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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Preferred picks
Sector Stocks
Automobiles TVS, Bajaj Auto
Banking HDFC Bank, ICICI Bank, Bank of Baroda, SBI
Cement Grasim Industries
Construction IRB Infra, Unity Infra
Engineering Greaves Cotton, Cummins, BEL, Havells
FMCG ITC, GCPL
Information Technology Infosys, TCS, KPIT, NIIT Tech
Logistics & Transportation Allcargo Global Logistics, Gateway Distriparks, Mundra Port
Media HT Media
NBFC IDFC, M&M Financial Services
Oil & Gas Cairn India, IGL
Source: Kotak Securities - Private Client Research
MARKET STRATEGY
Indian markets started December on a positive note, in anticipation of
coordinated action by central banks (for a possible solution to the of eurozone
crisis) in EU summit and key policy announcements from Parliament's
winter session on the domestic front. However, the rally was snapped by
policy logjam and renewed fears coming from the euro zone nations.
Sharper-than-expected contraction in IIP and currency depreciation also
impacted markets adversely. On the other hand, RBI's signal of rate hike
pause and decline in food inflation came as positives for the market. US and
European markets remained volatile due to fears of rating downgrades and
lack of comprehensive solution to solve debt crisis. However, ECB's offering
of 489bn euros in 3-year auction provided some respite from the rising
yields of Italian and Spanish bonds.
In the backdrop of a sharp contraction in IIP, RBI kept key policy rates
unchanged in its mid-quarter policy review. It also signaled the end of long
series of interest rate increases and mentioned that from now onwards,
monetary policy actions are likely to reverse the cycle. Food inflation has
also started coming down due to decline in prices of essential items and on
account of high base effect. However, in terms of key policy reforms, there
was disappointment as Government had to put on hold raising FDI limit in
multi-brand retail as well as the Lokpal Bill. It also had to withdraw two
important bills - the Companies Bill and Pension fund Regulatory and
Development Authority bill - due to lack of political consensus on the same.
It did introduce the National Food Security Bill, which has raised concerns
on the fiscal impact of the same.
Markets have been reacting to macro-economic concerns such as growth
slowdown, high interest rates and policy inertia on the domestic front as
well as continued challenges in euro-zone region. On the positive side,
inflation has started tapering down and interest rate cycle is also expected
to reverse from Q1FY13. Valuations are also near the lower end of the longterm
valuations band for the benchmark indices.
However, we believe that, near term market performance will be influenced
more by policy initiatives, currency movement, Q3FY12 results as well as
developments in Europe and US. These headwinds may keep markets under
pressure in the near term. Resolution of these issues is necessary for
markets to stabilize and move up. We recommend a bottoms-up approach
with a medium to long term view. One should accumulate stocks of
companies having ethical managements and strong balance sheets, which
are available at reasonable valuations, across sectors like IT, Banking, Media,
Logistics, Capital Goods and Infrastructure sectors.
Global markets remained fairly volatile
Global markets started on a positive note in anticipation of possible solution for eurozone
crisis. However, markets in US and Europe remained fairly volatile during the
month when policy makers failed to provide a comprehensive solution to the debt
crisis. On economic front in US, the pace of growth in the manufacturing sector rose
in November to its strongest level since June. The pace of job growth in the private
sector also accelerated in November and the jobless rate declined to a 2-1/2 year
low of 8.6%. The U.S. Congress passed the controversial payroll tax cuts extension
for the first two months of 2012, ending the risk of a sudden tax rise on January 1.
However, Federal Reserve declined to signal another round of quantitative easing
and left rates unchanged. Third quarter GDP data was also revised downwards to
1.8% from 2% estimated earlier.
In the much awaited EU summit, 26 of the 27 European Union leaders except UK
agreed to pursue stricter budget rules and also agreed to provide up to 200bn euros
in bilateral loans to the International Monetary Fund (IMF) to help tackle the crisis.
There were concerns on the legal problems of the treaty decided by the 26 Euro
countries, in the absence of UK and this was followed by rating downgrades by Fitch
for seven global banks based in Europe and US. Fitch also put Spain, Italy and four
others - Belgium, Slovenia, Cyprus and Ireland - on notice for possible credit downgrades.
