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Indian govt – acting or really acting
Event
Oscar Wilde said: To do nothing at all is the most difficult thing in the world, the
most difficult and the most intellectual. While the current Indian government
seemed to have had adopted this too literally, it now looks as if sharp criticism
has shaken them out of lethargy. We were excited by its decision on fuel prices
post which GoMs have cleared draft bills for Mining and Food Security, which
are very populist in nature.
Some of the bills appear to us to be ill drafted and shows a government that is
in a hurry. A very interesting comment came from the chairman of the Planning
Commission on the proposed Mining Bill, who said that the whole idea of
sharing profits with locals is flawed and represents privatisation of taxes! This
week we look at the 80+ pending bills with government and shortlist the critical
ones.
What caught our eye?
Indian performance dragged down by Infosys: This week, global markets
were weak on negative news flow on the European debt crisis and India was
no exception. IT was the worst performing sector (-6.8%) on weak results from
Infosys while the Realty Index was the best performer (0.7%). Fund flows
softened after two weeks of strong inflows from FIIs. Performance of our top 10
stocks (-1.4%) was negatively impacted by Infosys (-8.5%), which was offset by
DRRD (+9.1%) on the back of Fonda approval. Our top 10 list has continued to
outperform MSCI India by 680bp since August last year.
Cabinet reshuffle – interesting twist: While most changes were non-events,
what made an interesting twist was the shift of Mr Jairam Ramesh from the
Ministry of Environment to the Ministry of Rural Development. He will now be in
charge of “land acquisition’’, the second biggest hurdle after environment
clearance, for various projects. His strict actions as the environment minister
had almost brought the whole investment cycle to a standstill; we would be
interested to see what he has to offer in his new role.
Weak macro data added to the market downslide:
⇒ Inflation continues to remain sticky…: WPI remained above 9% for the
7th consecutive month; it was 9.44% YoY in June. Non-food anufacturing
WPI continued to inch up and we think this trend will continue as the recent
increase in fuel prices will start feeding into core inflation in the coming
months.
⇒ …while IIP data continues to be volatile: The May data came in at 5.6%
YoY; April IIP was revised down from 6.3% to 5.8%. The impact came from
slower growth in capital and intermediate goods.
⇒ RBI focus will remain on inflation; expect 25bp hike on July 26: RBI
has been vocal about the mixed signals it is getting from various macro
data points. Therefore, its sole focus would continue to be on inflation.
Outlook
Markets to consolidate: Markets were shaken by Infosys’ results until TCS
came in to support. It is difficult to see markets breaking out given the mixed
results we are seeing from the companies. For the coming week, we expect
weak results from Ashok Leyland, Wipro and Dr Reddys, to be balanced by
expected good results from HDFC Bank and Dish TV.
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