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India Monthly Wrap
Feb 2011: Stabilizing domestic politics vs. volatile
geopolitical situation
• MSCI India (US$) lost a marginal 3% over the month and
underperformed the MSCI Emerging markets index (down 1%). Energy
and Consumer Staples companies were relative out performers, while
Telecom and Utilities underperformed.
• FY 12 Union budget – no major changes in tax rates, optimistic
fiscal guidance. The budget was largely inline with market expectations
with no major changes in tax rates. The Finance Minister outlined
meaningful policy initiatives pertaining to fiscal consolidation and
financial sector reforms. The funding environment for infrastructure
projects was also liberalized. The targeted FY12 fiscal deficit at 4.6% of
GDP is lower than market expectations, but appears optimistic in our
view.
• Inflation moderates. January WPI inflation moderated slightly to 8.2%
oya from 8.4%oya in December. Primary article inflation remained high,
non-food manufacturing inflation eased to 4.8%.
• Weak December IP. December IP fell to 1.6%oya, the lowest print in 20
months, but primarily on account of an unfavorable base from the
previous year. Sequentially, growth at 1.8% M/M was not disappointing
• DII buyers; FIIs sellers. FIIs sold US$ 1,006 mn of India equities over
February. Insurance companies and mutual funds bought US$ 1,024 mn
and US$ 247 mn respectively.
• Other key developments over the month:
INR appreciated by 1.4% vs. the US$
10 year benchmark treasury yield softened by 15 bps to
8.02%
Equity review
MSCI India (US$) lost a marginal 3% over the month
and underperformed the MSCI Emerging markets index
(down 1%). The correction was led by foreign investors’
selling on the back of increased geopolitical uncertainties
risk. India is one of the most vulnerable emerging
markets to any shock in global crude oil prices. Domestic
political situation however improved on the margin with
the ruling UPA agreeing to JPC over 2G scam and start
of the ongoing budget session of parliament. The union
budget for FY12 largely met investor expectations.
Energy and Consumer Staples sectors were relative out
performers.
Energy sector’s outperformance was led by Coal
India and Reliance Industries. Company specific
news flows –proposed increase in coal pricing and
RIL – BP deal helped sentiment for these
companies.
Besides the defensive nature of the Consumer
Staples sector, no increase in duty for Cigarettes
helped sectoral performance. ITC was up a
significant 8% on the budget day.
Telecom and Utilities underperformed.
ADAG group companies underperformed over the
month on account of rumor related to 2G scam and
CBI probe.
Foreign institutional investors (FIIs) remained net
sellers of Indian equities over the month. FIIs sold
US$1,006 mn over the month. Over 2011 so-far, FII’s
were net sellers of US$2,060 mn.
Domestic institutional investors (DIIs) were net
buyers over the month and bought US$1,271 mn of
Indian equities. Insurance companies bought US$ 1,024
mn, while Mutual funds bought US$247 mn over the
month. Over 2011 so-far, insurance companies bought
US$2,047 mn and mutual funds have bought US$ 377
mn.
Earnings estimate and valuations
Marginal reduction in earnings expectations.
Consensus earnings estimates for the broad market
(MSCI India) were cut by (1.2%) for FY11 (E) and
(1.6%) FY 12(E) over the month. The street estimates
earnings growth of 22% each for FY11(E) and
FY12(E).The breadth of earnings revisions was negative.
Key event to watch for the month ahead
The budget session of parliament continues, 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.
RBI’s inter-meeting credit policy review on
March 16th.
Corporate news
• RIL announced that BP would take a 30% stake in 23
oil & gas fields, including KG-D6, for a total
consideration of $7.2B. Further payments of up to
$1.8B would be made if exploratory successes lead to
commercial production. After regulatory approval,
RIL will receive staggered payments over FY12.
Economic and political review
The Budget for FY2012E announced is long on
promise, but a bit short on numbers. No major
changes in taxation were expected and none were
announced. The Finance Minister outlined meaningful
policy initiatives pertaining to fiscal consolidation and
financial sector reforms. The funding environment for
infrastructure projects was also liberalized. Lower fiscal
deficit targeted, but underlying assumptions appear
optimistic. The targeted fiscal deficit of 4.6% is lower
than market expectations. But our Economists opine
that subsidies appear to be under provided for and
tax buoyancy budgeted appears high at this stage of
the economic cycle. This concern weighed on financial
markets, causing them to pare early gains. However,
while we think investors will likely remain skeptical of
the ability to achieve the deficit target, the issue is
unlikely to come to the fore until 2HFY12E. Over the
interim, the Government has substantial policy room to
cope with this risk once the state elections are concluded
next quarter.
