Eye on India Man vs machine ::Macquarie Research,

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Eye on India
Man vs machine
Event
 “Computers themselves, and software yet to be developed, will
revolutionize the way we learn,” said Steve Jobs, and this revolution now
seems to be reaching Indian shores. On 15 September 2011, the Delhi
government implemented an “Electronic Service Level Agreement” under the
Citizens‟ Charter to e-monitor the availability of services to common people in a
time-bound basis. This seems to be putting machines in as watchdogs over
seemingly callous and inept government officials, which should go a long way in
reducing corruption. India is changing!
 In another important development, the government has unveiled a draft IT
policy for India for the first time. The policy is aimed at increasing the IT sector‟s
annual revenues to US$300bn by 2020, which would imply a CAGR of 15%.
The government intends to work on IT education, provide incentives to smaller
companies, and use diplomatic efforts to open new geographical markets.
 IT stocks have corrected quite a bit on US concerns, but we expect stronger
and more diversified growth ahead; we would look to add positions in TCS,
Infosys, MindTree and Hexaware.
Impact
 Sharp bounce-back since last Friday: Global markets bounced back sharply,
especially after the meeting between Angela Merkel and Nicolas Sarkozy. Both
India and China outperformed the EM and World indices. Amongst sectors,
high-beta plays – Real Estate, Banks and Metals – were the top three
performers. FII net buying for the week (till 12 October) stood at US$130m,
while MFs‟ net buying was US$200m. Our defensively positioned top-10 list
underperformed MSCI India by 180bps; however, it continues to outperform by
560bps since August 2010.
 Macro blues continue to haunt: IIP data for August came in at 4.1% YoY,
slightly below market expectations, driven down by a slowdown in nearly all
categories. The mining sector‟s output declined by 3.4% due to the heavy
monsoon and possibly also because of regulatory hurdles that have plagued
the sector for the past few months (Link). Inflation too remained high, coming in
at 9.72% YoY for September vs 9.78% in August. As expected, the railways
too increased freight rates by >15% along with a 5% development surcharge
from 15 October on the net tariff, which will likely add to further inflation. (Link)
 RBI remains worried on inflation, but keeps markets guessing: RBI‟s
rhetoric continues to lean on the hawkish side, while macro indicators hint at a
gradual slowdown in growth. Governor Duvvuri Subbarao kept the markets
guessing, with mixed signals; sample this: 1) “We need to bring inflation down
in order to bring interest rates down”; and 2) “Whether we will be pausing the
hikes or whether we will be continuing with hiking, it‟s not clear [yet]“. (Link)
Outlook
 Time to consolidate: After a strong rebound, markets should consolidate here
and await triggers from upcoming results and also RBI meeting. We are sellers
into the rally as India is in a “Catch 22” situation. If global worries recede, oil
goes up and inflation worries creep up. The investment cycle is not driven just
by interest rate; it requires a conducive political environment and we see little
signs of that as yet.