Apr 2011: High Inflation drag on 4Q earnings and investor sentiment.

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Apr 2011: High Inflation drag on 4Q earnings and
investor sentiment.


• MSCI India (US$) lost 2% over the month and underperformed the
MSCI Emerging markets index (up 2%). Consumer Discretionary,
Consumer Staples and Health Care companies were relative out
performers, while Telecom, IT Services and Industrials underperformed.
• March inflation significantly higher-than-expected. WPI inflation for
March accelerated to 9%, led by higher non-food manufacturing
inflation. Energy prices surged as Coal India hiked prices by c30% over
the month. Food prices moderated sequentially, but still remain
uncomfortably high at 9.5% oya.
• February IP moderated further. February IP grew at a weaker-thanexpected
3.6% oya. The trend of robust growth in Consumer Durables
and disappointing performance by the Capital goods segment continued.
• FIIs buyers; DIIs turned sellers. FIIs remained buyers over the month
and invested US$ 1,618 mn into India equities. DII turned marginal net
sellers over the month with Insurance companies and domestic mutual
funds having sold US$ 51 mn and US$ 6 mn respectively over the
month.
• 4Q FY11 earnings indicate rising margin pressures. Almost half of
the large cap companies have reported their 4Q FY11 earnings. A notable
trend is that of healthy volume growth but rising margin pressure across
sectors.
• Other key developments over the month:
􀂾 INR appreciated by a marginal 0.8% vs. the US$
􀂾 10 year benchmark treasury yield increased 15 bps to
8.13%
Equity review
MSCI India (US$) lost a marginal 2% over the month
and underperformed the MSCI Emerging markets index
(up 2%). After a good fiscal-year-end rally, investor
sentiment dampened due to weaker-than-expected IP and
higher-than-expected inflation numbers reported over the
month. Additionally, rising global commodity prices and
disappointing margin performance reported by
companies over 4QFY11 results also had an adverse
impact on performance of Indian equities. Surprisingly,
despite these headwinds FII flows remained supportive
over the month, while DII’s tuned net sellers.
Consumer Discretionary, Consumer Staples and Health
Care were relative out performers.
􀂾 Auto stocks outperformed over the month
supported by a better-than-expected March vehicle
sales numbers. Additionally, company specific
news flows from Hero Honda also helped
performance of the sector.
􀂾 Consumer Staples being a defensive sector
outperformed a falling market. ITC was the key
outperformer with a gain of 7% over April.
􀂾 Company specific news flow and cautious investor
sentiment also helped performance of the Health
Care sector.
Telecom and IT Services underperformed.
􀂾 Ongoing probe related to 2G scam kept investors
wary of Telecom companies.
􀂾 Disappointing Q4 performance and muted
guidance by IT major - Infosys led to the
underperformance of the sector.
Foreign institutional investors (FIIs) remained net
buyers of Indian equities over the month. FIIs bought
US$1,618 mn over April. Over 2011 so-far, FII’s have
been net buyers of US$1,098 mn.
Domestic institutional investors (DIIs) were net sellers
over the month and sold a marginal US$57 mn of
Indian equities. Insurance companies sold US$ 51 mn,
while Mutual funds sold US$6 mn over the month. Over
2011 so-far, insurance companies bought US$1,935 mn
and mutual funds have bought US$ 378 mn.
Earnings estimate and valuations
Marginal reduction in earnings expectations.
Consensus earnings estimates for the broad market
(MSCI India) were cut by (0.1%) for FY11 (E) and
(0.7%) FY 12(E) over the month. The street estimates
earnings growth of 21% each for FY11(E) and FY12(E)
respectively.The breadth of earnings revisions was
negative. Industrials is the only sector where FY12E
numbers have seen upward revisioning with estimates for
Jaiprakash Associates, L&T and BHEL getting revised
up over the month.


Corporate news
• Infosys announced changes to its top management and
Board of Directors
• Indian companies are reporting Q4 FY11 earnings. A
notable trend has been that of healthy volume growth
margin pressure is felt across sectors. In Financials,
credit growth and NIMs have been better-than-muted
expectations. Asset quality also held up well. IT
Services companies reported a mix set of numbers;
demand environment has improved & managements
are cautiously confident on growth outlook. Cement
companies have reported better-than-expected
numbers on better realizations.
Economic and political review
March inflation surprised sharply on the upside,
printing at 9% oya (1.4 % m/m, sa) significantly higher
than market expectations (J.P. Morgan 8.4; Consensus:
8.3). Non-food manufacturing prices rose a further 1.3 %
m/m. sa – suggesting that inflationary pressures continue
to mount sharply. Equally revealing is the fact that the
increase in manufacturing prices was very broad-based,
with almost every singly sub-category showing a sharp
increase over the previous month.
In addition to manufacturing prices, energy prices also
surged 3.5 % m/m (sa) in March. Much of this was
anticipated with the increase in coking coal (33%) and
non-coking coal (27%) announced in late February,
feeding into the WPI index in March. The only good
news in this month’s print was that primary food
inflation moderated further to 9.5 % oya (-0.6 % m/m,
sa) from 10.6 % oya the previous month and levels of
about 15 % a few months ago.
.
10-year benchmark treasury yield increased by 15 bps
to 8.13% over the month. Higher-than-expected inflation
data for March dampened investor sentiment.
INR appreciated a marginal 0.8%% vs. the US$ over the
month. This could be attributed to weak DXY and
portfolio flows over the month.
India’s foreign currency reserve increased by a
marginal US$ 6 bn to US$279 billion