January WPI inflation moderated slightly to 8.2%
oya (1.2 % m/m, sa) from 8.4%oya in December. On a
sequential basis, primary food inflation stayed high at 2.3
% m/m, sa on the back of a 6.3 % increase the previous
month. Non-food primary article inflation continued to
surge on a sequential basis (3.9 % m/m, sa) and stay
above 20% (23.9 % oya) on a year-on-year basis
reflecting the fact that there has been no let up in global
commodity prices. It will come as a relief to
policymakers that non-food manufacturing inflation
(used as a proxy for core inflation by authorities) abated
in January to 4.8 % oya (0.3 % m/m, sa) from 5.3 % oya
the previous month.
10-year benchmark treasury yield softened by 15 bps
to 8.02% over the month. This could be mainly attributed
to lack of treasury issuances and marginal reduction in
inflation.
INR appreciated 1.4% vs. the US$ over the month.
India’s foreign currency reserve increased by a
marginal US$ 2 bn to US$271 billion.
Other News
December IP fell to 1.6%oya, the lowest print in 20 months, but primarily on account
of an unfavorable base from the previous year. IP had surged 18%oya in December
2009 and therefore, given the sharp increase in the index last December, this reading
had been largely anticipated by the market (Consensus: 2.0 %). Consequently, there
was no market reaction on account of the IP print. Given the high base effect, it is
more meaningful to look at the sequential monthly momentum. Viewed from this
perspective, December IP actually grew healthily (1.8 % m/m, sa) though,
admittedly, part of this may have been payback for the plunge (-3.5 % m/m, sa) the
previous month. Importantly, the healthy sequential momentum observed in
December was relatively broad-based across most sub-categories. Consumer
durables overcame a disappointing November print (-9,1 % m/m, sa) to bounce back
sharply in December (18.6 % oya, 16.8 % m/m, sa). There were concerns after the
November print that the sharp rise in nominal interest rates in recent months may
have begun to bite and impacted the remarkable run that consumer durables have had
over the last two years. Consumer non-durables also grew healthily in sequential
terms (4.7 % m/m, sa, -1.1 % oya) for a change, but this is most likely payback for a
sharp retrenchment in November (-5.3 % m/m, sa). Intermediate goods showed a
similar pattern. They rose robustly in December (6.6 % oya, 3.8 % m/m, sa) but it is
not clear whether this is just payback from the previous month’s sharp fall (-4.6 %
m/m, sa) or whether new momentum has been acquired. In contrast, capital goods
disappointed again.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Monthly Wrap
Feb 2011: Stabilizing domestic politics vs. volatile
geopolitical situation
• MSCI India (US$) lost a marginal 3% over the month and
underperformed the MSCI Emerging markets index (down 1%). Energy
and Consumer Staples companies were relative out performers, while
Telecom and Utilities underperformed.
• FY 12 Union budget – no major changes in tax rates, optimistic
fiscal guidance. The budget was largely inline with market expectations
with no major changes in tax rates. The Finance Minister outlined
meaningful policy initiatives pertaining to fiscal consolidation and
financial sector reforms. The funding environment for infrastructure
projects was also liberalized. The targeted FY12 fiscal deficit at 4.6% of
GDP is lower than market expectations, but appears optimistic in our
view.
• Inflation moderates. January WPI inflation moderated slightly to 8.2%
oya from 8.4%oya in December. Primary article inflation remained high,
non-food manufacturing inflation eased to 4.8%.
• Weak December IP. December IP fell to 1.6%oya, the lowest print in 20
months, but primarily on account of an unfavorable base from the
previous year. Sequentially, growth at 1.8% M/M was not disappointing
• DII buyers; FIIs sellers. FIIs sold US$ 1,006 mn of India equities over
February. Insurance companies and mutual funds bought US$ 1,024 mn
and US$ 247 mn respectively.
• Other key developments over the month:
INR appreciated by 1.4% vs. the US$
10 year benchmark treasury yield softened by 15 bps to
8.02%
Equity review
MSCI India (US$) lost a marginal 3% over the month
and underperformed the MSCI Emerging markets index
(down 1%). The correction was led by foreign investors’
selling on the back of increased geopolitical uncertainties
risk. India is one of the most vulnerable emerging
markets to any shock in global crude oil prices. Domestic
political situation however improved on the margin with
the ruling UPA agreeing to JPC over 2G scam and start
of the ongoing budget session of parliament. The union
budget for FY12 largely met investor expectations.
Energy and Consumer Staples sectors were relative out
performers.
Energy sector’s outperformance was led by Coal
India and Reliance Industries. Company specific
news flows –proposed increase in coal pricing and
RIL – BP deal helped sentiment for these
companies.
Besides the defensive nature of the Consumer
Staples sector, no increase in duty for Cigarettes
helped sectoral performance. ITC was up a
significant 8% on the budget day.
Telecom and Utilities underperformed.