It also resulted in spike in yields to 6.47% in an auction of Italian sovereign
debt for the five year period. However, ECB announced a series of "non-standard"
measures in its key lending program to boost liquidity for European banks and offered
489bn euros ($644bn) in an auction of three-year loans at a very low interest
rate of about 1%. The funding is expected to improve banks' finances, ease the
threat of a credit crunch and maybe tempt them to buy Italian and Spanish bonds.
Correspondingly, Italian bond auction saw decline in the yields for 10-year and 3-
year bond.
China's export growth slowed to 13.8 per cent last month, down from October's
15.9 per cent gain. Exports to the EU slowed significantly, but shipments to the US,
Japan and emerging economies remained reasonably steady. Inflation cooled to 4.2
per cent last month as industrial output growth weakened and China also reported
that its factory sector shrank in November for the first time in nearly three years.
Correspondingly, it announced a cut of 50 bps in bank reserve ratio.
Indian markets impacted by policy log-jam
Indian markets opened strong in the beginning in anticipation of coordinated action
of global central banks for possible solution of euro-zone crisis in EU summit and key
policy announcements from Parliament's winter session on the domestic front. However,
the rally in our markets was snapped by policy logjam and renewed fears coming
from the euro zone nations. Along with this, sharp contraction in industrial production
and rupee depreciation added to overall concerns. In line with deceleration
witnessed in growth, RBI kept the key policy rates unchanged.
Winter session of Parliament started on a stormy note and Government had to put
on hold raising FDI limit in multi-brand retail as well as the Lokpal Bill. It also had to
withdraw two important bills - the Companies Bill and Pension fund Regulatory and
Development Authority bill - due to lack of political consensus on the same. It did
introduce the National Food Security Bill, which has raised concerns on the fiscal
impact of the same.
National Food Security Bill, 2011 will make cheaper food grains a legal entitlement
to 63.5 per cent of the country's population. The bill brings under its purview 75 per
cent of rural households and 50 per cent of urban households. Person belonging to a
"priority household" will be provided with 7kg of grain per month, comprising rice,
wheat and coarse grain as per the bill. Rice will be provided at a cost of Rs 3/kg,
wheat at Rs 2/kg and coarse grain at Rs 1/ kg. The bill will also provide 3kg of grain
per month at not more than 50% of the minimum support price to people belonging
to the "general category". As per initial estimates, once passed, this food subsidy
bill is expected to rise to Rs 950 bn. We believe that though the bill aims at providing
food security to a large section of population, we expect it would worsen overall
fiscal deficit situation of our economy if it gets passed.
In a positive move, Moody upgraded the country's sovereign debt ratings from
speculative to investment grade for both long term and short term government
bonds denominated in domestic currency and long term country ceiling on foreign
currency bank deposits. Moody expects that the present slowdown in the growth
rates could reverse sometime in 2012-13 as inflation cools going forward. However,
it mentioned that country's weak fiscal metrics continue to remain a constraint for
the nation's rating.
Government is also considering pledging shares in Specified Undertaking of the UTI
(SUUTI) in order to raise funds and buy shares of certain Government-owned companies.
Government had set a disinvestment target of Rs 400 bn during budget. Government
plans to dissolve Suuti, transfer its assets to a newly-formed fund manager
and using the money borrowed against these assets to cover the shortfall in targeted
divestment.
IIP witnessed sharp deceleration
IIP growth in October came in sharply lower than estimates at -5.1 per cent, led by
sharp contraction witnessed in capital goods segment coupled with decline in manufacturing
and mining sector growth. Cumulative growth during Apr-Oct FY12 has
slowed significantly to only 3.5 per cent vs 8.7 per cent last year.
Manufacturing output contracted by 6.0 per cent in October 2011 as compared to a
growth of 2.4 per cent in the previous month. Mining sector's output contracted by
7.2 per cent while electricity
continued to grow at a robust rate of 5.6 per cent. We had expected mining sector
output to remain low due to mining bans and strikes in some parts of the country.
