Weakness persists in global markets

Sat, 27 Aug RoundUp

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Global markets continued to trade on a weak note in the week gone by. Barring a few, most of the sectoral indices remained in the negative territory. Markets remained under pressure for the entire week on hawkish comments made by the Fed policymakers giving rise to speculations for a rate hike. However, there was some recovery after the Federal Reserve Chair Janet Yellen did not give any firm indications of raising interest rates in the immediate future. But she said that improvements in the labor market and expectations for solid economic growth had strengthened the case for a rate hike that would be undertaken gradually. But volatility persisted after the Fed Vice Chairman Stanley Fisher asserted that Yellen's remarks were consistent with the possibility of two rate increases in 2016, suggesting the likelihood of a September rate hike.

Brazil was the biggest loser (down 2.3%). Among the Asian markets, each of China, India and Japan's indices were down by upto 1.2% each during the week. The US and UK markets were down by 0.8% and 0.3%, respectively. However, markets in France and Germany have managed to stay afloat and posted gains of 0.9% and 0.4%, respectively.

Back home, the Indian indices ended in the red bogged down by weak global cues on the rate-hike uncertainty and profit booking by institutional investors. The BSE Sensex was down by 1.1% for the week.

Key World Markets During the Week

On the sectoral indices front, consumer durable and oil & gas stocks led the gainers this week. On the other hand, stocks from metal and capital goods witnessed selling pressures.

BSE Indices During the Week

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

RBI has unveiled a comprehensive plan to limit exposure of banks to large borrowers and broaden the bond market. This will in-turn help the banks in improving their asset quality by reducing exposure towards highly leveraged firms. Additionally, banks will have to set aside higher provisioning for incremental lending to borrowers who have a certain amount in outstanding loans from the banking sector.

RBI has suggested the creation of a new segment of borrowers with aggregate fund-based credit limits (ASCL) of Rs.25,000 crore in 2017-18, Rs.15,000 crore in 2018-19 and Rs.10,000 crore from 1 April 2019 onwards. This segment of borrower called 'specified borrower' will require banks to make additional provisions and higher risk weights when specified borrowers borrow above the ASCL limit. This in turn will make large bank loans availed by India Inc expensive. However, banks can subscribe to bonds issued by the specified borrowers. To deepen the bond market, RBI has also suggested that it will allow banks to give greater credit enhancement or guarantee to service bond issues.

Public sector banks (PSBs) in India are lagging far behind their private sector peers. The recent data released by the Reserve Bank of India (RBI) showed that the total bad loan ratio of the state-run banks has ballooned to 11.4% in the 15 months since March 2015. On the other hand, during the same period, private banks' bad loans have risen from 2.2% to 2.8%.

To resolve the bad loan problem in the PSUs, the RBI has called for reforms in PSU banks. Some of the major reforms proposed by the RBI include the dilution of government stake in PSUs below 50%, extending CEO tenures to five years and providing managerial autonomy to banks. All of the above proposals were made by RBI deputy governor S S Mundra.

The Union Cabinet has approved nine projects to ramp up and decongest key routes for rail traffic in the freight as well as passenger segments. The expected expenditure to be incurred on these projects is pegged at Rs 243.7 billion.

Reportedly, under this project the Indian railways will lay tracks of a total length of 1,937 kilometers. The construction of these lines will facilitate easier movement of freight items such as steel, coal and cement.

Additionally, the railway minister has revised freight rates for coal. The freight rates for transportation of coal is set to get expensive for the plants located at a 200-700 km distance away from the mines. Howevers, for the plants situated at a distance above 700 km, the freight rates are set to reduce. Reportedly, freight rates for transportation of coal were raised by 8-14% between 200km and 700km and were lowered by 4-13% for distances above 700km.

As coal is largely used in thermal power plants, a spike in the freight cost may in-turn leads to an increase in tariffs. Experts believe that around 60% of the power plants in India need to transport coal for 200-700km, where there is an increase in the freight rate.

This may not bode down well with the power producers who are already facing subdued demand from the State Electricity Board (SEBs). An increase in tariff could possibly act as a dampener for the SEBs to buy power from the power producers.

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

Tata Power reported a dismal performance for the quarter ended June 2016. The company's net profits declined by 76% YoY to Rs 0.7 billion during the quarter. The profits were impacted on the back of a one-off item as well as implementation of the new Indian Accounting Standards.

There was a one-off item amounting to Rs 1.2 billion pertaining to its subsidiary Coastal Gujarat Power Ltd (CGPL). To add to this, there were regulatory orders worth Rs 0.6 billion pertaining to previous years and adjustments of Rs 1.3 billion related to the new accounting standards which impacted profits.

Total income from operations too declined by 4.8% YoY to Rs 68.3 billion during the quarter. Further, revenue from power, its largest business, fell 5.7% YoY to Rs 61.6 billion during the quarter.

Tata Power increased its generation capacity by around 9% YoY in the June 2016 quarter backed by commissioning of 44 MW Lahori wind farm project in Madhya Pradesh and Cennergi achieving commercial operations of both its 134 MW Amakhala Emoyeni and 95 MW Tsitsikamma Wind Farms. The company has significant presence in the clean energy space with a gross installed capacity of 1996 MW.

National Thermal Power Corporation (NTPC) reported healthy results for the June 2016 quarter. The net profits of the company grew by 4.5% YoY to Rs 23.7 billion on the back of higher generation and better capacity utilization.

