FIPB clears Vodafone, Tesco proposals

The Foreign Investment Promotion Board (FIPB) on Monday cleared Vodafone Plc’s proposal to hike stake in its Indian subsidiary and approved Tesco’s proposal to pick up stake in Trent ’s hypermarket subsidiary.

In a deal valued at Rs 10,141 crore, Vodafone Plc was looking to buy out the remaining stake in Vodafone India it does not already own. The London-listed company owns 64.38 percent in Vodafone India directly, and another 20.12 percent indirectly via stakes in other companies.

While UK-based retailer Tesco Plc had proposed to enter the Indian multi-brand retail segment in joint venture with a Tata Group company with an initial investment of USD 110 million (about Rs 682 crore). After the approval, Tesco will pick up a 50 percent stake in Trent Hypermarket Ltd, a wholly-owned subsidiary of Trent Ltd , a Tata group company.

Vodafone first deal since 100 percent FDI allowed

Vodafone’s proposal to own its entire local subsidiary would become the first since the government this year allowed 100 percent FDI in the telecom sector.

The deal assumes even more significance in the backdrop of a USD 2 billion, or over Rs 12,000-crore, tax case the telecom company has fought with the country’s tax department.

“It will give a fillip to investments that India is looking for,” Anuradha Dutt, counsel for Vodafone India in the tax case, said. “Vodafone has always maintained that it has a lot of confidence in the Indian economy.”

“This is a positive signal because Vodafone has probably been the one that has been most directly hit by the changes in government policy. Despite all the problems it has been going through with the government, it is still willing to up its holding in Vodafone India,” telecom analyst Kunal Bajaj said.

Vodafone buying 100 percent in its subsidiary would give it greater flexibility to take important business decisions, Mohammad Chowdhury, Executive Director and Leader, Telecom Sector, PriceWaterhouseCoopers, said.  “It gives the company more options with respect to how to chart out its strategy for the next few years in India which is very important, because with spectrum auctions, elections and M&A guidelines finalization coming up, there are several moves that the big players such as Vodafone may want to take.”

Tesco first foreign multi-brand retail chain

Tesco is the first global retailer to apply for multi-brand retailing after the government allowed 51 percent FDI in the segment in September last year.

The jinx has been broken,” said Amnish Aggarwal of Prabhudas Lilladher, referring to the lack of interest from global retailers after the government’s announcement. “Practically, every hypermarket player in India is in need of capital. This deal opens up the entire space for M&A.”

Trent Hypermarket runs 16 outlets, under the Star Bazaar chain, in the southern and western regions with support from Tesco.

The FIPB, headed by Economic Affairs Secretary Arvind Mayaram, considered 12 items including Tesco’s FDI proposal.

Trent stock price

On December 31, 2013, at 11:54 hrs Trent was quoting at Rs 1287.20, up Rs 29.45, or 2.34 percent. The 52-week high of the share was Rs 1345.00 and the 52-week low was Rs 902.00.

The company’s trailing 12-month (TTM) EPS was at Rs 22.10 per share as per the quarter ended September 2013. The stock’s price-to-earnings (P/E) ratio was 58.24. The latest book value of the company is Rs 461.02 per share. At current value, the price-to-book value of the company is 2.79.

Nifty may move 300-pt either way in next 3-4 weeks: JM Fin

Technical analyst Gautam Shah, senior VP at JM Financial says the market looks critically placed at this point in time. He has turned cautious on the market from his earlier bullish stance. He says the market is witnessing selling pressures at higher levels.

He sees the first important support below 6250, after which he says 6170 becomes a key level for the Nifty. He thinks the index could break below 6170 in January. “A close below 6170 would set Nifty up for a 5 percent decline at least,” he told CNBC-TV18 in an interview. A bullish stance can’t be taken until the Nifty crosses 6350, he says. However, he adds there are no immediate signs of weakness yet, though the price action in the Nifty has been lackluster.

“The Nifty is setting up for 300 point move either way in the next 3-4 weeks,” he says.

He continues to advise investors to adopt a stock-specific approach.

US stocks, bond yields rise on Fed taper expectations

US  equities and the dollar rose against the yen in holiday-thinned trading on Thursday, while Treasuries prices fell after strong economic data added to evidence of a recovering labor market that could free the Federal Reserve to continue withdrawing its stimulus.

The number of Americans filing new claims for unemployment benefits fell last week to the lowest level in nearly a month, a hopeful sign for the labor market. Initial claims for state unemployment benefits decreased 42,000 to a seasonally adjusted 338,000, the Labor Department said.

“We will be able to muster stronger job growth in 2014,” said Ryan Sweet, an economist at Moody’s Analytics in West Chester, Pennsylvania.

