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India Monthly Wrap
Jan 2011: A shaky start to the new year
• MSCI India (US$) lost a significant 11% over the month and
underperformed the MSCI Emerging markets index (down 3%). IT
Services, Health Care and Materials were relative outperformers, while
Consumer Discretionary, Telecom and Financials underperformed.
• Quarterly monetary policy review – rates hiked as expected. The
RBI continued with the calibrated monetary normalization process in the
January policy review meeting and hiked the benchmark rates by 25 bps
each. Repo rate is now 6.50%. The Central bank also increased the yearend
inflation forecast from 5.5% to 7.0%. Growth forecast for the
current year was left unchanged but risks for the next year were
highlighted.
• Surging inflation. WPI inflation rose to 8.4% from 7.5% oya last month,
led by a renewed surge in primary article inflation and a continued pickup
in the momentum of non-food manufacturing.
• Weak November IP. November IP growth plunged to 2.7% oya
significantly below market expectations (6.5% oya), led by a sharp
sequential decline in all use-based categories.
• DII buyers; FIIs sellers. FIIs turned sellers of US$1,054 mn of India
equities over January. Insurance companies and mutual funds bought
US$1,114 mn and US$40 mn respectively.
• Other key developments over the month:
INR depreciated by 2.7% vs. the US$
10-year benchmark treasury yield increased by 24 bps to
8.16%
Equity review
MSCI India (US$) lost a significant 11% over the
month and underperformed the MSCI Emerging markets
index (down 3%). The correction was led by foreign
investors’ selling on the back of increased policy risks
and political uncertainty. Surging inflation continues to
be a key concern for investors. The sharp rise in
commodity prices and recent political turmoil in some
Middle East countries have also adversely impacted
investor sentiment.
IT Services, Health Care and Materials sectors were
relative out performers.
IT Services outperformed the broader market
supported by encouraging economic data points
from developed economies – mainly the USA. IT
companies reported a mixed set of quarterly
earnings with TCS and HCL Tech surprising
positively while Wipro and Infosys failing to beat
expectations.
Being a defensive sector, Health Care
outperformed over the month despite having a
disappointing 3Q earnings performance.
Materials sector outperformed as outlook on
global economic growth further improved.
Consumer Discretionary, Telecom and Financials
underperformed.
Interest rate cyclical sectors have been
underperforming as banking system continued to
be significantly liquidity deficit and concerns on
inflation outlook worsened with commodity
prices, particularly food and crude Oil, rising
sharply.
Sentiment for the Telecom sector continues to be
bad on the back of policy uncertainties and
continued margin pressures. Mobile Number
Portability (MNP) was launched this month across
the country.
Foreign institutional investors (FIIs) turned net
sellers of Indian equities over the month. FIIs sold
US$1,054 mn over the month. Over 2010, FII’s were net
buyers of US$29.4 bn.
Domestic institutional investors (DIIs) were net
buyers over the month and sold US$1,154 mn of
Indian equities. Insurance companies bought US$ 1,114
mn, while Mutual funds bought US$40 mn over the
month. Over 2010, insurance companies bought US$1.4
bn and mutual funds sold US$ 5.7 bn.
Earnings estimate and valuations
Marginal reduction in earnings expectations.
Consensus earnings estimates for the broad market
(MSCI India) were cut by (0.7%) each for FY11 (E) and
FY12 (E) over the month. The street estimates earnings
growth of 23% for FY11(E) and 22% for FY12(E). The
breadth of earnings revisions was negative.
Key event to watch for the month ahead
Budget session starts from Feb 21, the first leg
of the Budget session would end on March 16,
and after a two-and-a-half week recess, the
second half would start on April 4 and continue
till April 21.
Union budget scheduled for Feb 28th.
Corporate news
• Indian companies have been reporting 3Q FY11
earnings; the reporting season will continue till 15th
February. A common trend of quarterly reporting has
been strong volume growth and disappointing margin
performance. Financials have reported healthy credit
growth and better-than-expected NIMs. IT companies
continue to be positive on near-term growth outlook.
• Wipro appointed Mr. T.K Kurien as the new CEO.
• Siemens AG has made an open offer to the public
shareholders of Siemens India for acquiring 19.82%
stake at a price of Rs930/share. This will increase
parent shareholding to 75%.
• M&M issued 17.3m shares, representing 3% of the
paid up capital to the Mahindra & Mahindra
Employees' Stock Option Trust.
• India Bulls restructuring to segregate the ownership of
business with different risk/reward.
Economic and political review
The RBI expectedly raised both the repo rate and the
reverse repo rate by 25 bps (repo: 6.5%; reverse
repo: 5.5%) and held constant the cash reserve ratio
(6%). However, the continued high inflation had
prompted some in the market (including us) that a 50bps
was a possibility. End-March inflation now seen at 7%,
FY11 GDP growth still at 8.5%. Citing the usual
suspects—high food, nonfood primary, and wage
inflation—the RBI raised its end-March inflation forecast
to 7% (JPM forecast 7.25%) from 5.5%, while
maintaining its GDP growth forecast for this fiscal year
at 8.5% with an upward bias (JPM: 8.5%).
