Global markets jittery before US Fed meet

Sat, 14 Dec RoundUp

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Barring Japan, all major global indices ended the week in the red with the markets in China leading the losses. The possibility of the US fed announcing the tapering of its Quantitative Easing (QE) policy, kept markets on tenterhooks. The US fed's open market committee will meet on the 17-18th December and global markets are expecting a decision to be taken in this regard. The US markets were down 1.7% for the week.

The nervous sentiment was witnessed across European markets as well, with the IMF warning that the European sovereign debt problems could flare up again. Markets across UK, Germany and France were all down between 1.7% and 1.8%. Markets in China were also not spared the selling pressure this week. The Shanghai Composite gave up all the gains of last week to end down 1.8%. The Hang Seng index in Hong Kong was down 2.1%.

Source: Yahoo Finance

The nervousness in Indian markets witnessed this week was due to a combination of factors. The worries about the fed announcing the tapering of its quantitative easing (QE) program this month, the dismal IIP numbers and the possibility of the RBI hiking interest rates in its mid-quarter policy next week all weighed on the markets. Most of the sectoral indices ended the week in the red with respite coming from only Software (up 1.5%) and FMCG (up 0.6%).

Source: BSE

Now let us discuss some of the economic developments of the week gone by.

The government has waived off ultra mega power projects (UMPPs) from the provisions of the Forest Act 1980 to expedite major capital investments in the country. As per the provisions of the Forest Act, project developers are required to identify non-forest land for afforestation as compensation. As per the new provisions, the developer of UMMP's will be required to pay for the afforestation initiative whereas the non-forestland will be identified by the host state government. The Cabinet Committee on Infrastructure has granted 'central government status' to UMMP's for the purpose of forestland acquisition. This decision is likely to benefit all companies that are currently executing UMMP's as well as future developers of such projects.

The department of telecommunications (DoT) has issued the main document-notice inviting application (NIA)-to start spectrum auction from 23 January. The award of spectrum in 1800MHz and 900MHz band shall be conducted as a single process. The last date for submission of applications by interested companies is January 4. DoT will hold a pre-bid conference on 20 December and last date for companies to seek clarifications on rules stated in NIA is 28 December. According to the initial proposal, DoT had sought 60 days time to start auction from the date cabinet decides on the spectrum base price and the NIA was to be issued after 15 days of the decision. The DoT has, however, issued NIA within three days of cabinet putting its stamp on minimum price for two sets of 2G spectrum-1800 MHz band and 900 MHz Together, the 900 MHz and 1800 MHz band airwaves are valued at about Rs.486.8 bn.

The consumer price inflation (CPI) and index of industrial production (IIP) numbers were announced on Thursday. Both numbers were disappointing. The CPI increased to an all time high of 11.24% for the month of November 2013 while the October IIP contracted by 1.8%. The inflation numbers have raised expectations of a rate hike by the Reserve Bank of India RBI at its policy meet next week. The increase in the CPI was largely due to an astounding rise of 61.6% in vegetable prices.

The Central Electricity Regulatory Commission (CERC) announced the draft norms on tariffs for the power sector which will be applicable between FY15 and FY19. These norms significantly tighten operating norms for power producing and transmission companies across the board. With the regulator proposing to tighten operating norms, the going may become tough for state-owned generators and transmission companies. The new regulations propose shifting of incentives to the company's plant load factor (PLF) from plant available factor (PAF). While the private generators have been given the permission to raise tariffs, this would cap state run NTPC's returns as it would suffer if the badly managed state electricity boards do not draw power.