Citing an improving labor market, the Federal Reserve this month said it would reduce its monthly USD 85 billion bond buying program by USD 10 billion starting in January.

The dollar rose to a five-year high against the yen on expectations the Fed will continue to withdraw its stimulus, while the Bank of Japan may ease further. The greenback rose as high as 104.84 yen, according to Reuters data, surpassing last week’s high of 104.63 yen. It last stood at 104.73 yen, up 0.4 percent.

The Dow Jones industrial average was up 91.26 points, or 0.56 percent, at 16,448.81. The Standard & Poor’s 500 Index was up 6.92 points, or 0.38 percent, at 1,840.24. The Nasdaq Composite Index was up 11.87 points, or 0.29 percent, at 4,167.28.

The advance put the Dow on track for its longest winning streak since March. Both the Dow and the S&P 500 closed at record highs on Tuesday.

US  benchmark Treasuries yields edged up to just below their two-year high of 3 percent in light trading as most investors stayed out of the market after the Christmas holiday. The US  bond market reopened after being closed on Wednesday, while major European markets stayed shut, keeping volume well below average.

The 10-year US  Treasury note was down 2/32 in price, its yield at 2.9905 percent.

A further rise in bond yields would push up long-term borrowing costs, taking steam out of the economic recovery – similar to what happened this past summer, analysts said.

“Other markets will take notice if we establish a foothold above 3 percent,” said Rob Zukowski, senior technical analyst at 4Cast Ltd in New York.

The rise in yields this year has hurt the Treasuries market, which is on course for its second worst year since 1996, according to data from Bank of America Merrill Lynch.

Earlier, Tokyo’s Nikkei share average climbed to a more than six-year high, driven by buying from retail investors. It is up 55.6 percent this year, on track for its best annual performance since 1972, driven by Japan’s aggressive fiscal and monetary stimulus.

In other markets, Brent oil was little changed as French workers extended a strike at two refineries, which limited demand, while US  oil prices rose in choppy trade, underpinned by the positive US  jobs data.

Gold gained nearly 1 percent in thin trade but was still set for its biggest annual loss in three decades.

Food prices; a bricks and mortar problem for Indian economy

Three months since journeying more than 700 miles (1,130 kms)from his village in Chhattisgarh to take a job in this bustling city near the capital, New Delhi, Charan is already looking forward to a 10 percent pay rise. He isn’t an engineer or programmer. He hauls bricks and sand at a local construction site for less than USD100 a month.

India’s biggest cities face a worsening shortage of migrant manual labourers like 26-year-old Charan, who goes by only one name. While India has long suffered from a dearth of workers with vocational skills like plumbers and electricians, efforts to alleviate poverty in poor, rural areas have helped stifle what was once a flood of cheap, unskilled labour from India’s poorest states.

Struggling to cope with soaring food prices, this dwindling supply of migrant workers are demanding – and increasingly getting – rapid increases in pay and benefits.

“After paying for food we are left with almost nothing. We need a wage hike,” said Charan, who sends a part of whatever he and his wife, who works at the same site, manage to save to their parents back home in Chhattisgarh.

If their employer refuses to give them an adequate raise, they are confident they’ll find better-paying jobs at one of the hundreds of other sites dotted around Gurgaon.

Such gains by migrants and the rural poor don’t come without a cost to the rest of the country.

More than pressuring corporate profits, these rapid blue-collar wage increases threaten efforts to quell inflation by new Reserve Bank of India (RBI) chief, Raghuram Rajan, the former International Monetary Fund economist who took over as governor at the RBI in September. Rajan has made price stability a policy priority, calling it a prerequisite for reviving economic growth that has slipped to 5 percent a year, the lowest in a decade.

Despite little evidence that interest rates can control food prices, Rajan has raised rates twice since taking over to prevent food-price inflation from spilling over into the wider economy. He has warned of another hike next month if prices don’t cool significantly.

“India has become a high-cost economy,” said Devendra Kumar Pant, chief economist at India Ratings & Research. “Persistently high inflation is a recipe for disaster.”

Take onions, which figure in almost every Indian meal. Prices for onions shot up 190 percent to USD 1.60 a kilogram in the past year, making them more expensive in India than in the United States, where incomes are roughly 35 times higher. That helped push vegetable prices up 95 percent in the past year and pushed India’s headline inflation rate in November to 7.5 percent, a 14-month high.

And while vegetable prices are expected to start easing next month following a bumper harvest, subsidised government purchases of grains and rising farming costs mean overall food inflation is not likely to slow down much.

