28 May 2015

Strong corporate news

Ultratech’s strong balance sheet is allowing the company to benefit from industry consolidation. It is contemplating the acquisition of JP Associate’s Bhilar plant at a cost of some $300mil. Nestle has had to recall 200,000 packets of Maggi instant noodles in Uttar Pradesh due to excessive levels of lead and certain food additives. Infosys will open its first overseas development centre outside India in China with an investment of $120mil to create 4,500 positions to exploit the Chinese market. The company will generate 100% of its power demand from renewable by 2018. HCL Tech is forecasting an operating margin of 22%, with sales growth sustained from Infrastructure services and increased cloud-based services.

27 May 2015

Record level of foreign reserves

While Mrs.Yellen continued to prep the bond markets for the end of six years of negligible interest rates, the governor of the RBI was emphasising how India was in a strong position to withstand the effects of another 'taper tantrum'. Commenting as the RBI announced another record level of foreign reserves at $354bn, Mr. Rajan emphasised the favourable macroeconomic environment in India, with benign inflation as well as steady external and fiscal balances, a strong reserve position and a positive growth outlook. The governor also warned about 'competitive monetary easing', the combination of lower interest rates and fiscal incentives may boost investment. Yet sustained growth depends on consumer demand. To further boost reserves, the government has relaxed the rules on FDI from NRIs and all overseas Indians. It is also considering abolishing the compulsory need for advance RBI approval of FDI proposals.

Reform, swift reform

The final Indian fiscal deficit for FY15 turned out to be 4% of GDP, even lower than the revised Budget estimate. Meanwhile, the Labour and Employment Minister said that he is trying to move labour reforms by negotiation with the unions rather than by trying to legislate for contentious reforms in parliament. Addressing concerns that the government’s reform agenda is not progressing swift enough, he is telling unions that rapid employment creation depends on reform.

26 May 2015

Mixed bag of results

We had a mixed bag of three results last week. Torrent Pharma reported a 6% decline in sales and a 46% drop in profits in the fourth quarter; the slowdown in USFDA approvals affected its US market volumes and margins. Bajaj Auto reported a 3.9% drop in sales and an 18.5% drop in profits; the company is guiding for a strong recovery this year. Pidilite reported sales growth of 4.2% and profits growth of 10.3%; retail sales were strong but a slowdown in industrial sales growth took the shine off margin expansion.

25 May 2015

MSCI weights India up

MSCI will increase India’s weighting in its MSCI Emerging Markets Index by 0.5% from the end of the month. Within its India country index, it will add Lupin at the same time, generating an extra $300mil of demand for the company’s stock as a result. The BSE also announced that it will add Lupin to the Sensex Index at the end of the month, further adding to demand; the company is already a Nifty constituent. Tata Power will be dropped from the Sensex.
After disappointing fourth quarter results, the market is looking to official GDP numbers this week as a prelude to June’s monetary policy review.

It was a good week

Markets broadly had a good week last week, the highlight being a speech by Fed Chairman Yellen, in which she foresaw the Fed funds rate increasing this year. This is predicated on economic headwinds continuing to abate and is intended to stave off overheating but is not to be seen as the start of a programme of sustained increases, unless justified by strong data. Indian markets enjoyed another positive week, the Nifty advancing 197 points to close 2.4% up at 8459, after trading in a range of 2.8%. Domestic institutions were the driving force again, buying a net $248mil as FIIs continued to sell a net $34mil of cash equities. Volatility subsided on the upward momentum, the India VIX trading down from the opening of 20, hitting 14 before recovering to close at 17. Market breadth was strong, with advances outrunning declines by three to one. The IT sector was strong, contributing 53 points of the Nifty’s gain and the HDFC counters added 42 points between them. Nifty futures were quiet as the three month contract approached the monthly roll at a premium of just sixty basis points.

21 May 2015

Land Acquisition Bills, progress expected

The extended Budget session of parliament failed to bring the expected approvals of the GST and Land Acquisition Bills. The GST Bill has been referred to a select committee of the upper house with the prospect of approval in the next, monsoon session. The government remains determined to meet the April 1, 2016 implementation date. The Land Acquisition Bill, a significant 'unblocking' reform to boost investment, will be taken up by a joint committee of both houses.

20 May 2015

Corporate news from India

Lupin presented disappointing results this week, with flat sales and a slight drop in profits. A slowdown in USFDA approvals frustrated growth in the US and sales in Japan were also sluggish. Lupin’s backlog of ANDA applications in the US is strong and approvals have picked up this quarter. The company announced the acquisition of Medquimica Industria Farmaceutica in Brazil, to strengthen its advance into Latin America. Balkrishna Industries reported a decline in sales of 14% due to exchange rate adjustments but improved margins brought constant profits, a positive surprise. Nestle India reported sales ahead by 8.4%, substantially boosted by exports of dairy products to Bangladesh and the Middle East. The company’s focus on higher margin products allowed it to boost profits by 23.6%.