ADAG group companies underperformed over the
month on account of rumor related to 2G scam and
CBI probe.
Foreign institutional investors (FIIs) remained net
sellers of Indian equities over the month. FIIs sold
US$1,006 mn over the month. Over 2011 so-far, FII’s
were net sellers of US$2,060 mn.
Domestic institutional investors (DIIs) were net
buyers over the month and bought US$1,271 mn of
Indian equities. Insurance companies bought US$ 1,024
mn, while Mutual funds bought US$247 mn over the
month. Over 2011 so-far, insurance companies bought
US$2,047 mn and mutual funds have bought US$ 377
mn.
Earnings estimate and valuations
Marginal reduction in earnings expectations.
Consensus earnings estimates for the broad market
(MSCI India) were cut by (1.2%) for FY11 (E) and
(1.6%) FY 12(E) over the month. The street estimates
earnings growth of 22% each for FY11(E) and
FY12(E).The breadth of earnings revisions was negative.
Key event to watch for the month ahead
The budget session of parliament continues, 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.
RBI’s inter-meeting credit policy review on
March 16th.
Corporate news
• RIL announced that BP would take a 30% stake in 23
oil & gas fields, including KG-D6, for a total
consideration of $7.2B. Further payments of up to
$1.8B would be made if exploratory successes lead to
commercial production. After regulatory approval,
RIL will receive staggered payments over FY12.
Economic and political review
The Budget for FY2012E announced is long on
promise, but a bit short on numbers. No major
changes in taxation were expected and none were
announced. The Finance Minister outlined meaningful
policy initiatives pertaining to fiscal consolidation and
financial sector reforms. The funding environment for
infrastructure projects was also liberalized. Lower fiscal
deficit targeted, but underlying assumptions appear
optimistic. The targeted fiscal deficit of 4.6% is lower
than market expectations. But our Economists opine
that subsidies appear to be under provided for and
tax buoyancy budgeted appears high at this stage of
the economic cycle. This concern weighed on financial
markets, causing them to pare early gains. However,
while we think investors will likely remain skeptical of
the ability to achieve the deficit target, the issue is
unlikely to come to the fore until 2HFY12E. Over the
interim, the Government has substantial policy room to
cope with this risk once the state elections are concluded
next quarter.
January WPI inflation moderated slightly to 8.2%
oya (1.2 % m/m, sa) from 8.4%oya in December. On a
sequential basis, primary food inflation stayed high at 2.3
% m/m, sa on the back of a 6.3 % increase the previous
month. Non-food primary article inflation continued to
surge on a sequential basis (3.9 % m/m, sa) and stay
above 20% (23.9 % oya) on a year-on-year basis
reflecting the fact that there has been no let up in global
commodity prices. It will come as a relief to
policymakers that non-food manufacturing inflation
(used as a proxy for core inflation by authorities) abated
in January to 4.8 % oya (0.3 % m/m, sa) from 5.3 % oya
the previous month.
10-year benchmark treasury yield softened by 15 bps
to 8.02% over the month. This could be mainly attributed
to lack of treasury issuances and marginal reduction in
inflation.
INR appreciated 1.4% vs. the US$ over the month.
India’s foreign currency reserve increased by a
marginal US$ 2 bn to US$271 billion.
Other News
December IP fell to 1.6%oya, the lowest print in 20 months, but primarily on account
of an unfavorable base from the previous year. IP had surged 18%oya in December
2009 and therefore, given the sharp increase in the index last December, this reading
had been largely anticipated by the market (Consensus: 2.0 %). Consequently, there
was no market reaction on account of the IP print. Given the high base effect, it is
more meaningful to look at the sequential monthly momentum. Viewed from this
perspective, December IP actually grew healthily (1.8 % m/m, sa) though,
admittedly, part of this may have been payback for the plunge (-3.5 % m/m, sa) the
previous month. Importantly, the healthy sequential momentum observed in
December was relatively broad-based across most sub-categories. Consumer
durables overcame a disappointing November print (-9,1 % m/m, sa) to bounce back
sharply in December (18.6 % oya, 16.8 % m/m, sa). There were concerns after the
November print that the sharp rise in nominal interest rates in recent months may
have begun to bite and impacted the remarkable run that consumer durables have had
over the last two years. Consumer non-durables also grew healthily in sequential
terms (4.7 % m/m, sa, -1.1 % oya) for a change, but this is most likely payback for a
sharp retrenchment in November (-5.3 % m/m, sa). Intermediate goods showed a
similar pattern. They rose robustly in December (6.6 % oya, 3.8 % m/m, sa) but it is
not clear whether this is just payback from the previous month’s sharp fall (-4.6 %
m/m, sa) or whether new momentum has been acquired. In contrast, capital goods
disappointed again.
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