Among use based classification, basic, capital and intermediate goods registered
negative growths of 0.1 per cent, 25.5 per cent and 4.7 per cent for October 2011.
High interest rates have continued to impact investment cycle and consumer demand
which is reflected by sharp decline witnessed in capital goods segment as well
as de-growth seen in consumer durable and non-durable segment. In view of the
sharp contraction in industrial production and slower GDP growth, RBI has moderated
its policy stance and indicated that focus on growth shall return sooner than
earlier expected. We now expect interest rates to start trending down towards the
end of current fiscal.
Inflation started tapering down
November inflation decelerated to 9.11 per cent from 9.73 per cent in October due
to cooling off of food inflation as well as higher base. However, September WPI was
revised up to 10.00 per cent from 9.72 per cent. Though food inflation is coming
down, but continued depreciation of rupee may keep fuel as well as manufactured
product inflation higher.
Food article inflation slipped to 8.5 per cent from 11.4 per cent in October. Normal
monsoons and a good harvest have kept food inflation in check. On the other hand,
non-food articles inflation eased further to 3.22 per cent from 7.71 per cent in October,
the lowest since October 2009, due to correction in the fiber prices (mesta, raw
silk, raw jute), logs & timber, raw rubber, among others. Fuel inflation stood at
higher levels at 15.5 per cent in November compared to 14.8 per cent in October
due to higher international prices coupled with sharp depreciation of rupee. November
manufactured product inflation stood at higher levels at 7.7 per cent as against
7.66 per cent in October due to steep rupee depreciation which resulted in higher
imported costs.
Thus, despite fall in the crude prices last month and continuous tight monetary policy
action by RBI, inflation remained higher due to currency depreciation, which made
imports costlier. Food inflation dipped to 0.42 per cent for the week ended December
17 from 1.81 per cent in the previous week as prices of essential items like vegetables,
onion, potato and wheat declined. In December last year, excessive rains
damaged the onion crop and caused prices to spike, pushing up food inflation to
more than 20 per cent. This is the lowest rate of food inflation since past six years.
The fuel inflation slipped at 14.37 per cent versus 15.24 per cent during the same
period while the primary articles price index rose 2.70 per cent compared with an
annual rise of 3.78 per cent in the previous week
Though food inflation has started coming down, continued demand pressures are
keeping non-food manufacturing inflation higher which remains much above RBI's
comfort zone. Central bank has articulated that there are risks to inflation emanating
from demand and supply side. However, it is of the view that inflation is showing
signs of easing, with momentum indicators also showing signs of moderation.
RBI kept the policy rates unchanged
Heightened concerns about weaker economic growth in Euro Zone and US and
slowing down of domestic demand led RBI to keep all of its policy rates unchanged
in its Mid-Quarter Policy review.
It kept the repo rate and CRR unchanged at 8.5 per cent and 6.0 per cent respectively.
It also indicated that it would be the end of long series of interest rate increases
and from now onwards monetary policy actions are likely to reverse the
cycle.
RBI has clearly indicated its concern on overall growth with sharp deceleration seen
in industrial production. Though it expects inflation to start coming down, but RBI is
more concerned about significant slowdown in investment activities, which could
have negative impact of supply side constraints. We expect RBI to commence rate
reduction from Q1FY13 unless there is some nasty surprise on the inflation front.
Rupee depreciation continued in December also
Rupee continued its slide during December also due to shift of investor preference
towards safer assets like US Dollar. Rupee declined by 1.7 per cent and closed at Rs
53.1 to a dollar for December, after touching closing lows of Rs 53.7 on 14th December.
RBI finally decided to curb the volatility in the rupee to remove speculation
on the currency movements. Firstly, it curbed trading in rupee forwards. Once cancelled,
forward contracts could not be bought again. The new rule is applicable to
domestic as well as foreign investors. Secondly, the RBI reduced the amount of open
positions dealers can maintain overnight. In this case, banks would not be able to
keep speculative positions open for a long time. With this, RBI tried to curb speculation
in the currency markets and wanted only genuine demand and supply to move
the currency rate. Post this measure, rupee witnessed some appreciation. However,
rupee has depreciated by nearly 19% in the current fiscal till date.