19 May 2015

Markets calmed down

Global bond markets calmed down a bit after a fractious period but seem nonetheless to be preparing for a bit of a tantrum if US rates are pushed up by the Fed. Although the event is likely to cause exaggerated liquidity swings in equity markets, economic conditions in India should provide comfort to committed investors. The latest inflation data confirm a benign environment. CPI in April was 4.9% helped by soft food prices in spite of Rabi crops being affected by unseasonal rain and hail in parts of Northern India. The wheat harvest is likely to be 5 million tonnes less than last year as a consequence but supply-side action by the government seems to have prevented a new squeeze on food prices. 

18 May 2015

Broad-based disinflation

WPI in April was negative 2.7%, the sixth month of broad-based disinflation. The Index of Industrial Production (IIP) rose by just 2.1% in March, compared to 5% in February. Overall, the IIP for the fiscal year ended in March rose by 2.9%, a modest number but a marked improvement on the decline of 0.1% the previous year. Against this background, there is broad expectation of a further cut in the repo rate at the beginning of June, the next monetary policy review. Even in the face of temperamental global liquidity swings, with its external and fiscal balances in better shape, Indian markets should be able to withstand the pressure.

17 May 2015

Not overheating by any means

In the US this week, the S%P closed at a record high, after the long bond retreated from a spike in yield as more data suggested the economy is not overheating by any means. Nonetheless the market seems to be steeling itself for the 'apocalypse' of a twenty-five basis point hike in interest rates in June. Meanwhile, the heat continues to come out of Indian economic data giving the Nifty the opportunity to advance for the second week running, adding 70 points to close 0.9% up at 8262, after trading in a range of 2.9%. FII selling continued as they offloaded a net $203mil in cash equities, yet domestic institutions were bullish, buying a net $346mil. Volatility stayed at its recent higher level, the India VIX closing up a point at 20, after hitting a high of 22 mid-week. Market breadth was fair with advances ahead of declines by three to two but there was some concentration on the upside, as three Financials contributed sixty-five of the total points advance for the week. Index futures were not very exciting, the three months contract closed at a premium of somewhat less than 1%.
Monetary policy expectations, in the US and India are likely to frame market movements for a few weeks

14 May 2015

Positive tax Dutch/India tax situation

Aberdeen Asset Management challenged an MAT assessment of $50,000 in the Bombay High Court and was given a stay of execution while the Court examines the case. Aberdeen pursued the case on this relatively small assessment, against a global emerging markets fund as a matter of principle. The outcome suggests that FIIs seeking relief will receive a fair hearing. In our case, it has already been clarified that the highly favourable Dutch/India double taxation avoidance treaty will be upheld.

13 May 2015

Positive corporte news

Bajaj Auto sales were 1% up on the previous year in April but motorcycle sales were 5% down in the face of intense competition and soft demand. Torrent Pharma signed a definitive agreement for the buyout of Zyg Pharmaceuticals from Encore Group for an undisclosed sum. The industry has seen thirteen USFDA approvals in April, an unusually high number; Torrent and Lupin have both benefitted.

12 May 2015

Modest earning reports Q4

Fourth quarter earnings reports are still quite modest; out of thirty-one of the top hundred having reported, positive surprises are equal to negative. The IT sector brought the most negative surprises so far, Industrials the most positive. Amongst our interests, we have had three reports in the Financial Sector this week. Kotak Mahindra Bank pleased with a 13.3% advance in net interest income (NII) and a 37.6% gain in profits. The bank announced a one for one bonus issue for shareholders. South Indian Bank disappointed with a 5% fall in NII and an 87% drop in profits, as the new management wrestled with getting asset quality under control. We hold a small long-term position in the expectation of a turnaround by the new management. Magma Fincorp reported its first earnings after the latest round of funding from US private equity investors. NII advanced by 20.8% in the fourth quarter of FY15 and profits advanced by 49.9%; the announcement came after the market closed on Friday.

Unexpected strong interest from #russia

The last few weeks the Dutch listed investment fund Himalayan Fund NV has seen a strong rise of interest in the fund by Russian investors. Especially online requests for information on the fund have been growing strongly. Chairman of Himalayan Fund NV mr. Ian McEvatt: “Himalayan Fund invests in listed Indian equities. We have done so successfully over the last 25 years and we know that many Russian investors look at the rise in value at the Mumbai stock exchange with a keen eye. Via Himalayan Fund you can invest in this booming market in a secure way.”

11 May 2015

Improvement in sentiment

A big reason for the improvement in sentiment last week was the legislative progress of the Constitutional Amendment Bill for the introduction of GST. At the start of the week it was struggling for support even as the government was determined that it should pass both houses by the end of the Budget session of parliament at the end of the week. The Bill passed the Lokh Sabha on Wednesday and was tabled in the Rajya Sabha; here the government lacks a decisive majority and duly encountered stiff opposition. The opposition wants the Bill passed to a scrutiny committee for further examination, which would cause a delay which might jeopardize the target implementation date of April 1st 2016. In the event, the government has extended the Budget session by three days to ensure passage. The fact that the measure now has the support of most states’ finance departments suggests a good chance that this key reform measure will pass next week. The prospective boost to GDP from this reform may well be the catalyst for the next market move.

