Eye on India - Demanding states :: Macquarie Research

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Eye on India: Demanding states
Event
 We have launched “Eye on India”, a weekly, which will discuss topical
issues from an economic and equity market perspective. We shall also try
and capture important events, monitor our model portfolio performance and
present useful valuation charts. We would like to hear your comments and
suggestions about what you would like to see in here on regular basis.
 This week we discuss the deteriorating fiscal health of state government
finances and look at possible political compulsions (read demanding coalition
partners) about larger grants from the central government. This makes us
believe that the central government may overshoot its fiscal deficit of 4.6%
for the year. Under various scenarios, it can be between 5.3% and 5.8%.
What caught our eye?
 India underperformed other regions last week: India underperformed
developed markets and emerging markets by 190bp. Nifty fell 1.4%, with large
caps outperforming. Real Estate fell the most -8.8%.
 Top 10 Focus List performance dragged down by JSW: Our Top-10 list
fell 0.7% in the past week, with JSW the worst performer (-4.5%) and DRRD
the best performer (+1.9%).
 FIIs continued to be net sellers of equity: The past week saw net outflow of
US$470m (YTD US$635m outflow) from FIIs while Domestic Mutual Funds
were net purchasers at US$180m (YTD US$600m net buys).
 Of projects delays and cost overruns: Media reports suggest that many
state owned projects in infra and other sectors like coal, steel, petroleum etc.
are experiencing cost overruns of as much as US$27bn or 20% and majority
have been delayed by 1-5 years.
 FDI off to a decent start: FDI statistics released by DIPP showed inflow of
US$3.1bn in April, an increase of 43% yoy and a promising start to FY12 after
a 28% decline in FY11 and a flat FY10.
 Oil prices retreat: Last night‟s decision by International Agency and US
government to liquidate the strategic oil reserves came as a blow to oil prices.
In any case over the last 6 weeks we had seen lots of speculative interest go
down and oil had seen 10-12% correction. For every US$1/barrel oil price
drop subsidy burden reduces by US$400mn. However current diesel prices
still reflect US$80-85/barrel and there is a long way to go.
Outlook
 We retain our negative view on the markets, but think that a relief rally is
round the corner, as markets seem to have overextended on the downside,
having lost 10% since April. The news of oil price decline might act as a
catalyst and investors might see false hope of inflation coming off. However,
we recommend using this opportunity to exit and get more defensive.