FIIs turned net buyers towards the end of month
For the month, FIIs turned net buyers to the tune of Rs 5.75bn while mutual funds
were net buyers to the tune of Rs 4.63 bn till 28th Dec, 2011. However, for most
part of the month, FII's were offloading their assets. Slowdown in growth, general
stalemate at policy level, rupee depreciation and shift towards less riskier assets has
resulted in FII's selling for most part of the month.
Recommendation
Markets have been reacting to macro-economic concerns such as growth slowdown,
high interest rates and policy inertia on the domestic front as well as continued challenges
in euro-zone region. On the positive side, inflation has started tapering down
and interest rate cycle is also expected to reverse from Q1FY13. Valuations are also
near the lower end of the long-term valuations band for the benchmark indices.
However, we believe that, near term market performance will be influenced more
by policy initiatives, currency movement, Q3FY12 results as well as developments in
Europe and US. These headwinds may keep markets under pressure in the near
term. Resolution of these issues is necessary for markets to stabilize and move up.
We recommend a bottoms-up approach with a medium to long term view. One
should accumulate stocks of companies having ethical managements and strong
balance sheets, which are available at reasonable valuations, across sectors like IT,
Banking, Media, Logistics, Capital Goods and Infrastructure sectors.
Preferred picks
Sector Stocks
Automobiles TVS, Bajaj Auto
Banking HDFC Bank, ICICI Bank, Bank of Baroda, SBI
Cement Grasim Industries
Construction IRB Infra, Unity Infra
Engineering Greaves Cotton, Cummins, BEL, Havells
FMCG ITC, GCPL
Information Technology Infosys, TCS, KPIT, NIIT Tech
Logistics & Transportation Allcargo Global Logistics, Gateway Distriparks, Mundra Port
Media HT Media
NBFC IDFC, M&M Financial Services
Oil & Gas Cairn India, IGL
Source: Kotak Securities - Private Client Research
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Preferred picks
Sector Stocks
Automobiles TVS, Bajaj Auto
Banking HDFC Bank, ICICI Bank, Bank of Baroda, SBI
Cement Grasim Industries
Construction IRB Infra, Unity Infra
Engineering Greaves Cotton, Cummins, BEL, Havells
FMCG ITC, GCPL
Information Technology Infosys, TCS, KPIT, NIIT Tech
Logistics & Transportation Allcargo Global Logistics, Gateway Distriparks, Mundra Port
Media HT Media
NBFC IDFC, M&M Financial Services
Oil & Gas Cairn India, IGL
Source: Kotak Securities - Private Client Research
MARKET STRATEGY
Indian markets started December on a positive note, in anticipation of
coordinated action by central banks (for a possible solution to the of eurozone
crisis) in EU summit and key policy announcements from Parliament's
winter session on the domestic front. However, the rally was snapped by
policy logjam and renewed fears coming from the euro zone nations.
Sharper-than-expected contraction in IIP and currency depreciation also
impacted markets adversely. On the other hand, RBI's signal of rate hike
pause and decline in food inflation came as positives for the market. US and
European markets remained volatile due to fears of rating downgrades and
lack of comprehensive solution to solve debt crisis. However, ECB's offering
of 489bn euros in 3-year auction provided some respite from the rising
yields of Italian and Spanish bonds.
In the backdrop of a sharp contraction in IIP, RBI kept key policy rates
unchanged in its mid-quarter policy review. It also signaled the end of long
series of interest rate increases and mentioned that from now onwards,
monetary policy actions are likely to reverse the cycle. Food inflation has
also started coming down due to decline in prices of essential items and on
account of high base effect. However, in terms of key policy reforms, there
was disappointment as Government had to put on hold raising FDI limit in
multi-brand retail as well as the Lokpal Bill. It also had to withdraw two
important bills - the Companies Bill and Pension fund Regulatory and
Development Authority bill - due to lack of political consensus on the same.
It did introduce the National Food Security Bill, which has raised concerns
on the fiscal impact of the same.
