India Equity Research: Macro & Markets - March events fail to cheer

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Indian equities slipped in March after an impressive performance in Jan-Feb as the outcome of several big events - Union budget, monetary policy and state assembly polls - failed to boost sentiments. The budgeted fiscal consolidation is too optimistic as subsidies are clearly underpriced and deficit cut is heavily skewed towards revenue enhancement than expenditure cuts. Further, monetary policy continued to raise inflation concerns, leading to scale back in rate cut expectations. CRR cut did come as a surprise, but LAF borrowing persisted at elevated levels reflecting poor reserve money creation in FY12. However, on the whole, Q4 was favourable for the markets. Going ahead, quarterly earnings will shape sentiments. We expect a growth of 6.4% YoY in Sensex earnings.

Union Budget: Fiscal consolidation, but only so much

The Union Budget 2012-13 largely failed to provide material support to the economy. First, the consolidation is likely to be only mild; second, deficit reduction is heavily skewed toward revenue enhancement rather than expenditure cuts; and third, it failed to provide boost to business confidence as several pressing issues such as SEB losses, coal shortages etc were left unaddressed. However, we do see crowding out pressures in the private sector reducing compared with FY12.

Liquidity deficit: Much beyond comfort zone

Liquidity deficit in recent months has spiked substantially as reserve money creation for FY12 has been quite low due to the heavy forex intervention by RBI to check sharp fall in INR. In next couple of months, due to redemptions and govt. spending, LAF deficit is expected to taper. However, liquidity pressures can build up again, except for capital flows pick up significantly or RBI takes timely measures of OMOs and CRR cut.

Balance of Payments: Slips into deficit

Balance of Payments (BoP) slipped into deficit of USD12.8bn in Q3FY12, the first time since Dec 2008, as weak capital flows (USD6.6bn) could not fund the widening CAD of ~USD19.4bn. Slower merchandise exports (due to weak external economy) and buoyant imports (due to heavy gold imports) led to such a high CAD. Meanwhile, net capital inflows were weak as escalating European debt crisis led EU banks to retrench exposures to EMs including India. We expect CAD to narrow to ~USD15bn in Q4.

Earnings outlook: Incrementally better

Indian equities had a good Q4, clocking ~12% return. Moving ahead into April, much will depend on how earnings pan out. Our estimates point to yet another sub-par quarter, where we expect flat earnings growth for our coverage universe (ex OMCs) while Sensex earnings are expected to grow 6.4% YoY. Going into FY13, we see an improving trajectory which will help lift earnings growth in the coming quarters.

Macro & Markets - March events fail to cheer

Regards,