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

India's largest two-wheeler maker Hero MotoCorp is set to acquire 60% stake (i.e. 17.49 lakh shares) in joint-venture (JV) with Italian firm Magneti Marelli. The premise for the joint venture is to sell, distribute and market complete two wheeler fuel injection systems or component parts amongst others. Hero MotoCorp and Magneti Marelli have already announced plans to invest USD 27 mn in the JV over the next 10 years. They are also targeting sales of around USD 100 mn in the 5 years. The partners would invest USD 8.5 mn in the ratio of 60:40 over a period of 3 years. The Italian firm Magneti Marelli designs and produces advanced systems and components for automotive industry and registered a turnover of Rs 5.8 bn Euros in 2012. Back home, Hero MotoCorp reported a growth of 10% YoY and 9% YoY in revenues and net profits respectively during 2QFY14. The management also intends to introduce 7 new products every year which will be a combination of completely new products, refreshing existing products and launching new variants going forward.

Coal India Ltd (CIL) is expected to earn additional revenues to the tune of Rs 21.2 bn in FY14 from revision in coal prices, as per Minister of State for Coal. In May 2014, CIL revised the prices of all grades of non-coking coal barring G1, G2 and G5 for all its eight subsidiaries. CIL is the largest coal producer with over 80% market share. However, in another development the Competition Commission of India has imposed a penalty of Rs 17.7 bn on CIL and its subsidiaries for following unfair trade practices in Fuel Supply Agreements with power producers.

India's largest Telecom firm Bharti Airtel is looking to leverage the fiber optic cable network of Reliance Jio after the recently announced tie-up between the two companies. Bharti has indentified high speed data services as the growth driver for the company. Using the fiber optic network of Reliance Jio for these services would certainly benefit the company to keep operating costs in check. Currently only 10% of Bharti's telecom towers are connected by fiber optic cables. The company would use Reliance Jio network in all the areas where it exists and would not create its own at those locations.

Oil and Natural Gas Corporation (ONGC) Chairman and Managing Director Mr. Sudhir Vasudeva has stated that the net price realizations on the sale of crude oil have been declining due to subsidy discounts on crude oil to oil marketing companies and have almost fallen to the cost of oil production. The management has stated that ONGC needs a minimum realization of US$ 65 per barrel to keep investing in oil and gas hunt. As against a cost of production of US$ 40 per barrel of oil (without considering return on investment), ONGC's net price realizations on crude stood at US$ 40.17 per barrel and US$ 44.84 per barrel in the first and second quarters respectively of the current fiscal year (FY14). The management has stated that this leaves the company with small margin and hardly any investible surplus. Since most of its production is from mature and ageing fields that need huge capital to raise output, a lot of development plans have become unviable at the current pricing. Since 2004, ONGC has paid around Rs 2,428 bn in fuel subsidy, but for which its net profit would have been higher by Rs 1,403 bn. As per the management, this amount is enough to buy properties producing 10-15 million tonnes of oil per annum (mtpa). The management has further said that if the trend continues, entire oil production from nominated blocks (more than 80% of ONGC's production) will become unprofitable.

The government has fixed the issue price for the sale of Power Grid Corporation of India's (PGCIL) shares at Rs 90 apiece, the upper end of the band. The price band for the FPO was Rs 85-90 apiece. The offer is expected to fetch about Rs 70 bn crore. The follow-on public offer (FPO) of the company last week witnessed bids for 530 crore shares, or 6.74 times the 78.7 crore shares on offer. As per the company's filing to the BSE, retail investors and eligible employees will get a discount of Rs 4.50 a share on the issue price. The Cabinet had approved the FPO last month. The offer comprised 13% fresh equity by the company and 4 % stake sale by the central government. The government will get about Rs 16 bn from selling 18.51 crore shares, while the company will raise around Rs 54 bn from its offer of 60.18 crore new shares. After the issue, the government's holding in the company will come down to 57.89 % from the present level of 69.42 %. The retail portion of the FPO, which closed on December 6, was subscribed 2.17 times. Qualified institutional buyers (QIBs) bid for 9.09 times the shares reserved for them and non-institutional buyers bid for 9.7 times the shares they were offered.

Going forward, important local and global events like the RBI's policy meet on the 18th December and the US Federal Reserve open market committee's (FOMC) meet on 17-18th December respectively will influence investor's mood in the short term. However investors should not get swayed by short term considerations. Sticking to fundamentally sound companies should always be the main criteria while investing in the stock market.