The company produced 64.5 billion units of electricity during the quarter, a jump of 11% as compared to a year ago. Although the company added 2,130 megawatts (MW) to its installed capacity, the utilization levels or the Plant Load Factor (PLF) improved by 3% YoY to 81% during the quarter ended June.

The average tariff of power sold reduced to Rs 3.12 a unit from Rs 3.18 a year ago, mainly on the back of lower fuel charges. Fuel portion mainly comprises of coal costs. Expenses on account of coal reduced on the back of minimal imports of coal coupled with the rationalization of coal linkages. As fuel charges are a pass through, the overall average tariffs reduced.

The company has 24,000 MW of capacity under construction, which it intends to complete by FY 2020. Successful completion of these projects coupled with demand from loss-making state electricity boards (SEBs) will be the key things to watch out for going forward.

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

Indian Oil Corporation (IOC) will invest Rs 6.5 billion in increasing its storage and bottling capacity in Tripura over the next three years. In order to prevent fuel crisis in the state, the company will set up one Petroleum, Oil and Lubricant (POL) depot and a new bottling plant in Agartala.

Reportedly, the POL depot will incur an investment of around Rs 5 billion with a capacity of around 6,000 kilo litres. Further Rs 1.4 billion is the estimated expenditure for setting up the bottling plant with a capacity of 30,000 million tonnes per annum.

Meanwhile, in order to capitalise part of the reserves, the company's board will meet on 29th August to consider issue of bonus shares to its shareholders.

Tata Steel has started export of Tata Ferro Shots from its steel plant located in Kalinganagar, Odisha. The new product Tata Ferro Shots is a granulated pig iron solidified by cooling in water. It was launched by Tata Steel from its Kalinganagar plant in March this year. The steel industry, which traditionally uses pig iron, sponge iron and scrap, has responded favourably to this innovative product.

Moreover, after its encouraging acceptance in the domestic market, the product is set to make its foray into the international arena. The company's Kalinganagar plant flagged off the first export consignment to a South East Asian country.

Notably, Tata Steel is setting up a 6 million tonne per annum (MTPA) integrated steel plant at Kalinganagar in two phases. The first phase of 3 MTPA is being implemented at an investment of Rs 250 billion.

Cadila Healthcare has issued a recall of 223,776 bottles of Venlafaxine HCL ER Capsule both 75 mg and 150 mg for failed dissolution specifications. Venlafaxine HCL ER capsule is used for treatment of major depressive and anxiety disorders.

Reportedly, Cadila was slapped with a warning letter by the US FDA (Food & Drugs Administration) for Moraiya formulation facility and Ahmedabad API facility (Zyfine) earlier (Subscription Required) during the year. This recall has been initiated on the same grounds. Moreover, the recall was already initiated from 19th July but was reported to the FDA only on 18th Aug. Most of the products recalled were from a batch of 2017 expiry.

Infosys is expected to earn incremental revenues of Rs 4 billion spread over the third and fourth quarter as part of implementation of the Goods Service and Tax Network (GSTN).

Lupin has received an approval from the Central Drugs Standard Control Organisation (CSDO) to launch a 100mg acotiamide tablet in India which is used to treat indigestion. The company is geared to commence the promotion of this product shortly.

Further, clinical trials phase- III in Europe and phase- II in the US have also been conducted for the drug. The estimated market for the gastronomical drug is pegged at about Rs 114.3 billion and is growing at 13% annually.

Acotiamide is a novel drug, being introduced in India for the first time. Reportedly, a novel drug is any active compound or molecule that has previously not been approved by the country's drug regulatory body. Acotiamide is approved by PMDA Japan and is actively marketed in Japan.

Infosys had been awarded a contract from the government to implement the GST network last September. However, with hurdles over the passage of the bill, the contract work had halted. The work on the same seems to have resumed since the government has asked Infosys to start work on the hardware part a day after the Rajya Sabha passed the constitutional amendment bill for GST on 3 August.

The contract involves installation of hardware devices and once that's done software will be installed in it. The total contract value is pegged at Rs 13.8 billion and will be recognized as revenues over five years of the contract period.

Nestle India's noodle brand Maggi has retained its leading position by clocking 56% share of the market in June this year on the back of strong marketing campaigns and introduction of new variants.

FSSAI (Food Safety and Standards Authority of India) had imposed a ban on Maggi, last year, for its harmful lead content.The noodle brand witnessed its first staggering climb in December last year when it was re-launched into the market after a five-month ban. Maggi had 10.9% of the market share when it made its comeback in November. Within one month, Nestle India registered a climb to 35.2% in December. In March 2016, it had 51% market share (Subscription Required).

Earlier this year, Nestle India launched up to 25 products across various categories to fend off competition. Reportedly, Nestle's non-Maggi portfolio growth turned positive in the second quarter of 2016 ending June and going ahead, the company will focus on accelerating growth in this vertical.

Going ahead, global markets are likely to remain volatile on uncertainty with respect to the rate hike by the US Fed. Apart from global cues, factors such as revival in the rural economy on good monsoon and better farm income and the reform process gaining momentum with the passage of the goods and services tax bill will influence the movement of the domestic equity markets. However, instead of speculating on these macro developments, focusing on fundamentals of companies will prove to be a better strategy.

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

After ending the session on a flat note for three straight weeks, the index has finally given up a bit. The Nifty ended the week down - to just below 8,600. If bears persist some more, they can push the index lower - to 8,500 levels. You can read the detailed market update here...

Weak Global Cues Drag Nifty Lower

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