Stocks
Indian consumer sector Q3FY17: Poor growth figures and no tailwinds
Indian consumer companies have shown very little growth in Q3FY17, with year-on-year (y-o-y) sales growth of 4%, EBITDA growth of 0.9%, and adjusted profit after tax growth of 1.7%, and not much growth expected this year, according to a research report by Religare. 
 
FMCG majors such as Hindustan Unilever Limited and ITC posted disappointing sales growth figures of -4% and 0%. The managements of FMCG companies have expressed the view that the rural wholesale sector, along with North and Central India, are the worst hit by demonetisation. The companies don’t expect high recovery, because the rolling out of GST may lead to another round of destocking. EBITDA margins fell by 0.6% in Q3FY17 y-o-y to 20.4%, while the gross margins fell by 1% y-o-y. Companies resorted to selective pricing and cutting down on ad spends. The profit after tax figures were a mixed front, with Britannia Industries and United Spirits outperforming the expected numbers while Colgate Palmolive lagged estimates. 
 
Over the last two years, poor demand has weighed down the Indian consumer sector. Additional headwinds from demonetisation and GST rolling out (likely in FY18) could further impact the sector in a disruptive manner on the distribution value chain, pushing recovery further to the second half of FY18. The sector valuations also need correction according to the lower earnings profile, considering that there are no margin tailwinds, and steep growth seems unlikely, given the rising fragmentation and competitiveness of the industry. 
 
Asian Paints has commented that the demand environment remains challenging with no recovery seen yet. South and West India have recovered at a faster rate compared to other geographies. Management expects input costs to be substantially higher in Q4FY17. Optimal margin for the paints industry is 17% in the medium term. 
 
Britannia’s management sees no respite on the raw material cost inflation for the next six months and has taken a price hike of approximately 1.5% in Q3 and plans to increase its prices by 2-3% in the next 2-3 months. 
 
Dabur’s management is expecting high single-digit growth in H1FY18 and early-to-mid double-digit growth for H2FY18.
 
Emami is expecting 12-13% sales growth in FY18, but has added that lower menthe prices aided gross margin expansion in the past, but this is unlikely to be a sizeable margin lever going ahead.
 
For Godrej Consumer, East and North India were the hardest hit by demonetisation. Low unit packs were witnessing higher growth. Management expects consumer demand to improve post GST implementation.
 
United Spirits Q3 volumes were ahead of the industry. Demonetisation impact would be marginal in Q4 as the cash supply situation could get normal. Price hikes, productivity and premiumisation led to gross margin improvement. The management is expecting double-digit volume growth and Rs2,000 crore reduction in debt over the next two years.
 
Jubiliant Foodworks’ (JUBI) management said that the consumer sentiments have not changed much sequentially. JUBI closed six Dominos restaurants in 9MFY17. The impact of demonetisation was more pronounced in tier 2/3 cities compared to metros.
 

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Nifty, Sensex still range-bound – Weekly closing report
We had mentioned in last week’s closing report that Nifty, Sensex lacked momentum. The major indices of the Indian stock markets were range-bound during the week and closed with small gains on Friday. The trends of the major indices in the course of the week’s trading are given in the table below:
 
 
Indian equity benchmarks closed flat with very little gains on Monday as the market waited for the January retail inflation data to be announced after-hours. Industrial production declined by 0.4% in December 2016, against the strong growth of 5.7% in November 2016. Bank of Baroda, one of the largest public lenders, fell more than 10% because the market was disappointed with the December quarter results. SBI also fell 1.76%, whereas most of the private bank stocks rose. Coal India fell 1.23% after consolidated net profit fell 20.25%, to Rs2,884.47 crore, on 2.88% rise in total income, to Rs21531.28 crore, for the December 2016 quarter, the results of which were announced on Saturday, 11 February 2017. 
 
Infosys rose by 1.6% as co-founder NRM Murthy commented that Chairman R Seshasayee enjoys the “highest integrity” and called off his fight with the board, saying that the company will deal with the corporate governance issues. Piramal enterprises rose by 3.37% after reporting growth in total income of 31.11%, to Rs2,313.83 crore, and net profit growth of 31.66%, to Rs404.08 crore. Suzlon rose by 11% after the company reported growth in total income of 75.7%, to Rs3307.48 crore, and net profit of Rs274.34 crore for December 2016 quarter, as against net loss of Rs121.84 crore in December 2015 quarter. On Monday, the Central Statistics Office (CSO) reported that India's annual retail inflation eased to 3.17% in January, from 3.41% in December and 5.69% reported during the corresponding period last year. The increase in inflation could lead to a hardening of interest rates and hence a slowdown in the bullish approach in the stock markets.
 
Indian equities markets on Tuesday closed on a flat note as disappointing macro-economic data, coupled with broadly negative Asian indices and profit booking, subdued investors' sentiments. The BSE market breadth was tilted in favour of the bears -- with 1,790 declines and 1,039 advances. On the NSE, there were 479 advances, 991 declines and 61 unchanged. India's annual rate of inflation, based on wholesale prices, rose to 5.25% during last month, from 3.39% reported for December 2016, official data showed on Tuesday, mainly due to a rise in fuel costs. According to the Wholesale Price Index (WPI) data released by the Commerce and Industry Ministry, the annual inflation rate was (-)1.07% in January, 2016. The wholesale inflation for food articles declined by (-)0.56% during the month under review, from (-)0.70% in December and 6.46% recorded for January, 2016. However, expenses on primary articles, which constitute 20.12% of the WPI's total weight, rose by 1.27% during January. 
 
