Global Markets in Turmoil

Sat, 31 Oct RoundUp

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Global markets closed the week on a negative note with a majority of the indices ending in the red.  

US gross domestic product (GDP) increased at an annual rate of 1.5%, down from 3.9% in the second quarter, according to the Commerce Department. However, consumer spending, which accounts for more than two-thirds of US economic activity, grew at a rate of 3.2%. The Federal Reserve on Wednesday kept interest rates unchanged at their record low of near-zero levels. However, the committee specifically pointed towards the possibility of raising rates at its December meeting. The stock markets in the US were down by 0.1% during the week.

Also this week, China's central bank cut interest rates for the sixth time in less than a year. The majority of the Asian markets ended the week on a negative note. The stock markets in Singapore and Hong Kong were down by 2.3% and 2.2% respectively during the week.

Back home, the Indian markets ended lower by 3%. The earnings season has surely disappointed the investors. The disappointment over the Q2 earnings season coupled with the Fed's hints at a possibility of a rate hike in December hurt the investor sentiments and dragged the markets down.

Barring consumer durables sector, all other sectors ended the week on a negative note. Stocks from the capital goods and realty sector were the biggest losers for the week. 

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

The government proposed a 2% levy on domestic and international plane tickets in order to subsidize the airline operators. The subsidy will be provided to the airline operators to encourage them to expand their operations in the small and remote cities. Further, subsidy will also help the airlines to compensate for their losses on flights that have little or no air connectivity.

Telecom Regulatory Authority of India (TRAI) has asked mobile operators to compensate consumers for every call drop which takes place. The telecom operator will have to pay Rs 1 for every call drop that occurs due to a fall in their network. However, they have asked TRAI to roll back the compensation policy. Further, operators have also challenged the technical basis on which TRAI calculates the call drops. In response to this TRAI has asked operators to suggest some other ways to measure the call drop data. TRAI will review its decision after six months taking into consideration the measures taken by the operators to address the call drops. Recently, Cellular Operators Association of India (COAI) had written to TRAI stating that such a move could have an impact of 3-5% on the financials of the company.

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

As reported in a financial daily, tractor sales of various auto companies have declined sharply for the first half of the current fiscal. The sales have plummeted by 20% for the said period. Reportedly, a second straight year of week deficient rainfall have led to lower disposable income in the hands of farmers. Further, lower than expected increase in the minimum support prices for the crops also affected the income of the farmers. These factors have led to poor demand of the tractors.

Reportedly, some companies like Escorts Ltd, have also put hold on their expansion plans. The company's sales in the domestic market declined by 17.7% to 25842 units in the six months ended 30th September.

Not only tractors but even motorcycle sales have been hit by the slump in the rural income. As per the data published by Society of Indian Automobile Manufacturers (SIAM), sales of motorcycles declined by 4.06% to 5.36 m units in the six months ended 30th September.

Cheaper motorcycles with an engine displacement of 100cc to 110cc were the worst affected. Reportedly six out of ten motorcycles are from the above category. Hero Motocorp which has considerable exposure to the rural market reported a decline of 8% in sales for the quarter ended 30th Septemeber on a YoY basis.

As reported in financial daily, Nestle India has commenced the production of 'Maggi'. The move comes, after the brand cleared the safety tests.

Reportedly, the production has commenced in company's plant at Karnataka, Punjab and Goa. However, samples manufactured at these plants will be first sent to testing to the three accredited laboratories as directed by the Bombay High Court. The product will be available to the customers only after the samples are cleared by these laboratories.

Further, according to company's managing director the company hopes to bring the product back to the shop shelves by the year-end.

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 this.

According to a financial daily, Sun Pharmaceutical Industries has recalled an anti-allergic drug from the US market. The drug is named 'Loratadine' and it is a generic version of Bayer's Claritin. Certain checks revealed that the drug were 'out of specification' and 'super potent'. The drugs were recalled voluntarily by the company and were a Class III recall. Such recalls are generally not considered very serious by nature, as exposure to such a drug is not likely to cause adverse health consequences.

