Concerns over US fiscal deadlock continue

Fri, 11 Oct RoundUp

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In the week gone by, barring the UK, majority of the global stock markets closed in the green. This was despite the US government moving into its second week of shutdown. However, US President Barack Obama and Republican leaders seem to be making some attempts to end the impasse. While both the political parties have yet to arrive at a finite conclusion; talks continued to bring an end to the shutdown and extend the government's borrowing authority beyond the stated deadline of 17th October.

On the other hand, Janet Yellen has been nominated for the chair of Federal Reserve. Yellen is widely believed to be dovish on monetary policy. This has raised hopes that she will take a slower path towards a reduction in the Fed's bond-buying program.

The BSE-Sensex was among the top gainers among various global markets closing higher by 3.1% for the week gone by. The week for Indian markets started on a positive note, as the surprise announcement from the country's central bank to improve liquidity conditions in the banking system helped boost the sentiments. Further, the result season also started on a positive note, as IT major Infosys Ltd declared good results for the September 2013 quarter.

Source: Yahoo Finance

Majority of the sectoral indices ended in the green with Banking FMCG (up 4.6%) witnessing maximum buying interest. Only stocks from pharma and realty closed in the red. The small cap stocks also witnessed selling pressure.

Source: BSE

The Reserve Bank of India, (RBI) declared a cut in the MSF (marginal standing facility) by 0.5%. This is the second reduction taken by RBI since the 20 September, when it was lowered to 9.5% from 10.25%.

India's trade deficit declined to US$ 6.8 bn during the month of September 2013. This is the lowest figure since March 2011. The improvement was largely on account of a sharp reduction of 18.1% in imports - due to lower crude prices and gold and silver imports. On the other hand, merchandise exports increased by 11.2%.

But the key question here is, is this a reason for India to cheer? Well, not entirely as this may not be a sustainable trend. Crude prices, which are not in our control, were lower last month and helped the country report better numbers. Further, while the investment scenario in the country may be dull at the moment, as and when things take a turn for the better, companies will look at importing more capital equipment which would change the trade deficit scenario entirely. The long term solution we believe is to boost exports, by making India more competitive on a global scale.

The International Monetary Fund has revised growth forecasts for the Indian economy. In its World Economic Outlook report, IMF has cut India's growth rate by 1.8% to 3.8% in 2013 versus the earlier estimate of 5% on account of weak demand in the country. In comparison, the finance ministry and Reserve Bank of India expect the economy to expand by 5-5.5% in the current year. For the next year, IMF expects the domestic growth rate to recover to 5.1% (versus an earlier estimate of 6.2%). Further, the IMF has cut the world growth forecast to 2.9%. IMF has warned that India needs to restrict spending in the scenario of high inflation and maintain the credibility of fiscal and monetary policies.

It is very clear that the economy is flashing red signals. In such a challenging scenario if the international confidence for any economy evaporates, the outflow of capital will be that much more rapid. This would further put pressure on the economy.

As the result season kicks off, IT major Infosys Ltd has declared results for the second quarter ended September 2013.

The company has reported a flattish growth of 1.4% on a quarter on quarter (QoQ) basis during the quarter. The consolidated revenues in dollar terms were up by 3.76% QoQ. In rupee terms, the revenues grew by 15.1% QoQ. The operating profit for the quarter increased by 6.5% QoQ. The management has revised FY14 sales guidance to 9-10% against the earlier guidance of 6-10%. As per the management, the company has witnessed broad based volume growth, healthy client additions, five large deal wins and increased sales momentum of its big data and cloud offerings during the quarter. The management has further stated that the company will continue with planned investments and initiatives to explore new avenues of growth. Regarding rupee volatility, the management has said that the company has an active hedging program to minimize its impact on margins.

Now let us move on to some news from the corporate world.

A leading financial daily states that the government is all set to issue detailed guidelines for sharing spectrum for the telecom sector. It is also likely to announce the in-principle approval for trading in airwaves before the next round of bandwidth auctions. This move is expected to bring a major relief to the debt-laden telecom sector.

This move will pave way for the operators to sell rights to unutilized spectrum and share airwaves with each other. This will enable spectral efficiency and in turn will improve the delivery of services over the networks of operators. Moreover, trading in spectrum will also allow operators to exit the sector by selling spectrum. This move from the government is expected to transform the dynamics of the telecom industry. The telecom industry has been plagued by spectrum issues of sharing and trading for quite some time now. Also, this move would bring cheer to the foreign investors who have been demanding a road-map for consolidation. And finally, the guidelines on sharing spectrum are also expected to resolve the long-standing battle between the government and the telecom operators over the 3G intra-circle roaming arrangements.

