Global Markets Tumble

Sat, 12 Dec RoundUp

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Major global markets witnessed strong selling pressures and consequently closed on quite a weak note in the week gone by. Weak crude oil prices and worries about the US junk bond markets rattled the US indices. The oil prices fell to 2008 and 2009 levels.

Fears of slowdown in China also dampened market sentiments. The sell off activity gained ground across European and Asian indices.

Among the European indices, stock markets in UK (down 4.6%) and Germany (down 3.8%), led the pack of losers. The sharp correction comes ahead of the Fed decision on sinterest rates.  Uneasiness on expectations for the first US interest rate hike in a decade, have kept the markets at bay.  Consequently, various indices recorded steepest weekly losses since August.

Global weak cues also kept the Indian equity markets on edge. The key benchmark indices closed on a discouraging note as selling activity intensified during the week.

Barring the IT sector, all sectors ended the week on a negative note. Stocks from metal and realty sectors were the biggest losers for the week.

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

As reported in a leading financial daily, latest version of real estate regulation bill mandates putting aside 70% of the sales proceeds in an escrow account by builders to meet the construction cost. This, experts feel, would curb delays and lead to a more efficient utilization of funds by the property developers and builders. However, this provision could impose serious risks in relation to the cash flows of the real estate companies. As they can utilize only 30% of the money acquired, they will have way too less money to endorse and promote their schemes.

To add to this, they can now launch their scheme only once they have got adequate approvals from the appropriate authorities. Previously, developers pre-sold their apartments at lower price points to buyer before obtaining the approvals. This will also put a dent on the cash flows of the real estate firm.

Recently, power sector reforms termed Ujwal Discom Assurance Yojana (UDAY) were introduced. Under this scheme, state governments had an option to take 75% of the loans which appeared on the balance sheet of State Electricity Board (SEB) as on 30 September 2015. Even Chattisgarh government has given its approval to join the scheme. To add to this, states such as Andhra Pradesh, Jharkhand, Rajasthan, Punjab, Himachal Pradesh, Jammu & Kashmir and Uttarakhand have already given their in-principle approval for joining the UDAY scheme.

The scheme aims at providing relief to the ailing state of the SEBs. To add to this, government is keen to revive this sector wherein the distribution companies owe huge debt to the public sector banks. A default of the same will lead to a huge setback to India's economy in general and the financial sector in particular. As reported in a leading financial daily, Cellular Association of India (COAI) has pleaded with the Delhi High Court to put a stay on the call drop compensation. Recently, in the month of October, Telecom Regulatory Authority of India (TRAI) had ordered telecom operators to pay a compensation of Rs 1 for every call drop they experienced in their network. However, COAI argued that TRAI does not possess any power for ordering telecom operators to grant compensation to the end subscriber under the TRAI Act.

Further, telecom operators contested that the regulator has not taken into account factors such as spectrum related issues, closing down of sealing of cell-sites and other factors which are beyond the control of service providers. The telcos state that such factors are significantly responsible for the call drop problems.

To add to this, telcos state that the outgo of money from such compensation will be Rs 540 billion on an annual basis. Further, in order to recover this compensation outgo, the telecom operators will have to increase tariffs.

As reported in a leading financial daily, indirect taxes increased by 34.3% during the April-November period. The spike in the collection was owing to a robust increase in the excise duty collection which grew by 67.2% during the period under consideration. This sharp surge in excise also, suggests a gradual pick-up in the economic activities. The government's additional measure for increasing the excise on petrol, diesel, clean energy cess coupled with withdrawal of exemption for motor-vehicles, capital goods and consumer durables have also contributed to the increase in the collections. To add to this, increase in the rate of service tax from 12.36% to 14% also helped in better tax collections. The higher collection of indirect tax will partially offset the likely shortfall from the direct taxes. This is also expected to help the government to maintain the targeted fiscal deficit levels.