The drug was manufactured by Ohm Laboratories which is based at New Jersey. Ohm Laboratories is a subsidiary of the erstwhile Ranbaxy. Presently, all the plants in India of erstwhile Ranbaxy are under a US Food and Drug Administration (USFDA) import alert.

It is imperative to note that drugs are recalled by drug makers or in some cases US regulator, if they find any defects in the product. While, such recalls may not have immediate impact on the company's revenues, but if such instances occur repeatedly, it may have negative repercussion.

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

National Thermal Power Company (NTPC) reported its results for the quarter ended September 2015. The revenues of the company grew by 6.9% on a YoY basis. The growth was driven on the back of commissioning of the 800 MW hydropower plant. This plant registered a healthy Plant Load Factor (PLF) of 83%. The average PLF reported an improvement of 400 bps to 77%. Reportedly, the average tariff increased marginally by 0.9% to Rs 3.29 per unit in the first half of the current fiscal year.

Operating profits of the company grew by 24% YoY, due to lower fuel costs. This helped in margin expansion of 310 bps to 22.5% for the quarter.

The net profit of the company reported a growth of 40% YoY. However the huge growth in the net profit is primarily because of a tax writeback of the previous year. Excluding the impact of tax writeback, net profits increased just by 4.8% YoY.

Maruti Suzuki reported its results for the quarter ended September 2015. The revenues of the company grew by 13.2% on a YoY basis. The sales of passenger vehicle grew by 9.8% YoY to 353,000 during the September quarter. Reportedly, company's growth in the rural areas was higher as compared to the urban areas. This comes as a surprise as various automobile players are struggling in the rural areas. The company's sales in the rural areas grew by 10% as against 4% in the rest of the country.

The operating profitability of the company grew by 393 bps to 16.3% YoY. The operating profitability was higher on account of low raw material cost and favourable foreign exchange movements. The net profits of the company grew by 42.1% to Rs 12.3 bn on a YoY basis.

Further, Maruti plans to pay the royalty to parent company in rupee terms for all the new models it plans to introduce. Earlier the royalty was paid in Japanese currency 'Yen'. Royalty payment in rupee terms will ensure that the average royalty outgo is capped and is not subject to foreign exchange fluctuation.

Richa Agarwal, Managing editor of Hidden Treasure, recently wrote an interesting piece, where she has discussed about the excess royalties paid by the Indian arm of the MNCs, to use the MNC's product technology or brand. Read this article to know more on how the investor's wealth is getting affected due to the high payment of the royalties.

Lupin Ltd reported its results for the quarter ended September 2015. The revenues of the company (including non-operating income) grew marginally by 4.7% YoY. Reportedly, excluding the non-operating income the growth in the revenues was just up by 2% YoY for the said period.

As per a financial daily, the managing director of the company stated that the slowdown in the approvals from the US market was the key reason for the dampening of the growth in revenues. The company has received 8 product approvals in this financial year. However the same did not make a significant contribution to the revenues as the product approvals have smaller revenue potentials.

The operating profits declined by 24% to Rs 7.1 bn YoY. The net profit of the company reported a decline of 35% to Rs 4 bn YoY.

HDFC reported its results for the quarter ended September 2015. The total income of the company reported a growth of 12.1% to Rs 74.80 bn on a YoY basis.

The loan book for the quarter grew by 18% on a YoY basis. The growth in the loan book was driven by the low margin retail loan book. However, bank's asset quality remained stable with the gross bad loan ratio at around 0.7%.

The company's Net Interest Income (NII) grew by 17.9% to Rs 25.49 bn on a YoY basis. The NII stood at 3.95% during the quarter. The net profits of the company grew by 18.2% to Rs 16.04 bn.

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.