RURAL PROGRAMMES

Farming costs are also being driven higher by a government-run, rural employment guarantee programme that uses public works projects to provide at least 100 days of guaranteed wage employment each financial year to each rural household with adult members willing to work on irrigation, reforestation, soil conservation and road construction.

Since its rollout in 2006, the programme has helped boost livelihoods on poor Indian farms. In the largely rural Andhra Pradesh, according to one study, the programme has enabled households to boost spending by a tenth, and raise spending on items other than food by almost a quarter.

Rural wage increases have jumped, from 2.7 percent a year before the programme to 9.7 percent after its passage. Since 2009, nominal agricultural wages have climbed by more than a fifth a year, with non-farm rural wages up almost 17 percent.

Adding to wage inflation is a pickup in economic activity and job creation in laggard states of central and eastern India, which in the past used to be the main source of migrant labour.

Improved law and order and greater focus on development have helped boost growth in poorer states such as northeastern Bihar, whose economy has been growing by roughly 11 percent a year since 2006

While that’s not enough to reverse India’s broader economic slowdown, migration of workers has dramatically slowed down.

With jobs and wages rising so fast at home, big cities offer less of a lure to rural workers. Bihar estimates that immigration of unskilled workers last year dropped by two-fifths. That’s shutting down an important source of workers for industries that have come to rely on them, particularly the construction sector that accounts for 8 percent of India’s GDP.

“Wages in states like Bihar are more or less comparable to those in Delhi,” said Ram Kumar, a contractor who supplies workers to different construction projects around Gurgaon. “But the cost of living is much cheaper than Delhi. So there’s not much to gain from coming to big cities.”

Govt bond prices likely to remain rangebound: Dhawal Dalal

Dhawal Dalal, DSP Blackrock said, “Government bond prices are likely to remain range-bound in the near term amid supply pressure and fragile sentiment. Although benchmark government bond yields look attractive from relative value perspective, lack of interest among market participants has created a pocket of nervousness. We see value at these levels.”

“We expect new 10-year government bond to trade between 8.85-8.95 percent in near term and the spread between old and new 10-year to narrow gradually,” he added.

Expect margins to rise to 13% in FY15: Havells

Anil Rai Gupta, Joint Managing Director, Havells India , believes the Indian economy is bottoming out and a turnaround in sentiment should increase demand for its products.

About 25 percent of the company’s business comes from the industrial segment, which tends to be an early indicator of the economy, he told CNBC-TV18 in an interview. “That segment had started de-growing at the start of the year and has now inched up to 10 percent growth. We believe this will be followed by a revival in the consumer business, which is 75 percent of our business.”

“Our company-level net profit margins had slowed down to 10 odd percent. We expect them to increase to 13-13.5 percent by next year,” he said.

When asked about analysts’ concerns over sluggish growth at its 2007 acquisition, Sylvania, Rai said the company had turned profitable and even as the economic situation in Europe remained challenging, he expected 5-6 percent profits at the operating level going forward.

Havells India stock price

On December 26, 2013, at 11:54 hrs Havells India was quoting at Rs 797.00, up Rs 15.40, or 1.97 percent. The 52-week high of the share was Rs 817.00 and the 52-week low was Rs 556.80.

The company’s trailing 12-month (TTM) EPS was at Rs 34.03 per share as per the quarter ended September 2013. The stock’s price-to-earnings (P/E) ratio was 23.42. The latest book value of the company is Rs 149.83 per share. At current value, the price-to-book value of the company is 5.32.

China cabinet report sees 2013 economic growth at 7.6%

China’s economic growth is likely to come in at 7.6 percent this year, according to a cabinet report cited by the official Xinhua news agency, just above the government’s target of 7.5 percent and slightly below last year’s 7.7 percent.

Xu Shaoshi, head of China’s top economic planning body, told lawmakers in a briefing on the report uncertainties remain in the global economic recovery, and the international market has failed to produce strong demand, Xinhua said late on Wednesday.

Domestically, higher labour and environmental costs for enterprises pose challenges, he added.

“We cannot deny a downward pressure on economic growth,” Xinhua quoted Xu as saying. Xu is head of the National Development and Reform Commission.

The forecast is in line with analysts’ predictions of around 7.6-7.7 percent in 2013, but still puts China’s growth near the weakest pace since the Asian 1997-98 financial crisis.

Stability rather than fast growth remains the watchword as President Xi Jinping and Premier Li Keqiang seek to push through sweeping plans to restructure China’s economy so it is driven by consumption and services rather than exports and investment.

Economic data for November showed sustained momentum from a mid-year pick-up into the final quarter, indicating the economy was on track to reach this year’s official growth target.

Sources at top government think tanks told Reuters this week that for 2014, China will likely use the same 7.5 percent growth target it set for this year.

