A Mixed Week for Global Markets

Sat, 19 Dec RoundUp

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Major global markets witnessed considerable volatility in the week gone by. The historic event of the first interest rate hike by the US Fed in about nine years pulled markets in opposite directions. While the Chinese market was the top gainer, the Brazilian market was the big loser this week.Crude oil prices fell to levels last seen in 2009 and worries about the US junk bond markets has also affected sentiment.The US market fell sharply on Friday, to end the week in the red. Trading volumes on Friday were the second highest of 2015. The Japanese market ended lower for the week due to a surprising move by the Japanese central bank to expand its stimulus measures.The US Fed's rate hike did not damage sentiment in the Indian equity markets. The key benchmark indices closed nearly 2% higher for the week.

Metal stocks were the top gainers this week. All sectoral indices ended the week in the green.

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

The Reserve Bank of India (RBI) has announced that all banks will have to follow a new uniform methodology from the next fiscal (April 1, 2016) for calculation of base rate based on the marginal cost of funds. The move is aimed at improving transparency and ensuring speedier monetary policy transmission.

As per the financial guidelines, the new lending rates, Marginal Cost of Funds-based Lending Rate (MCLR), will be computed based on banks' marginal cost of borrowing, or incremental cost of funds. Under the current system, banks fix their lending rates based on the average rate of outstanding deposits. Say for example, if a bank's cost of borrowing is 8% now but tomorrow the incremental cost of funds becomes 7.5%, the marginal cost of borrowing for the computation purpose will be 7.5%, rather than the average of the two.

As per the RBI, the MCLR will be a tenor linked internal benchmark and the actual lending rates will be determined by adding the components of spread to the MCLR. Banks will have to review and publish their MCLR of different maturities every month on a pre-announced date. Lastly, the central bank stated that marginal cost pricing of loans would help the banks become more competitive and enhance their long run value and contribution to economic growth.

As per an article in Economic Times, the government has allowed commercial coal mining by central and state utilities. This comes after the Cabinet Committee on Economic Affairs (CCEA) gave its approval for allotting coalmines to central and state PSUs for sale of coal. This move will resume the commercial mining by state corporations that were barred by the Supreme Court in September 2014.

Further, the government also approved auctioning of isolated coal and ignite blocks to companies for producing gas through underground coal gasification. The bidding for this will be held on the lines of revenue sharing auction model of coal bed methane (CBM) blocks. It is reported that the Central Mine Planning and Design Institute Ltd will be responsible for preparing bid documents, conducting the bidding process, evaluation of bids and monitoring.

The government is planning to double the power transmission capacity in southern part of the country in the next three years. For this, the government is planning to present an amended tariff policy soon to guarantee pick up in more transmission projects via bidding.

Power and Coal minister Piyush Goyal, regarding this, said that many efforts are being made to improvise the transmission sector across various parts of the country. Adding to this he stated that it is for the first time that a government has spent Rs 100 billion to set up transmission and distribution in Northeastern areas of the country.

These reforms come as power distribution companies (DISCOMs) across the country are operating on huge debts. Ironically, some of them do not even have the money to buy power. Tracking this situation, various initiatives have been taken by the government to aid this dire state of discoms. One of such is a scheme named Ujwal Discom Assurance Yojana (UDAY). Under the scheme, the government has allowed state governments, which own the discoms, to take over 75% of the debts as of September 30, 2015 over two years - 50% in 2015-16 and 25% in 2016-17.

As per a statement by the finance ministry, banks have opened 19.2 crore accounts under the government's ambitious financial inclusion scheme of Jan Dhan Yojana with deposit of more than Rs 268 billion. The ministry regarding this said that RuPay cards have been issued to 165 million customers and that two lakh accounts are opened every day. However, the statement noted that zero balance accounts in PMJDY have declined from 76% in September 2014 to 36.5% in November 2015.

Furthermore, banks have disbursed Rs 459 billion as on November 2015 under the Pradhan Mantri Mudra Yojana (PMMY). The statement stated that this has benefited 66 lakh borrowers. The government has set a target of Rs 1.22 lakh crore for loans to be given by banks to promote new entrepreneurs under this scheme.

As per an article in leading financial daily, India's merchandise exports contracted in November for the 12th straight month in a row. Indian exports fell by 24.4% YoY in November. In October, exports had contracted by 17.5% YoY. Exports were low mainly because of a weak global recovery. Further, contraction was owing to sharp fall in exports of petroleum products, engineering products, gems, jewellery.

Imports too fell sharply in the month of November. Non-oil imports fell 25%, reflecting a weak demand in the domestic economy. Rating agency, Crisil stated that the decline in exports is not merely cyclical in nature, but that there are structural reasons too.