Markets have been reacting to macro-economic concerns such as growth
slowdown, high interest rates and policy inertia on the domestic front as
well as continued challenges in euro-zone region. On the positive side,
inflation has started tapering down and interest rate cycle is also expected
to reverse from Q1FY13. Valuations are also near the lower end of the longterm
valuations band for the benchmark indices.
However, we believe that, near term market performance will be influenced
more by policy initiatives, currency movement, Q3FY12 results as well as
developments in Europe and US. These headwinds may keep markets under
pressure in the near term. Resolution of these issues is necessary for
markets to stabilize and move up. We recommend a bottoms-up approach
with a medium to long term view. One should accumulate stocks of
companies having ethical managements and strong balance sheets, which
are available at reasonable valuations, across sectors like IT, Banking, Media,
Logistics, Capital Goods and Infrastructure sectors.
Global markets remained fairly volatile
Global markets started on a positive note in anticipation of possible solution for eurozone
crisis. However, markets in US and Europe remained fairly volatile during the
month when policy makers failed to provide a comprehensive solution to the debt
crisis. On economic front in US, the pace of growth in the manufacturing sector rose
in November to its strongest level since June. The pace of job growth in the private
sector also accelerated in November and the jobless rate declined to a 2-1/2 year
low of 8.6%. The U.S. Congress passed the controversial payroll tax cuts extension
for the first two months of 2012, ending the risk of a sudden tax rise on January 1.
However, Federal Reserve declined to signal another round of quantitative easing
and left rates unchanged. Third quarter GDP data was also revised downwards to
1.8% from 2% estimated earlier.
In the much awaited EU summit, 26 of the 27 European Union leaders except UK
agreed to pursue stricter budget rules and also agreed to provide up to 200bn euros
in bilateral loans to the International Monetary Fund (IMF) to help tackle the crisis.
There were concerns on the legal problems of the treaty decided by the 26 Euro
countries, in the absence of UK and this was followed by rating downgrades by Fitch
for seven global banks based in Europe and US. Fitch also put Spain, Italy and four
others - Belgium, Slovenia, Cyprus and Ireland - on notice for possible credit downgrades.
It also resulted in spike in yields to 6.47% in an auction of Italian sovereign
debt for the five year period. However, ECB announced a series of "non-standard"
measures in its key lending program to boost liquidity for European banks and offered
489bn euros ($644bn) in an auction of three-year loans at a very low interest
rate of about 1%. The funding is expected to improve banks' finances, ease the
threat of a credit crunch and maybe tempt them to buy Italian and Spanish bonds.
Correspondingly, Italian bond auction saw decline in the yields for 10-year and 3-
year bond.
China's export growth slowed to 13.8 per cent last month, down from October's
15.9 per cent gain. Exports to the EU slowed significantly, but shipments to the US,
Japan and emerging economies remained reasonably steady. Inflation cooled to 4.2
per cent last month as industrial output growth weakened and China also reported
that its factory sector shrank in November for the first time in nearly three years.
Correspondingly, it announced a cut of 50 bps in bank reserve ratio.
Indian markets impacted by policy log-jam
Indian markets opened strong in the beginning in anticipation of coordinated action
of global central banks for possible solution of euro-zone crisis in EU summit and key
policy announcements from Parliament's winter session on the domestic front. However,
the rally in our markets was snapped by policy logjam and renewed fears coming
from the euro zone nations. Along with this, sharp contraction in industrial production
and rupee depreciation added to overall concerns. In line with deceleration
witnessed in growth, RBI kept the key policy rates unchanged.
Winter session of Parliament started on a stormy note and Government had to put
on hold raising FDI limit in multi-brand retail as well as the Lokpal Bill. It also had to
withdraw two important bills - the Companies Bill and Pension fund Regulatory and
Development Authority bill - due to lack of political consensus on the same. It did
introduce the National Food Security Bill, which has raised concerns on the fiscal
impact of the same.