As per a financial daily, Ranbaxy Laboratories is looking to buy a facility in India to manufacture drugs for the US market. Reportedly, the company is looking at several options to shift its blockbuster drugs which are pending approval in the US market. The acquired facility will help the company to reduce its risk arising out of the issues in its three of the four US approved facilities. Further, this step comes after the company had received import alert on its Mohali unit in India. Currently, all the three manufacturing plants located in India are undergoing US FDA surveillance, and hence the company's only operational facility is Ohm Laboratories located in the US.

According to a leading business daily, State Bank of India (SBI) is the largest bank in the country but it lags behind in critical parameters such as business and profit generation capacity according to a report released by Reserve Bank of India (RBI). The report titled 'A Profile of Banks: 2012-13' released by RBI states that in FY13, the business per employee of SBI stood at Rs 94.3 m while the overall average for banks was Rs 121.3 m. The average profit contribution by an SBI employee was Rs 6.5 lakh as compared to banking aggregate of Rs 8.3 lakh. Even the net non performing assets (NPA) of the bank at 2.1% of total advances were higher than the bank aggregate value of 1.7% in FY13. However, the bank has scored on the profitability front, reporting a net interest margin (NIM) of 3.06% as compared to bank aggregate value of 2.79% during the year.

One of the leading financial dailies states that, the Indian software companies are poised to gain more outsourcing contracts from the US than ever before. This is due to the fact that several regional banks in the US are looking to cut costs and become more efficient with their technology budgets. This is welcome news for large IT companies such as Infosys, Tata Consultancy Services (TCS) and Wipro as the US is by far their biggest market. Over the last few years, large sized contracts from US companies have been hard to come by.

The top 20 regional banks in the US including SunTrust Bank, PNC and Key Bank, currently spend US$ 1-1.5 bn on information technology every year, of which only 20-25% is outsourced to offshore services providers. This is likely to rise to 75% over the next few quarters as they adopt newer technologies to cut costs, integrate their banking systems and catch up with their larger rivals. These smaller banks will initially focus on deploying emerging technologies, such as analytics, cloud computing and mobility, into their existing systems but they may also expect Indian software firms to provide additional services like infrastructure management through outsourcing. They are looking for a 'one stop shop' solution where they can get infrastructure, software, applications and BPO all from the same vendor, provided that the vendor has proven and deep domain expertise. According to industry body NASSCOM, Indian software firms get up to 40% of their revenues from the banking, financial services and insurance (BFSI) vertical. Growth in this key vertical has been a cause for concern for many Indian IT firms recently due to the uncertain growth prospects of the US economy.

As per one of the leading financial dailies, Glaxosmithkline Pharmaceuticals (GSK) Ltd has been impacted by the implementation of the pricing policy. Sales of the company might get hit on bulk orders, as the company has reduced its profit margins for the bulk buyers. Reportedly, major territories of India have stopped buying the company's drugs. Further it is also reported that, the retailers are using various tactics by not purchasing drugs from companies who have reduced their margins. The new pricing policy targets to curb prices of costly brands sold by drug makers in order to make medicines more affordable.

According to a leading financial daily, the West Bengal government has given a nod to sell 40% stake in sick Haldia Petrochemicals Ltd (HPL) to Indian Oil Corporation. IOC was the sole bidder and has been approved to buy 675 m shares of HPL from the State government. The approval is subject to the condition that the private sector partner, The Chatterjee Group (TCG) that holds 41% stake in the petrochem project, does not exercise its first right of refusal. The TCG Group had raised objection to the State Government's claim on 155 m shares and currently the case is in the Supreme Court. Reportedly Haldia Petrochemicals, the naptha-based petrochem project, has been loss-making for the past five years and has wiped out its net worth with no funds to buy feedstock.

In the coming week, US’ decision pertaining to the debt ceiling will be an important event for the stock markets. Even the International Monetary Fund (IMF) chief has warned that if the US fails to raise the debt ceiling, it could adversely impact both the American and global markets. Further, as the results season kicks into full swing, it will certainly have a bearing on the movement of the Indian indices.