The increased chances of an upcoming US rate hike, along with disappointing quarterly results, dragged the Indian equities markets lower on Wednesday. The key domestic indices closed more than half a per cent down, as selling pressure was witnessed in automobile, healthcare and consumer durables' stocks. The BSE market breadth was skewed in favour of the bears -- with 2,143 declines and 698 advances. On the NSE, there were 298 advances, 1,361 declines and 73 unchanged.
 
State-run Hindustan Aeronautics Ltd (HAL) is set to go public soon to sell 10% of equity shares of Rs10 face value, a top official said on Sunday. "We will soon make Initial Public Offering (IPO) to sell 36.1 million shares, which are equivalent to 10% of the holding by the government. The draft prospectus is ready for filing with the market regulator (Sebi) and have appointed the book-running lead managers," HAL Chairman T Suvarna Raju told reporters. 
 
The government, which owns the defence behemoth, has diluted 25% (120.5 million shares) of its full holding through buy-back and collected Rs5,265 crore, including Rs981 as tax from the company, during the last fiscal (2015-16). Post-IPO, the government holding in the company will be 65%. "The valuation process is underway to fix the issue price for the IPO. We hope to do so by the end of this fiscal (2016-17) or during the ensuing fiscal (2017-18)," asserted Raju. The cash-rich firm paid Rs750 crore as dividend to the government for fiscal 2015-16. These shares are also likely to be attractive to foreign institutional investors post-listing on the stock exchanges.
 
Broadly, positive global indices and value-buying lifted the Indian equities markets on Thursday. The key domestic indices closed with gains of more than half a per cent each, as buying was witnessed in healthcare, automobile, and metal stocks. The BSE market breadth was in favour of the bulls -- with 1,807 advances and 992 declines.  On the NSE, there were 1,154 advances, 480 declines and 86 unchanged.
 
On Friday, the major indices of the Indian stock markets were range-bound and closed with small gains of 0.50%-0.59%. However, some gains were capped on the back of negative global cues and profit booking. The BSE market breadth was marginally in favour of the bulls -- with 1,418 advances and 1,392 declines. On the NSE, on Friday, there were 866 advances, 760 declines and 83 unchanged.
 

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Deposits raised by unregulated entities are on the radar of Finance Ministry
India is a country where business is largely carried on in the form of proprietary concerns and partnership firms, and not in the form of companies and Limited Liability Partnerships (LLP). The way of doing business is quite informal, including modes of raising funds for business.
 
While a few companies (Saradha, Sahara, Sumangal, and Sanchayita) were responsible for the scams in the past, all those doing business will have to bear the brunt of their acts. When the deposit rules under the Companies Act, 2013 became stricter, it was obvious for people to think of LLPs. Most people would prefer not to do business in a highly regulated environment, especially when the business model itself is fairly simple. Fund requirement is a perennial issue and, depending on the size of business and capacity of the businessman, the source varies. So, one may not necessarily go to a bank or a non-banking finance corporation (NBFC) or one’s relatives to raise funds for a business, and instead may go to  ‘Khanna uncle’ or ‘Balbirbhai’. However, the enforcement of Banning of Unregulated Deposit Schemes and Protection of Depositors’ Interests Act, 2016 (the Bill 2016) will curb this practice. Looking at the penal provisions, businessmen would prefer to suffer losses rather than to go to jail.
 
Section 45S of the Reserve Bank of India (RBI) Act also prohibits acceptance of deposits by unincorporated bodies. The intent of this bill is also to spread the net on all deposit-takers who accept or solicit deposits to defraud investors, and not to meet the fund requirement in the ordinary course of business. However, the exclusion carved out does not adequately consider options like borrowings from ‘Khanna uncle’, unless they are obtained as advance for supplying goods, or rendering service, or received as credit. Similarly, raising money through issue of bonds, debentures by LLP or trust has not been included, unless these entities are Alternative Investment Funds (AIF) or mutual funds.
 
In September 2015, SEBI in an informal guidance given to Vijay Suraksha Realty LLP, conveyed that while the definition of ‘debt securities’ under SEBI (ILDS) Regulations 2008 covers securities issued by a LLP (a body corporate), the definition of ‘issuer’ talks specifically about company, public sector undertaking or statutory corporation. Further, the option for LLPs to raise funds from other sources, not partners or relatives of partners, gets prohibited under this Bill.  
 
Every Ponzi scheme is followed by a new law and such reactive law-making adds to the woes of genuine entrepreneurs. The penal provisions under such law are equally scary. ‘Scheme’ means to make plans, especially in a devious way or with intent to do something illegal or wrong. The intention is to prohibit such persons from defrauding investors. However, funds raised from third person for genuine business purpose cannot be regarded as a scheme for raising deposits in a country where a large part of business is run in an unorganised manner.
 
So each time an unincorporated body or LLP requires funds, it will have to look at the Central Government and plead ‘Prabhu path pradarshitkariye’ to wait for the Central Government to notify deposit schemes that shall not be treated as Unregulated Deposit Schemes for the purposes of this Act. Instead of specifying what schemes can be excluded, a litmus test must be provided such that meeting of any of those conditions would regard the loan as unregulated deposit. 
 
Considering the above mentioned points and keeping in view the small businesses, this Bill may be made lenient for particular cases. Protection should be given to those who intend to be protected, therefore, the known investors (other than relatives) should also be able to lend to such businesses.
 
(CS Vinita Nair-Dedhia is partner at Vinod Kothari & Co)

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