The central bank’s FY12 outlook was overloaded with
negative risks. On the inflation front it underscored that
despite much better harvest, food inflation had been
stubbornly high. More worrying to the RBI was that
inflation of a number of food items that have not been
affected by the supply shocks (read milk, meats, and
poultry) have also spiked. And, of course, high global
commodity prices. Importantly, the RBI acknowledged
that non-food manufacturing inflation was significantly
above its trend (JPM estimate: 8% m/m, saar, in
December). It also went on to cite a number of other
demand side pressures emerging in the economy,
including the closing of the output gap. Reiterating its
previous view, the RBI again stressed the urgent need to
begin fiscal consolidation and remove the stimulus from
the economy.
WPI inflation rose to 8.4 % from 7.5% oya last
month, led by a renewed surge in primary article
inflation and a continued pick-up in the momentum of
non-food manufacturing. Surging food inflation in
December was a key driver of the headline rate.
10-year benchmark treasury yield increased by 24 bps
to 8.16% over the month. This could be attributed to tight
systemic liquidity and sharp rise in inflation over the
month.
INR depreciated by a meaningful 2.7% vs. the US$ over
the month.
India’s foreign currency reserve increased by a
marginal US$2 bn to US$270 billion.
Other News
November IP growth plunged to 2.7 % oya (-4.4 % m/m, sa) significantly below
market expectations (6.5 % oya), led by a sharp sequential decline in every use-based
category. Meanwhile, October IP was revised upwards to 11.3 % oya (4.5 % m/m,
sa) from the initial print of 10.8% released last month. Much of the volatility
observed in IP growth in recent months has been because ebbs and flows have been
driven primary by capital goods and consumer durables which, while accounting for
less than 15 percent of the basket, have grown and fallen sharply on a sequential
basis in recent months. November was no different. Consumer durables declined 9.9
% m/m, sa suggesting that lending rate increases may have finally begun to bite,
though it may also have been a payback for a surge in durables in October in the runup
to Diwali. Consumer non-durables have had a spectacularly unimpressive run
over the last year and this sector continued to under-perform declining 6.8 % m/m,
sa.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Monthly Wrap
Jan 2011: A shaky start to the new year
• MSCI India (US$) lost a significant 11% over the month and
underperformed the MSCI Emerging markets index (down 3%). IT
Services, Health Care and Materials were relative outperformers, while
Consumer Discretionary, Telecom and Financials underperformed.
• Quarterly monetary policy review – rates hiked as expected. The
RBI continued with the calibrated monetary normalization process in the
January policy review meeting and hiked the benchmark rates by 25 bps
each. Repo rate is now 6.50%. The Central bank also increased the yearend
inflation forecast from 5.5% to 7.0%. Growth forecast for the
current year was left unchanged but risks for the next year were
highlighted.
• Surging inflation. WPI inflation rose to 8.4% from 7.5% oya last month,
led by a renewed surge in primary article inflation and a continued pickup
in the momentum of non-food manufacturing.
• Weak November IP. November IP growth plunged to 2.7% oya
significantly below market expectations (6.5% oya), led by a sharp
sequential decline in all use-based categories.
• DII buyers; FIIs sellers. FIIs turned sellers of US$1,054 mn of India
equities over January. Insurance companies and mutual funds bought
US$1,114 mn and US$40 mn respectively.
• Other key developments over the month:
INR depreciated by 2.7% vs. the US$
10-year benchmark treasury yield increased by 24 bps to
8.16%
Equity review
MSCI India (US$) lost a significant 11% over the
month and underperformed the MSCI Emerging markets
index (down 3%). The correction was led by foreign
investors’ selling on the back of increased policy risks
and political uncertainty. Surging inflation continues to
be a key concern for investors. The sharp rise in
commodity prices and recent political turmoil in some
Middle East countries have also adversely impacted
investor sentiment.
IT Services, Health Care and Materials sectors were
relative out performers.
IT Services outperformed the broader market
supported by encouraging economic data points
from developed economies – mainly the USA. IT
companies reported a mixed set of quarterly
earnings with TCS and HCL Tech surprising
positively while Wipro and Infosys failing to beat
expectations.
Being a defensive sector, Health Care
outperformed over the month despite having a
disappointing 3Q earnings performance.
Materials sector outperformed as outlook on
global economic growth further improved.
Consumer Discretionary, Telecom and Financials
underperformed.
Interest rate cyclical sectors have been
underperforming as banking system continued to
be significantly liquidity deficit and concerns on
inflation outlook worsened with commodity
prices, particularly food and crude Oil, rising
sharply.
