Eye on India- Numbers do matter :: Macquarie Research,

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Eye on India
Numbers do matter
Event
 This week we focus on the upcoming results season as we believe it will be
key to sustenance of the current bullishness in the markets. Our estimates for
1Q FY12 results indicate just 13% YoY PAT growth for the Sensex compared
to full year consensus estimate of 17% growth. We believe earnings
downgrades will continue.
 Among sectors, we recommend taking advantage of good potential results by
the cement and consumer staples sectors by reducing exposure to them post
results. We recommend adding oil refiner and capital goods names on weak
potential results.
 On the long side, some stocks which look interesting to us from a results point
of view are JSW Steel, HCL Tech, Tata Power, Bajaj Auto and Glenmark. On
the short side, they are Maruti, Idea Cellular, ZEE and BHEL.
What caught our eye?
 Market rally continues: Over the last week, India outperformed developed
and emerging markets by 115bp and 85bp respectively. The Sensex rose
1.4%, with Real Estate outperforming (6.9%) and Metals underperforming (-
0.6%). Our Top 10 Focus List rose 1.2% led by BPCL (+5.8%) and M&M
(3.5%) while RIL (-3.1%) and DRRD (-1.8%) were a drag on overall returns.
Our Focus List has continued to outperform MSCI India by 570bp since
August last year.
 Strong fund flows this week: The past week saw net inflow of US$1.1bn
(YTD US$1.6bn net inflow) from FIIs and US$18m from domestic mutual
funds (YTD US$730m net buys).
 Government expects ‘suppressed’ inflation to alleviate growth worries:
Inflation continues to haunt the Finance Minister, as do high oil prices, which
he expects may not ease anytime soon (read here). Further feeding into
inflation would be the second-round effects of higher wages, which have risen
sharply due to high GDP growth, commodity prices, inflation and NREGA
(Four Reasons for Wage Boom, July 7 print edition of Economic Times).
 On a positive note: a) job growth is likely to be strong in the near term.
Global consulting firm Mercer expects “double-digit salary increases and
creation of new jobs” to continue, as per their survey of 90 companies across
industries. b) Normal monsoon so far, sans last week when they were 25%
below normal. The monsoon has not been regular recently but has been
„normal‟ since its onset, with improving distribution over the country.
Outlook
 Market rally on weak legs: We are already seeing signs of fatigue appearing
in the market, and hence will take this rally in some of the beta names to
prune exposure. The cabinet reshuffle is due this week, which we believe may
hinder progress of further reforms ahead of Uttar Pradesh elections next year
since new ministers would take time to settle in. Some of the defensives from
our top ten ideas may declare subdued results, which we believe may present
an opportunity to buy them at attractive levels; these are BPCL, DRRD and
INFO.