National Food Security Bill, 2011 will make cheaper food grains a legal entitlement
to 63.5 per cent of the country's population. The bill brings under its purview 75 per
cent of rural households and 50 per cent of urban households. Person belonging to a
"priority household" will be provided with 7kg of grain per month, comprising rice,
wheat and coarse grain as per the bill. Rice will be provided at a cost of Rs 3/kg,
wheat at Rs 2/kg and coarse grain at Rs 1/ kg. The bill will also provide 3kg of grain
per month at not more than 50% of the minimum support price to people belonging
to the "general category". As per initial estimates, once passed, this food subsidy
bill is expected to rise to Rs 950 bn. We believe that though the bill aims at providing
food security to a large section of population, we expect it would worsen overall
fiscal deficit situation of our economy if it gets passed.
In a positive move, Moody upgraded the country's sovereign debt ratings from
speculative to investment grade for both long term and short term government
bonds denominated in domestic currency and long term country ceiling on foreign
currency bank deposits. Moody expects that the present slowdown in the growth
rates could reverse sometime in 2012-13 as inflation cools going forward. However,
it mentioned that country's weak fiscal metrics continue to remain a constraint for
the nation's rating.
Government is also considering pledging shares in Specified Undertaking of the UTI
(SUUTI) in order to raise funds and buy shares of certain Government-owned companies.
Government had set a disinvestment target of Rs 400 bn during budget. Government
plans to dissolve Suuti, transfer its assets to a newly-formed fund manager
and using the money borrowed against these assets to cover the shortfall in targeted
divestment.
IIP witnessed sharp deceleration
IIP growth in October came in sharply lower than estimates at -5.1 per cent, led by
sharp contraction witnessed in capital goods segment coupled with decline in manufacturing
and mining sector growth. Cumulative growth during Apr-Oct FY12 has
slowed significantly to only 3.5 per cent vs 8.7 per cent last year.
Manufacturing output contracted by 6.0 per cent in October 2011 as compared to a
growth of 2.4 per cent in the previous month. Mining sector's output contracted by
7.2 per cent while electricity
continued to grow at a robust rate of 5.6 per cent. We had expected mining sector
output to remain low due to mining bans and strikes in some parts of the country.
Among use based classification, basic, capital and intermediate goods registered
negative growths of 0.1 per cent, 25.5 per cent and 4.7 per cent for October 2011.
High interest rates have continued to impact investment cycle and consumer demand
which is reflected by sharp decline witnessed in capital goods segment as well
as de-growth seen in consumer durable and non-durable segment. In view of the
sharp contraction in industrial production and slower GDP growth, RBI has moderated
its policy stance and indicated that focus on growth shall return sooner than
earlier expected. We now expect interest rates to start trending down towards the
end of current fiscal.
Inflation started tapering down
November inflation decelerated to 9.11 per cent from 9.73 per cent in October due
to cooling off of food inflation as well as higher base. However, September WPI was
revised up to 10.00 per cent from 9.72 per cent. Though food inflation is coming
down, but continued depreciation of rupee may keep fuel as well as manufactured
product inflation higher.
Food article inflation slipped to 8.5 per cent from 11.4 per cent in October. Normal
monsoons and a good harvest have kept food inflation in check. On the other hand,
non-food articles inflation eased further to 3.22 per cent from 7.71 per cent in October,
the lowest since October 2009, due to correction in the fiber prices (mesta, raw
silk, raw jute), logs & timber, raw rubber, among others. Fuel inflation stood at
higher levels at 15.5 per cent in November compared to 14.8 per cent in October
due to higher international prices coupled with sharp depreciation of rupee. November
manufactured product inflation stood at higher levels at 7.7 per cent as against
7.66 per cent in October due to steep rupee depreciation which resulted in higher
imported costs.
Thus, despite fall in the crude prices last month and continuous tight monetary policy
action by RBI, inflation remained higher due to currency depreciation, which made
imports costlier. Food inflation dipped to 0.42 per cent for the week ended December
17 from 1.81 per cent in the previous week as prices of essential items like vegetables,
onion, potato and wheat declined. In December last year, excessive rains
damaged the onion crop and caused prices to spike, pushing up food inflation to
more than 20 per cent. This is the lowest rate of food inflation since past six years.
