European Market on a Roll

Sat, 24 Oct RoundUp

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Global markets closed the week on a positive note with a majority of the indices ending in the green. Stock markets in Europe and US surged upwards after the European Central Bank hinted that further rate cuts were being considered to stimulate the eurozone economy. The stock markets in Germany and France were up by 6.8% and 4.7% respectively during the week.

China's central bank cut interest rates on Friday for the sixth time in less than a year. Further, it again lowered the amount of cash that banks must hold as reserves in a bid to jump start growth in its stuttering economy. The majority of the Asian markets ended the week on a positive note. The stock markets in Japan and Singapore were up by 2.9% and 1.2% respectively during the week.

Coming to the US markets, the Fed holds two more policy meets this year: next week and in December. Market expectations for a rate hike have shifted to next year in recent weeks, though some haven't completely ruled out a hike in December. Data released on Tuesday showed US housing starts rose solidly in September on soaring demand for rental apartments, a sign that the housing market continues to steadily improve. The stock markets in the US were up by 3.1% during the week.

Back home, the Indian markets ended higher by 0.9%. The Index of Industrial Production (IIP) rose to 6.4% for the month of August. Electricity generation, mining, and manufacturing output grew by 5.6%, 3.8%, and 6.9% respectively during the month.

Among the sectoral indices, stocks from the information technology and Fast Moving Consumer Goods (FMCG) were the top gainers. Stocks from the capital goods and metal were the biggest losers for the week.

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

China cut interest rates for the sixth time since November. The benchmark rate was cut by 0.25% to spur the economic growth. The announcement came after the growth slowed to a six-year low of 6.9%. The moves intensifies concerns that the measures taken so far have had limited traction in supporting growth and that more drastic measures might be required in the coming months.

The European Central Bank (ECB) kept its interest rates unchanged in its policy meeting on last Thursday. The ECB is holding interest rates at record lows and printing money to try and boost consumer prices. The marginal lending rate was maintained at 0.3%. However, the President ‘Mario Draghi' has kept the door open for more monetary stimulus to tackle the falling inflation.

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

Mahindra and Mahindra have launched two new products in the passenger and load category segment. The new launches are from their new product platform called Supro. Supro Van caters to the passenger van segment while Supro Maxitruck caters to the load carrier category. Supro Van is an 8 seater diesel vehicle. The vehicle is suitable for large families and caters to the tour and travel segment. The vehicle is launched at a price of Rs 4.4 lakh ex-showroom Thane. As reported by Economic Times, vehicle can be used as a personal vehicle for large families in the semi-urban, Tier II and Tier III towns. Supreme Maxitruck has a payload capacity of 1-tonne. The vehicle can be used for intra and inter city transportation of goods. The vehicle is launched a t a price of Rs 4.2 lakh ex-showroom Thane. The truck will compete with the likes of Tata Ace which enjoys a healthy market share in this segment. Reportedly, company has invested a sum of Rs 1.2 bn for the product development of its Supro brand. The company will also export these vehicles to the SAARC countries and South African markets.

As per an article in Livemint, Gujarat and Karnataka government has lifted the ban on Nestle's 'Maggi' noodles on Monday. The ban was imposed after the Food Safety and Standards Authority of India (FSSAI) ordered the company to withdraw the 'Maggi' noodles from the market.Nestle, thereafter had appealed in the Bombay High Court revoke this ban. Recently, the Court ruled in the favour of the company. However it asked Nestle to retest the samples of 'Maggi' at the 'National Accreditation Board for Testing and Calibration Laboratories (NABL). Recently, three laboratories certified by NABL stated that the product is safe and the lead content was much below the permissible limits. Nestle India's Maggi noodles had earlier cleared tests in various countries including the US, UK, Singapore and Australia. Post the clearance from these two governments, it is believed that other states too will lift the ban on the noodles.

In one of our edition of the 5 Minute Wrap up, we had discussed about this controversy, as the stock of Nestle had tanked post this ban. And here is what we had written, - "Even if product quality suffers in the interim but is associated with a strong brand, the good image in mind of individuals remains intact. In the end, it all boils down to investing in wide moat companies. Bigger the brand, wider the moat". Read this interesting piece, where we have discussed in detail on the topic.

As per an article in Business Standard, certain adverse observations have been made at Cipla's Indore plant by the US drug regulator. The adverse observations are in relation to the manufacturing practices followed at the plant. Some of the adverse observations as stated includes, lack of authority of the quality control units to review the production records to ensure that no errors have occurred. Further, the inspection also observed that the sterile product vials were handled by ungloved and un-sanitized hand by the packaging lines employees. While the management did not specifically comment on the US FDA observation, company stated that they are closely working with the regulatory authorities to ensure that they maintain the highest quality standards. Reportedly, US market account for 8% of the total revenues of the company.

Now let us move on to quarterly performance reported by companies.

Hero MotoCorp declared its results for the quarter ending September 2015. The company's revenue fell by 1.1% to Rs 68.4 bn on a YoY basis. The sales volume of two-wheelers fell by 7.1% on a YoY basis to 1.57 million units. The sales volumes got impacted due to poor demand. The deficit rainfall and unseasonal winter rain damaged the crops, thereby hurting farm incomes and consumer demand for the motorcycles. However, company's EBIDTA (Earnings before Interest, Depriciation, Taxation and Amortization) expanded by 2% to 15.45% during the quarter. As per an article in Livemint, margins expanded on the back of the cost reduction programs which were introduced by the company.The net profit of the company rose marginally by 1% to Rs 7.7 bn on a YoY basis. The demand from the rural areas will be the key thing to watch out for in the coming quarters.

Biocon declared its results for the quarter ended September 2015. The company's revenue grew by 11.4% to Rs 8.6 bn on a YoY basis. Reportedly, the research service unit of the company named 'Syngene International Ltd' contributed around 33% to the overall revenues of the company. The net profit grew by almost 200% to Rs 3 bn on a YoY basis. The spurt in the net profit was due to an extra-ordinary item. The extra-ordinary item was in relation to the gain of Rs 2 bn from selling of shares in its research service unit 'Syngene International'. Even after excluding the extra-ordinary item, 'Syngene International' contributed to around 50% of the overall profits of the company. The company has spent Rs 570 m on research and development in the quarter. Reportedly the company's Active Pharmaceutical Ingredients (APIs) business grew by 4% YoY to Rs 4.6 bn while its Indian branded formulation business grew by 3% YoY to Rs 1.2 bn.

Idea Cellular reported its numbers for the quarter ended September 2015. The revenues of the company grew by 14.8% to Rs 86.9 bn on a YoY basis. Growth came in from the non-voice services' segment. However, company witnessed a decline in voice usage. It stated that the voice minutes usage declined by 3.2% YoY to 189.5 billion on a sequential basis. Further, pressure was also seen on the 'mobile data' segment front. The company witnessed pressure on realizations; there was an 11.7% drop in average price realization in the data business. It is expected that the launch of Reliance Jio's services will further add to the pressure.

Idea has written to investors, stating that there would be pressure on the mobile data realization rate as the competition intensifies. However, net profits of the company grew by 7% to Rs 8 bn on a YoY basis. The stock of the company ended the day on a dismal note (down 7.3%) on the BSE.

The ongoing earnings season so far has not cheered the stock markets. Crucial reforms such as Goods & Service Tax and Land Acquisition Act will be crucial to get the economy growing. However, keeping aside these short term fluctuations, investors should not lose track of company fundamentals while making investment decisions.