Sentiment for the Telecom sector continues to be
bad on the back of policy uncertainties and
continued margin pressures. Mobile Number
Portability (MNP) was launched this month across
the country.
Foreign institutional investors (FIIs) turned net
sellers of Indian equities over the month. FIIs sold
US$1,054 mn over the month. Over 2010, FII’s were net
buyers of US$29.4 bn.
Domestic institutional investors (DIIs) were net
buyers over the month and sold US$1,154 mn of
Indian equities. Insurance companies bought US$ 1,114
mn, while Mutual funds bought US$40 mn over the
month. Over 2010, insurance companies bought US$1.4
bn and mutual funds sold US$ 5.7 bn.
Earnings estimate and valuations
Marginal reduction in earnings expectations.
Consensus earnings estimates for the broad market
(MSCI India) were cut by (0.7%) each for FY11 (E) and
FY12 (E) over the month. The street estimates earnings
growth of 23% for FY11(E) and 22% for FY12(E). The
breadth of earnings revisions was negative.
Key event to watch for the month ahead
Budget session starts from Feb 21, the first leg
of the Budget session would end on March 16,
and after a two-and-a-half week recess, the
second half would start on April 4 and continue
till April 21.
Union budget scheduled for Feb 28th.
Corporate news
• Indian companies have been reporting 3Q FY11
earnings; the reporting season will continue till 15th
February. A common trend of quarterly reporting has
been strong volume growth and disappointing margin
performance. Financials have reported healthy credit
growth and better-than-expected NIMs. IT companies
continue to be positive on near-term growth outlook.
• Wipro appointed Mr. T.K Kurien as the new CEO.
• Siemens AG has made an open offer to the public
shareholders of Siemens India for acquiring 19.82%
stake at a price of Rs930/share. This will increase
parent shareholding to 75%.
• M&M issued 17.3m shares, representing 3% of the
paid up capital to the Mahindra & Mahindra
Employees' Stock Option Trust.
• India Bulls restructuring to segregate the ownership of
business with different risk/reward.
Economic and political review
The RBI expectedly raised both the repo rate and the
reverse repo rate by 25 bps (repo: 6.5%; reverse
repo: 5.5%) and held constant the cash reserve ratio
(6%). However, the continued high inflation had
prompted some in the market (including us) that a 50bps
was a possibility. End-March inflation now seen at 7%,
FY11 GDP growth still at 8.5%. Citing the usual
suspects—high food, nonfood primary, and wage
inflation—the RBI raised its end-March inflation forecast
to 7% (JPM forecast 7.25%) from 5.5%, while
maintaining its GDP growth forecast for this fiscal year
at 8.5% with an upward bias (JPM: 8.5%).
The central bank’s FY12 outlook was overloaded with
negative risks. On the inflation front it underscored that
despite much better harvest, food inflation had been
stubbornly high. More worrying to the RBI was that
inflation of a number of food items that have not been
affected by the supply shocks (read milk, meats, and
poultry) have also spiked. And, of course, high global
commodity prices. Importantly, the RBI acknowledged
that non-food manufacturing inflation was significantly
above its trend (JPM estimate: 8% m/m, saar, in
December). It also went on to cite a number of other
demand side pressures emerging in the economy,
including the closing of the output gap. Reiterating its
previous view, the RBI again stressed the urgent need to
begin fiscal consolidation and remove the stimulus from
the economy.
WPI inflation rose to 8.4 % from 7.5% oya last
month, led by a renewed surge in primary article
inflation and a continued pick-up in the momentum of
non-food manufacturing. Surging food inflation in
December was a key driver of the headline rate.
10-year benchmark treasury yield increased by 24 bps
to 8.16% over the month. This could be attributed to tight
systemic liquidity and sharp rise in inflation over the
month.
INR depreciated by a meaningful 2.7% vs. the US$ over
the month.
India’s foreign currency reserve increased by a
marginal US$2 bn to US$270 billion.
Other News
November IP growth plunged to 2.7 % oya (-4.4 % m/m, sa) significantly below
market expectations (6.5 % oya), led by a sharp sequential decline in every use-based
category. Meanwhile, October IP was revised upwards to 11.3 % oya (4.5 % m/m,
sa) from the initial print of 10.8% released last month. Much of the volatility
observed in IP growth in recent months has been because ebbs and flows have been
driven primary by capital goods and consumer durables which, while accounting for
less than 15 percent of the basket, have grown and fallen sharply on a sequential
basis in recent months. November was no different. Consumer durables declined 9.9
% m/m, sa suggesting that lending rate increases may have finally begun to bite,
though it may also have been a payback for a surge in durables in October in the runup
to Diwali. Consumer non-durables have had a spectacularly unimpressive run
over the last year and this sector continued to under-perform declining 6.8 % m/m,
sa.
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