In a recent article Vivek Kaul, Co-Editor of "The Daily Reckoning" wrote an interesting piece discussing about implications of falling crude oil prices. Further, he has also explained in-depth about the effects on India's fiscal deficits, imports and exports. Read on to know more...

The Wholesale Price Index (WPI) based deflation continued for a 13th month in a row. However, Consumer Price Index (CPI) based inflation rose to 5.41% in the month of November, highest since the new levels of series was launched in January. The CPI rose on the back of increasing food prices. The month of November witnessed a sharp rise in the prices of pulses, which were up by around 46% YoY.

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

According to a leading financial daily, Hindustan Unilever (HUL) has signed an agreement with Mosons Group to acquire its flagship brand 'Indulekha'. The deal envisages the acquisition of the trademarks 'Indulekha' and 'Vayodha', intellectual property, design and knowhow, for a consideration of Rs 3.3 billion, payable upon closing of the transaction and a deferred consideration of 10% on the domestic turnover of the brands each year, payable annually for a 5 year period commencing FY18.

The proposed acquisition is in line with the company's strategic intent to strengthen (Subscription required) its leadership position in Personal Care by providing an impetus to its play in the evolving Premium Naturals segment. The company recently reported a revenue growth of 4% YoY during the quarter, while profits declined marginally by 2% YoY (Subscription required).

German insurer ERGO is planning to raise its stake in the insurance venture with HDFC to 49% for Rs 11 billion. This would value the HDFC ERGO General Insurance Company (HDFC ERGO) at Rs 49 billion. The stake increase is at a price of Rs 90.973 per share. Post this transaction, which is subject to regulatory approvals, HDFC's stake will come down to 50.7% from 73.6% earlier.

The transaction is at 4.9 times the book value, which stands at Rs 10 billion. The company had a share capital of Rs 5.5 billion as on March 31. It had gross written premium of Rs 32 billion, underwriting business like motor, health, property and crop. During the last fiscal year, it had reported profit of Rs 1 billion.

HDFC ERGO is a general insurance joint venture between home financier HDFC and Ergo -an arm of Munich Re, the world's largest reinsurance company. The company operates out of 108 branches spread across 89 cities. HDFC is India's premier housing finance company. Its main business is to provide loans for the purchase or construction of residential houses.

Minority shareholders of Maruti Suzuki have given their approval to the company's parent entity Suzuki to invest and run its third plant in Gujarat. There is an agreement for contract manufacturing between Maruti and Suzuki wherein the latter will manufacture cars at Gujarat plant and sell it to Maruti at no-profit-no-loss basis. Afterwards it will be Maruti, which will be selling the car to the dealers or end-consumers.

Reportedly, related party transaction needs approval of minority shareholders and hence the proposal was put to vote. Reportedly, Life Insurance Corporation (LIC), which owns 5% in the company, is said to have voted in favour of the resolution. The Gujarat plant is critical as well as crucial to the company's target of achieving sales of two million cars by 2020.

As per an article in leading financial daily, National Thermal Power Corporation (NTPC) has received environmental clearance for one of its project in Telangana. The company has received the clearance for its thermal power plant of 1,600 MW. The company is also looking to set up another 4,000 MW thermal plant in Telangana.

The project requires an investment of Rs 8.34 billion for environmental protection measures. The coal requirement for the projects will be met through the Mandakini-B coalmine in Odisha.

Tanushree Banerjee (Research Analyst), Managing Editor of "StockSelect", recently released a detailed research report on National Thermal Power Corporation (Subscription required). In the note, Tanushree explains the current scenario of the power sector and how things can turn around provided the new reforms be implemented effectively. Further, she also explains how NTPC will be the biggest beneficiary once the sector revives. If you are interested in the stock, then this is a must read!

As per an article in leading financial daily, Mahindra group has entered into agreement to buy Italian car designer Pininfarina SpA. The acquisition will help the company to boost its design and styling capabilities.

Mahindra and Mahindra and Tech Mahindra through a Special Purpose Vehicle (SPV) will buy a 76.06% stake in the Italian car designer. Further, the company will also make an open offer to the shareholders of Pininfarina for acquiring the balance stake of 23.94%. In addition, company will also make a right issue to infuse a sum of Euro 20 million into Pininfarina. The cost of acquisition will be funded by Mahindra and Tech Mahindra in the ratio of 40% and 60% respectively. Pininfarina has designed cars for Ferrari, Maserati, Rolls-Royce and Cadillac.

With the US Fed rate hike behind it, the markets will look towards the upcoming results season next month for direction. The progress of key reform bills in the ongoing session of parliament will also be tracked. However, investors should avoid being carried away by short-term events and focus on picking stocks with sound long-tem fundamentals.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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