The cabinet report also said that China will further enhance interest-rate flexibility and coordination on using various policies, including for fiscal, monetary, industrial, land use and environmental ones, Xinhua said.

The government will carefully deal with the issue of local government debt while ensuring reasonable needs for liquidity, the report said.

Official figures for fourth-quarter and 2013 gross domestic product will be announced next month.

Opening Bell: Cues that will move the Nifty today

Asian markets extended the week’s gain on strong retail buying. Nikkei has raced to a fresh 6-year high in early trade supported by a weaker yen. Investors are now eyeing Shanghai post the release of Beijing’s five-year plan to fight corruption.

Back home, the Sensex lost 68.32 points to 21,032.71 on Tuesday, and the Nifty fell 16.10 points to 6268.40 while the BSE Midcap gained 0.5 percent and Smallcap soared a percent. The market was shut on Wednesday for Christmas holiday.

Additionally, the market regulator Securities and Exchange Board of India (SEBI) has amended collective investment scheme rules. In proving the way to settle large corporate cases, its has also approves settlement regulations.

Meanwhile, the Department of Industrial Policy and Promotion (DIPP) raised the red flag on royalty payments as outflows to foreigners double in the past few years. The Commerce Minister Anand Sharma has written to the Finance Minister asking him to decide on imposing a cap on the same or to tax royalty payments.

And in political news, Delhi will now have a government this weekend. Aam Aadmi Party Arvind Kejriwal and his cabinet will take oath as the Chief Minister (CM) on Saturday.  Meanwhile, the party has denied any rift over cabinet berths and the Congress has said it is not rethinking on its outside support to the AAP.

In other asset classes

In the currency space, the dollar hit a five-year high against the yen on Thursday and held firm against other currencies on expectations the US Economy will continue a solid recovery, allowing the federal reserve to gradually withdraw its stimulus next year.

In commodities, crude prices inch up in early trade with Brent nearing USD 112 per barrel with Nymex trading below USD 100 per barrel.

From precious metals space, gold id trading above USD 1200 although a tad weak,  while silver is down a quarter of a percent

The emerging market to watch in 2014

Vietnam equities have outperformed their emerging market peers by a wide margin this year, and with the nation getting its economic house in order, this trend is expected to continue into 2014.

“At a time when the fundamentals in Indonesia and Thailand are deteriorating, Vietnam’s are turning brighter. We expect the market to outperform its regional peers in 2014,” Sean Darby, chief global equity strategist at Jeffries wrote in a recent report.

The benchmark VN Index, Southeast Asia’s best performer this year, has risen 23 percent year-to-date, compared with a 6 percent decline in the MSCI Emerging Markets Index over the same period.

Darby notes that the economy’s “Achilles heel”, its trade deficit, is improving, while foreign direct investment (FDI) remains healthy.

FDI reached USD 9.6 billion for the first ten months of the year, with 70 percent of investment going into the manufacturing sector. A stable local currency combined with competitive labor costs are set to help further boost investment into the country, say experts.

“Vietnam is enjoying stable growth with lower inflation helped by an increase in manufacturing contribution from foreign owned firms,” Darby said, highlighting the contrast with India and Indonesia which are seeing slower growth and rising inflation.

Vietnam’s economy is forecast to grow at around 5.5 percent in 2014 with inflation running a little higher at over 6 percent. The country’s gross domestic product grew 5.42 percent this year, compared with 5.25 percent in 2012.

“This is probably ‘the optimum’ speed for economic growth and if the inflation rate cools further there may be some room for rates to fall,” he said.

On top of an improving economic outlook, the government is also taking action to clean up bad loans in the banking system.

In October, state-owned asset management company Vietnam Asset Management Company (VAMC) announced it would be acquiring USD 118 million of bad debt from Vietnam Bank for Agriculture & Rural Development, the country’s largest lender by assets.

Agribank had a bad-debt ratio of 6.1 percent as of June 2012, according to the State Bank of Vietnam – the country’s central bank. Lenders with bad debt ratios of 3 percent or more will be required to sell non-performing loans to VAMC, according to a government statement in May.

Andreas Karall, chief investment officer of Asia Frontier Capital (Vietnam) – an investment management firm that runs a fund focusing on small to medium high growth companies in Vietnam – says he sees “enormous upside potential” in the new business cycle that has started in the country and is expected to last up to seven years.

In addition, he notes that the market offers attractive value with around one third of the over 700 listed Vietnamese stocks trading at a price to earnings ratio of between 6 and 7

“Many of them have a dividend yield of more than 9 percent, and there are even some companies whose net cash position is almost as high as their market [capitalization],” Karall said in a press release announcing the launch of AFC Vietnam Fund earlier this month.