The fuel inflation slipped at 14.37 per cent versus 15.24 per cent during the same
period while the primary articles price index rose 2.70 per cent compared with an
annual rise of 3.78 per cent in the previous week
Though food inflation has started coming down, continued demand pressures are
keeping non-food manufacturing inflation higher which remains much above RBI's
comfort zone. Central bank has articulated that there are risks to inflation emanating
from demand and supply side. However, it is of the view that inflation is showing
signs of easing, with momentum indicators also showing signs of moderation.
RBI kept the policy rates unchanged
Heightened concerns about weaker economic growth in Euro Zone and US and
slowing down of domestic demand led RBI to keep all of its policy rates unchanged
in its Mid-Quarter Policy review.
It kept the repo rate and CRR unchanged at 8.5 per cent and 6.0 per cent respectively.
It also indicated that it would be the end of long series of interest rate increases
and from now onwards monetary policy actions are likely to reverse the
cycle.
RBI has clearly indicated its concern on overall growth with sharp deceleration seen
in industrial production. Though it expects inflation to start coming down, but RBI is
more concerned about significant slowdown in investment activities, which could
have negative impact of supply side constraints. We expect RBI to commence rate
reduction from Q1FY13 unless there is some nasty surprise on the inflation front.
Rupee depreciation continued in December also
Rupee continued its slide during December also due to shift of investor preference
towards safer assets like US Dollar. Rupee declined by 1.7 per cent and closed at Rs
53.1 to a dollar for December, after touching closing lows of Rs 53.7 on 14th December.
RBI finally decided to curb the volatility in the rupee to remove speculation
on the currency movements. Firstly, it curbed trading in rupee forwards. Once cancelled,
forward contracts could not be bought again. The new rule is applicable to
domestic as well as foreign investors. Secondly, the RBI reduced the amount of open
positions dealers can maintain overnight. In this case, banks would not be able to
keep speculative positions open for a long time. With this, RBI tried to curb speculation
in the currency markets and wanted only genuine demand and supply to move
the currency rate. Post this measure, rupee witnessed some appreciation. However,
rupee has depreciated by nearly 19% in the current fiscal till date.
FIIs turned net buyers towards the end of month
For the month, FIIs turned net buyers to the tune of Rs 5.75bn while mutual funds
were net buyers to the tune of Rs 4.63 bn till 28th Dec, 2011. However, for most
part of the month, FII's were offloading their assets. Slowdown in growth, general
stalemate at policy level, rupee depreciation and shift towards less riskier assets has
resulted in FII's selling for most part of the month.
Recommendation
Markets have been reacting to macro-economic concerns such as growth slowdown,
high interest rates and policy inertia on the domestic front as well as continued challenges
in euro-zone region. On the positive side, inflation has started tapering down
and interest rate cycle is also expected to reverse from Q1FY13. Valuations are also
near the lower end of the long-term valuations band for the benchmark indices.
However, we believe that, near term market performance will be influenced more
by policy initiatives, currency movement, Q3FY12 results as well as developments in
Europe and US. These headwinds may keep markets under pressure in the near
term. Resolution of these issues is necessary for markets to stabilize and move up.
We recommend a bottoms-up approach with a medium to long term view. One
should accumulate stocks of companies having ethical managements and strong
balance sheets, which are available at reasonable valuations, across sectors like IT,
Banking, Media, Logistics, Capital Goods and Infrastructure sectors.
Preferred picks
Sector Stocks
Automobiles TVS, Bajaj Auto
Banking HDFC Bank, ICICI Bank, Bank of Baroda, SBI
Cement Grasim Industries
Construction IRB Infra, Unity Infra
Engineering Greaves Cotton, Cummins, BEL, Havells
FMCG ITC, GCPL
Information Technology Infosys, TCS, KPIT, NIIT Tech
Logistics & Transportation Allcargo Global Logistics, Gateway Distriparks, Mundra Port
Media HT Media
NBFC IDFC, M&M Financial Services
Oil & Gas Cairn India, IGL
Source: Kotak Securities - Private Client Research
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