Catalyst for upward movement

FIIs were again net sellers, unloading $589mil as domestic institutions bough a net $587mil on average daily trading volumes of $3.3bn. Volatility rose, the India VIX trading up to 20 from last week’s close before settling back to a two point advance on the week at 19. Market breadth ended with advances just ahead of declines and little in the way of major concentrations. The new three month Nifty futures contract closed at a premium of just over 1% as investors sought a catalyst for a sustained upward movement.

10 May 2015

Very volatile market conditions

The price of oil reached $68 a barrel this week, its highest level since bottoming out at $45 a barrel. Government bond yields in major developed markets moved sharply upwards as expectations of a hike in US interest rates in June hardened. The same sensitivity saw sustained hot money outflows from emerging markets. India has seen three successive weeks of market declines and looked set for a fourth, when a sharp turn in sentiment on Friday drove the Nifty to a ten-point gain on the week, closing marginally ahead at 8192 after trading in a range of 4.5%.

8 May 2015

Essar Steel, Bajaj Auto, Torrent Pharma

HDFC Bank has sold its entire $100mil credit exposure to Essar Steel to an asset reconstruction company. After experiencing soft market demand and loss of market share, Bajaj Auto plans to boost sales by 35% in the current fiscal year with the introduction of five new more high-powered models. Torrent Pharma has received USFDA approval to market its generic Aripiprazole formulation in multiples strengths and dosages. This is an anti-psychotic formulation for dealing with Schizophrenia and bi-polar disorder.

7 May 2015

More liberal labour market in India

The government is pursing labour reform by amending rules to permit companies with up to 300 employees to implement layoffs without first getting permission; restricting the activities of external unions and scrapping tribunals. The GST amendment bill will be introduced a week later than expected as the government continues negotiations to ensure passage through parliament.

6 May 2015

Minimum Alternative Tax, the latest

The Central Board of Direct Taxes has agreed to settle all Minimum Alternative Tax (MAT) claims from FIIs under Double Taxation Avoidance Treaties (DTAs) within one month. It has been further clarified now that DTAs which preclude India from charging tax on long-term capital gains will be upheld; this group includes Mauritius, Singapore and The Netherlands. DTAs that allow taxation of long-term capital gains will be the subject of protracted negotiations and possible litigation; these include the US, the UK and Luxembourg. It was also clarified the private equity investment will be subject to long-term capital gains.

5 May 2015


Foreign Direct Investment increased by 63% year on year in February, to $3.3bn. Perhaps responding to PM Modi’s urging to '#makeinindia', FDI in Manufacturing surged by 45% in the second half of FY15. The government has raised the FDI limit in the Pensions Sector to 49% to align it with the Insurance Sector.

4 May 2015

Q4FY15 earnings season surprises

The Q4FY15 earnings season has opened with six positive and six negative surprises out of fifteen announcements so far. In the IT sector, three out of four companies reporting so far underperformed expectations. Our interests this week were encouraging, with ICICI Bank reporting net interest income ahead by 16.6% and profits up by 10%. Credit quality improved and the bank gave added cheer by disclosing an estimate of the embedded value of its ICICI Prudential insurance joint venture, which adds about twenty Rupees a share overall. Axis Bank also reported excellent results, with NII ahead by 20% and profits by 18.4%; credit quality was also better here. Ultratech Cement reported sales ahead by 4%, though profits were down by 24%; sales volumes were good in difficult circumstances but margins were affected by a sharp increase in wage costs.

3 May 2015

The market; volatile, nervous

Another holiday-shortened week saw markets unnerved by a US FOMC statement. A statement that removed any reference to timing for a hike in US interest rates, leaving it open to economic data. Then we had a soft first quarter GDP number and weak employment numbers, though these were accompanied by some evidence of rising wage rates. In India, heavy FII selling weighed on the market as nervousness about the MAT threat rumbled on. The Nifty shed 123 points to close 1.5% down at 8182 after trading in a range of 2.3%. Foreign investors sold a net $632mil in cash equities, while domestic institutions picked up a net $650mil. Selling was broad-based except for two banks on the buy side which added 54 points to the Nifty. Volatility slipped back again as the India VIX traded up slightly at first, only to subside again to close three points down on the week at 16. The new three month Nifty futures contract closed at a premium of just 1.2% to cash.

1 May 2015

Monsoon looks good

The monsoon season is approaching and the first forecasts have been issued but they are dependant on varying views on the potential impact of an El Nino effect. The Indian Meteorological Department is forecasting aggregate rainfall of 93% of the long-period average. Skymet, an independent forecasting agency, on the other hand, is forecasting 102% of the LPA, with a margin of error of 4% either side. Meanwhile, average all-Indian rainfall in the six weeks after March 1st, has been 96.6mm, more than twice the historic average. This has mainly affected wheat harvest and mango production.