A Weak End to the Month

Thu, 1 Oct RoundUp

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The month of September was not a great one for global markets, and the last few days did not bring any cheer. The relief surrounding the US Fed's decision not to raise interest rates has been replaced by fears of a global slowdown.

Much uncertainty surrounds the future of the Fed's policies and how they could affect global markets. This uncertainty, along with the fears of a prolonged economic slowdown in emerging markets including China, has kept global investors nervous.

US markets were marginally lower this week. The European markets fared worse as major auto stocks were under pressure following the Volkswagen fiasco. The Chinese markets continued to remain weak.

Indian markets, on the other hand, ended the shortened week with gains following the Reserve Bank of India's (RBI) surprise decision to cut the benchmark repo rate by 0.5%.

Among the sectoral indices, stocks from the consumer durables and real estate were the top gainers, while banking stocks closed in the red.

Now let us discuss some of the key economic and industry developments in the week gone by.The big economic development this week was the RBI's decision to cut the repo rate by 0.50% in its monetary policy meeting on 29 September 2015. The central bank has chosen to frontload its action due to falling inflation rate (measured by the CPI).As reported in a financial daily, the Indian commerce and industry ministry released data on core sector growth for the month of August 2015. Reportedly, the index of eight core industries registered growth of 2.6% YoY, for the month. This is higher compared to the 1.1% YoY growth reported for the month of July 2015. Out of the eight sectors, five sectors registered a growth above 5% YoY for the month. However, the growth in the three sectors viz coal, natural gas, and steel declined in the month of August. While the growth momentum has improved recently, we believe, given the poor performance of the three sectors the prospects are moderate. As per an article in Economic Times, domestic steel producers could increase prices by up to Rs 1,500 per tonne to offset a hike in the safeguard duty. Earlier this month, the government imposed a provisional safeguard duty of 20% on imports of certain hot rolled fat steel products with a view to protect domestic producers. As reported, government spending on public projects coupled with the industrial activity could lead to a pick up in the second half of this fiscal. These factors along with a depreciating rupee against the US$ could provide a good opportunity for the steel producers to raise prices. This would help improve their realizations. In all, a stabilizing impact on domestic prices and demand-supply equation could be on the cards.The Reserve Bank of India (RBI) has allowed companies to raise up to US$750 million from overseas markets under the automatic route, through rupee-denominated bonds. With this announcement on Tuesday, the banking regulator has also allowed real estate investment trusts (REITs) and infrastructure investment trusts (IITs) to raise funds under this route. The proceeds from these, as stated by the RBI, can be used for all purposes except for equity investments domestically, real estate activities other than for development of integrated township or affordable housing projects. These bonds will come with a minimum maturity period of five years. This could help some realty players ease their liquidity position.As per an article in Livemint, the Indian drug regulator is set to draft an amendment to existing pharmaceutical manufacturing laws pertaining to manufacturing practices. The Drug Controller General of India (DCGI) will move a proposal within the next six months to amend the Drugs and Cosmetics Act, 1940. Consequently, the controller general could revisit the existing laws. Reportedly, these efforts are on to bridge the gap between Indian manufacturing practices and the World Health Organisation's (WHO) good manufacturing practices (GMP). The number of Indian drug manufacturers following the WHO's GMP norms is currently 10%-15%. The GMP norms consist of certain standardisation of various aspects in manufacturing. This includes factors such as sanitation and hygiene, qualification and validation, self-inspection, quality audits, suppliers' audits, etc. According to the sources, the new regulations will require additional investment of Rs 50 million per facility. This means the new law could increase the costs of the pharma companies whose facilities are not compliant as per the WHO norms.

Movers and shakers during the week

Now let us move on to some of the key corporate developments of the week gone by.

As per a leading financial daily, eight public sector banks, including State Bank of India (SBI), Punjab National Bank (PNB) and Bank of Baroda, have allotted equity shares on preferential basis to the government against capital infusion of Rs 139.5 billion. Further, Bank of India, Canara Bank, Dena Bank, Corporation Bank and Andhra Bank are among the other lenders that have received capital infusion from the government. The most recent capital infusion is a part of the government's program to infuse a total of Rs 700 billion of equity into PSU banks over four years up to 2018-19. It will help shore up their capital base for meeting Basel norms. Earlier in August, the government had said that it would infuse Rs 200.8 billion in 13 PSU banks in about a month. That said the rest of the amount is likely to be infused in the last quarter of 2015-16.

India's fourth largest software firm, HCL Technologieshas given a pre-quarter revenue warning. It indicated the reported US dollar revenues for the September 2015 quarter could be impacted up to multiple factors. These include a sharp depreciation of basket of currencies against the US dollar as well as client-specific issues. The company also stated that as a matter of prudence it is considering reserving up to US$20 million this quarter for a client disengagement process, regarding a custom application development project. The company also stated that revenues would be impacted due to changes in transition timelines for some infrastructure management projects.

Housing Development Finance Corporation (HDFC) Ltd, India's largest mortgage lender will be raising Rs 50 billion through non-convertible debentures (NCDs) and warrants to qualified institutional buyers (QIBs). The company will use the proceeds from the issue to boost lending operations and meet its future capital needs. HDFC has been able to post healthy growth in loan book and maintain net interest margin over the past few quarters. The entity's capital adequacy ratio and gross NPAs stood at 15.8% and 0.7% respectively at the end of June 2015. It is commendable that the housing finance company has been able to keep asset quality in check despite the overall slowdown. Going ahead as the economy picks up and with the government's strong focus on smart cities and affordable housing, credit offtake for housing loans is likely to grow at a robust pace.

Leading Indian pharma company Sun Pharmaceutical Industries has announced the commencement of a tender offer for acquisition of all outstanding shares of InSite Vision. The offer has been commenced through the company's indirect wholly owned subsidiary - Thea Acquisition Corporation. The acquisition of outstanding shares of InSite Vision will be for US$0.35 per share in cash, without interest and less any required withholding taxes. To recall, Sun Pharma had on 16 September 2015 announced its intention to acquire InSite Vision.

As per an article in Economic Times, Hero MotoCorp has unveiled two scooters named 'Maestro Edge' and 'Duet'. Duet is a full metal body scooter. The 110 CC Maestro Edge will compete directly against Honda Activa. The launch is scheduled for 13 October 2015. The scooter is priced at Rs 49,500 before local levies and insurance in Delhi. The launch of Duet will follow thereafter. Hero currently has two scooters in its portfolio - 'Pleasure' and 'Maestro'. Both the models were developed using Honda's technology. The new models have been developed in-house. Hence, it would be interesting to see how well the company is able to garner market share with its own technology.

L&T Infotech Ltd has filed documents for its initial public offering (IPO). The company is the software service arm of Larsen and Toubro (L&T). L&T will sell 17 million shares as a part of the issue. The firm intends to raise Rs 15 billion by selling shares to the public. L&T Infotech's revenue rose 2.15% on a YoY basis for the year ended 31 March 2015. However, the net profit declined by 14% to Rs 7.74 billion during the same period. The move is in line with the chairman's statement at the annual general meeting (AGM) to unlock the value from its IT services business.

Going forward, global factors as well as the result season will influence the markets. More volatility cannot be ruled out. However, long-term investors will do well to focus on the company fundamentals and ignore short-term price movements.