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June's headline yoy WPI of 9.4% was below market expectations of 9.7%, as seasonally adj.
core mfg. inflation of 5% came in close to the RBI's comfort zone.
June headline yoy WPI of 9.4% vs. Bloomberg consensus of 9.7%
Yoy WPI inflation climbed from the 9.1% reading for May.
Looking at the details, yoy total food inflation rose to 8.4% from 8.0% in May as
manufactured food products inflation increased to 8.5% from 7.3% while primary food
inflation was stable at 8.3% (down a bit from 8.4% in May).
Yoy fuel and power inflation increased to 12.8% in June from 12.3% in May.
Yoy core manufacturing inflation dipped a bit to 7.2% in June from 7.3% in May.
April yoy headline WPI inflation was revised up to 9.7% from 8.7%.
Seasonally adj. core manufacturing inflation within RBI's comfort zone
The core manufacturing price index declined three basis points from May.
On a seasonally adjusted basis, the core manufacturing price index increased 42 basis
points from May, which suggests an annualized rate of only 5%, in line with the RBI's
comfort range and significantly below the current yoy rate of 7.2%.
As the following chart comparing seasonally adjusted and yoy core manufacturing inflation
shows, we think core manufacturing inflation peaked on a seasonally adjusted basis earlier
this year (February/March).
Yoy inflation to peak around 10% in August due to base effect and fuel price hike
The impact of the retail fuel price hikes in late June (diesel, LPG and kerosene) will be fully
reflected in the fuel & power index only in July. We also expect higher fuel prices to flow
through into core manufacturing inflation in July and August, which should increase yoy core
manufacturing inflation as seasonally adjusted core manufacturing inflation was subdued in
July and August 2010.
As such, we expect yoy core manufacturing inflation to increase to above 8% in August 2011.
Bullish markets and rate sensitives
We continue to be buyers of Indian equities as valuations have moderated and we believe
interest rates are close to peaking out (we expect only one more 25 bp policy rate hike from
the RBI). Our model portfolio is overweight interest rate sensitive stocks (wholesale funded
banks and financial institutions and autos).
Our key stock overweights from a portfolio perspective are Larsen & Toubro (LT IN), Maruti
Suzuki (MSIL IN), Cipla (CIPLA IN), Canara Bank (CBK IN), Power Finance (POWF IN) and
Hindalco (HNDL IN).
Our key stock underweights are Coal India (COAL IN), Ambuja Cements (ACEM IN), JSW
Steel (JSTL IN) and DLF (DLFU IN).
Power Finance is a beneficiary of potential power sector reforms
93% of Power Finance's loans are to central and state governments, and it should benefit
from distribution sector reforms. The State Power Ministers' Conference on "Distribution
Sector Reforms" unanimously adopted a resolution yesterday agreeing upon a set of
measures to bring down distribution losses. Key highlights of the resolution are as follows:
States to ensure that the difference between Average Revenue Realization (ARR) and
Average Cost Supply (ACS) is not only bridged but is positive to generate internal surpluses
which can be used for network expansion and maintenance.
State governments to ensure payment of all outstanding dues from various departments of
state government and institutions to the distribution utilities or release payments from the
State budget directly.
State governments to consider converting loans due from the state governments to the
distribution utilities as state government equity to ensure capital infusion and improvement in
net worth of utility.
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