessed a fall of 6.4% and 4.1% respectively for the month.

After China recently devalued Yuan by 1.9% to boost its flagging economy, the rupee has plunged to a two-year low of 65.10 to a dollar. But given falling inflation levels and comfortable foreign exchange reserves, the falling rupee is not likely to derail the economic recovery process.

In a setback to Nestle India, the center has demanded a compensation of Rs 4.26 bn from the Swiss major. The compensation is based on alleged damages caused by Maggi noodles to Indian consumers and has been calculated on the basis of 'Maggi' sales share in Nestle India's total revenue in the country in 2014-15. However in a major relief, the Bombay High Court has set aside the ban on Maggi noodles. But the withdrawal of the ban is subject to a retest wherein the company would be required to submit samples of five variants at accredited laboratories. The samples have to be tested at laboratories in Hyderabad, Mohali and Jaipur to check the lead content. The court ruled that the Food Safety and Standard Authority of Inida (FSSAI) had not given the company enough opportunity to present its case and was a violation of natural justice. FSSAI is considering an appeal against the ruling in the Supreme Court.

The state government is collaborating with NTPC to develop a 375 mw solar power park in Jalon district at an estimated cost of Rs 30 bn. Under the agreement, the state government plans to hand over about 750 hectares to NTPC on a nominal rent for developing the solar park in a phased manner. The project is part of NTPC's plans to set up 10,000 mw of renewable energy projects by 2020. The government has appointed NTPC to act as the nodal agency for implementing 15,000 mw of solar projects under the National Solar Mission Phase II Batch II in three tranches - 3000 mw in 2014-17, 5000 mw in 2015-18 and 7000 mw in 2016-19. NTPC is also planning to set up solar projects in Madhya Pradesh (750 mw), Rajasthan (1000 mw) and Telangana (500 mw).

Biscuit major Britannia Industries is planning to expand its dairy business, which presently contributes less than 5% to total sales. The company would be investing close to Rs 3-3.5 bn over the next few quarters. Reportedly, the company will take eight to nine months more to complete its dairy plans and take it to the board. The company is evaluating an in-house model from procurement to processing as opposed to the current outsourced model.

Now that the result season is in full swing, let us take a look at the interim performance of some of the companies.

The country's largest lender State Bank of India (SBI) has reported a 10.25% increase in the net profit at Rs 36.9 bn for the quarter ended June 2015. The growth in the profit has come on the back of 8.7% rise in interest income and 20% jump in non-interest income. The gross Non Performing Asset (NPA) stood at Rs 564 bn at the end of June 2015 quarter, which is 4.29% of the gross advances as compared to 4.95% at the end of June 2014 quarter. The domestic Net Interest Margin contracted to 3.29% compared to 3.54% in the year-ago quarter due to reduced base rate and a subdued 5.4% growth in advances. However growth in deposits was more robust and stood at 13.7% in June 2015 quarter.

IDBI Bank has posted a 27% rise in its net profit for the quarter ended June 2015 on a YoY basis. This was backed by a substantial rise in its net interest income (NII) and other income (comprising of fees, commissions and treasury earnings). The bank's NII rose 20% on a YoY basis. Credit witnessed an 11% YoY rise while deposits grew by 15% YoY. Other income for the company surged 28% YoY for the quarter.

Wockhardt has reported over fivefold jump in its consolidated net profit after tax at Rs 1.14 bn for the quarter ended June 30, 2015 as compared to Rs 199.5 m for the same quarter in the previous year. Net sales grew by 15.1% YoY to Rs 11.4 bn, while other income nearly jumped 183% to Rs 233 m in the quarter gone by. Operating profit increased 2.7 times to Rs 1.67 bn and margin expanded by 840 basis points to 14.7% compared to corresponding quarter of last fiscal.

However, largest pharma company by revenue Sun Pharmaceuticals saw its net profit slump by 60% YoY for the quarter ended June 2015. This was mainly due to the one time and exceptional charges of Rs 6.8 bn on account of impairment of fixed assets, goodwill and other related costs post the acquisition of Ranbaxy. The revenues for the company were up by a tepid 3% during the quarter.

Tata Steel has reported a dismal financial performance for the quarter ended June 30, 2015. The company has reported 44.9% YoY decline in its net profit for the quarter. This was due to lower sales and increased costs. Total income during the quarter decreased 7.25% on a YoY basis. However, the company reported 126.18% rise in its net profit after taxes on a consolidated basis. This was on the back of a sharp fall in the operating expenses, lower tax outgo and higher other income.

Ashok Leyland posted a stellar financial performance for the quarter ended June 2015. The company clocked a 55% YoY jump in its revenues backed by a 42% increase in its sales during the quarter. As per the company, investments in many new products and controlled costs have helped boost the results. In the medium and heavy vehicle segment, the company's market share rose to 29.2% from 24.6% a year ago. Further, the smaller business of light commercial vehicles did well and registered a 33% growth during the quarter.

Global stock markets are likely to remain volatile on slowdown fears arising from the currency devaluation and uncertainty surrounding the rate hike by the US Fed. For the domestic stock markets, concerns over stalemate in the reform process and the interest rate actions by RBI will also add to the volatility quotient. However, it would be in the best interest for investors to disregard these distractions and only focus on spotting buy opportunities in fundamentally sound scrips.