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

According to a leading financial daily, Tata Motors' subsidiary Jaguar Land Rover has entered into an agreement with the Government of the Slovak Republic to build a new plant in the city of Nitra, western Slovakia. The company will be the first British carmaker to open a manufacturing facility in Slovakia. Reportedly, the first cars will come off the production line in late 2018. The factory will have an initial capacity of 150,000 vehicles and construction will commence in 2016. Jaguar Land Rover has made significant progress in building its international manufacturing presence over the last year. It opened a new joint venture in China and commenced construction of its local manufacturing plant in Brazil at the end of 2014. The creation of new international plants allows Jaguar Land Rover to offer its customers even more exciting new models, protect against currency fluctuations and create a globally competitive business.

As per an article in Business Standard, Comptroller and Auditor General of India (CAG) pulled up state owned Oil and Natural Gas Corporation (ONGC) for poor planning in hiring and use of drilling rigs. Reportedly, this has resulted in a loss of Rs 79.9 billion. The report stated that the firm lacked uniformity in the preparation of annual rig requirement plan and delayed rig acquisition and hiring. To add to this, the report also stated the company had an inefficient repair and refurbishment policy.

Reportedly, CAG ordered ONGC to ensure that their plans are complete and consistent with each other. To add to this, the auditor stated that the drilling activities are a key to hydrocarbon production and constitute the single most significant operation of ONGC, both financially and operationally.

According to a leading financial daily, Rourkela Steel Plant (RSP), a unit of Steel Authority of India Limited (SAIL), has set up 1 MW solar photovoltaic (PV) power generation unit inside the plant premises at a cost of Rs 66.8 million. The system, which is in the final stage of commissioning, is expected to generate minimum 1.479 million units of solar energy per annum. It is also installing other facilities for production of green energy. Reportedly, two 5 KW rooftop solar PV power generation systems have already been installed and seven more such systems are in the pipeline. RSP is also in the process of setting up a 15 MW hydro power project on the downstream of Mandira Dam in collaboration with GEDCOL. SAIL is India's largest steel producing company. The company is among the five Maharatnas of the country's Central Public Sector Enterprises.

As per a leading financial daily, ITC has acquired 87.06% equity share capital of group firm Classic Infrastructure and Development Ltd for Rs 113.8 million. The shares of the company have been acquired through Greenacre Holdings Ltd, a wholly owned subsidiary of Russell Credit Ltd which in turn is a subsidiary of ITC. CIDL is into property maintenance and management and its net worth as on March 31, 2015 and profit after tax for the full year is Rs 84.4 million and Rs 2.01 million, respectively.

In other news, the government-appointed Arvind Subramanian panel's recommendation of a steep 40% tax on tobacco products triggered a sell-off in cigarette makers. Domestic companies currently pay blended value added tax rate of 25 to 26%, plus central excise duty. Companies like VST only deals with cigarettes and ITC derives about 80% of its profits from this segment. As such, the prospects of these companies and stocks are tied closely to the regulations governing cigarettes. The share price of ITC has slumped 10% in past one week.

Infosys reported that the company will expand its operations in Ireland, doubling the number of staff in the country to 500 in three years and setting up its first product-centric research and development center outside India. This project has been supported by the Department of Jobs through IDA Ireland.

As per the reports, the expansion will see Infosys create up to 95 roles at its first dedicated product-centric research and development (R&D) center outside India, and open a second Irish facility to house up to 155 people who will provide IT services to Infosys clients. The highly skilled technology roles at the R&D facility, which will be established by EdgeVerve Systems, the product subsidiary of Infosys, will reportedly focus on FinTech research and development. The center will operate an open innovation model, working closely with customers, technology partners, academic institutions and the start-up community in areas of technology, such as block chain and analytics.

Going forward, the uncertainties over key reforms in the winter session of the parliament are likely to keep markets on the edge. The US Fed meet is scheduled in the coming week.  The rate hike by the US Fed might impact the markets negatively. However, instead of getting swayed by these short-term gyrations, investors should remain focused on the long term potential and fundamentals of companies while taking a decision to invest.

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