India Monthly Wrap May 2013: Losing Steam...JPMorgan

 MSCI India (US$) lost a meaningful 3% and performed largely in-line
with the MSCI EM index over the month. The global environment was
volatile as the surge in developed market treasury yields created uncertainty
over the sustainability of growth recovery. Economic indicators in key
developed economies surprised positively though. Global commodity prices
remained range-bound. At home, political developments and growth
indicators were disappointing. Inflation surprised positively. Sector
performance reflected risk aversion - IT Services, Consumer Staples, and
Consumer Discretionary outperformed while Utilities and Industrials
underperformed.
 Rate cut, tone hawkish. In the quarterly credit policy meeting, the RBI cut
the benchmark Repo rate by 25 bps to 7.25%. The CRR was left unchanged
at 4.00%. The central bank maintained a hawkish tone and indicated that the
scope for further easing is limited. The Central bank is targeting year-end
WPI of 5.0% and estimated FY14E GDP growth of 5.7% oya.
 Monthly Inflation and IP surprise positively. April composite CPI print at
9.4% oya was lower-than-consensus expectation. WPI inflation at 4.9% was
the first sub-5% print in over three years. The fall in inflation was broad
based. March IP growth at 2.5% oya was in line with expectations, driven
largely by the volatile capital goods segment.
 FIIs buyers, DIIs sellers. FIIs remained buyers of Indian equities and
invested a significant US$3.6 bn over May. DIIs were sellers of US$2.2 bn.
Insurance companies and mutual funds sold US$1.6 bn and US$634 mn
respectively.
 Other key developments over the month:
 10 Year treasury softened a significant 50bps to 7.22%
 INR depreciated a significant 5%
 4Q FY13 GDP increased 4.8% oya

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Equity review
MSCI India (US$) lost a meaningful 3% and
performed largely in-line with the MSCI EM index
over the month. The global environment turned
volatile as the surge in developed market treasury
yields created uncertainty over the sustainability of
growth recovery. Economic indicators in key
developed economies surprised positively. Global
commodity prices remained range-bound. Our global
economics team is constructive on global growth outlook
into 2H CY. They note that “If we are right, this year is
different and global growth will rise to an above-trend
pace during the second half. This year’s buoyancy in
equity and credit markets—which reflects the interaction
of easy money with reduced macroeconomic
uncertainty—provides a key support for this view. But
activity indicators remain lackluster, and judging by the
path of industrial activity and our global GDP
nowcaster, we are still tracking last year’s path—with a
strong start followed by an early spring downshift. We
believe that we are at the fork in the road where the
global economy will turn onto the path less traveled in
recent years. Rather than watch the spring downshift
magnify and produce a growth scare, we think activity
indicators will move into midyear in a way that forms the
base for a forecasted second-half lift. Three components
of this view can be tracked through upcoming data
releases”, in the GDW dated May 31st.
Domestic growth outlook remained largely
disappointing and was not conducive for equity
performance. April WPI inflation fell below 5%. CPI
moderated to 9.4% oya, but remains uncomfortably
high for a sharp rate cut ahead. Separately, India
remains extremely vulnerable to external
developments and any reversal in global liquidity.
Sectoral performance indicated increased risk
aversion. Consumer Staples, IT Services and
Consumer Discretionary outperformed while Utilities
and Industrials underperformed.
FIIs were buyers and DIIs were sellers over the
month. Over May, FIIs bought US$3.6 bn of Indian
equities. CY YTD FII’s have invested US$15.3 bn.
DIIs were sellers of US$2.2 bn over May. Insurance
companies and mutual funds sold US$1.6 bn and
US$634 mn respectively. CY YTD Insurance companies
and mutual funds have sold US$6.8 bn and US$2.2 bn
respectively.
Earnings estimate and valuations
Marginal cuts in earnings expectations. Consensus
earnings estimates for the broad market (MSCI India)
were revised down by 1.5% and 1.3% for FY14 (E) and
FY 15(E) over the month.The street now estimates
earnings growth of 13% and 15% for FY14(E) and
FY15(E) respectively. The breadth of earnings revisions
was negative too. Upgrades were seen only in Health
care and Utilities sectors.

Corporate news
 The RBI published the final guidelines on restructuring
of loans for Indian banks. The new standards tighten the
existing provisioning norms and classify all restructured
loans as NPLs from FY16 onward.
 As per various media reports (CNBC, Reuters, FE), the
National Green Tribunal (NGT) has allowed the shut
copper smelter of Sterlite Ind. at Tuticorin to restart.
 Stake reduction by promoters to meet SEBI stipulated
free float requirement of 75%. Companies under JPM
coverage are: Essar Ports, Adani Enterprises, Jet
Airways.
 Finance Ministry imposed 2.5% import duty on melting
scrap, aluminum scrap among others
 Reliance Communications has increased the headline
tariffs for its services across GSM and CDMA pre-paid
mobile networks by 33 percent.
 4Q FY13 earnings increased 4% yoy for our coverage
universe. Consumers, Private Sector Banks, Health Care
and Steel Companies surprised positively; Industrials, IT
Services, SoE Banks and Cement companies
disappointed.
Economic review
Monthly Inflation and IP surprise positively.
March composite CPI print at 9.4% oya was lowerthan-consensus expectation. WPI inflation at 4.9%
reached its first sub-5% print in over three years. The
fall in inflation has been broad based. March IP
growth at 2.5% oya surprised positively, largely
driven by a volatile capital goods segment.
The RBI cut the benchmark Repo rate by 25 bps to
7.25%. The CRR was left unchanged at 4.00%.The
central bank maintained a hawkish tone and indicated
that the scope of further easing is limited. The Central
bank is targeting year-end WPI of 5.0% and FY14
GDP growth of 5.7% oya.
10-year benchmark treasury yields softened by a
significant 50 bps over the month. Positive surprises in
monthly inflation prints and hopes of further easing aided
the downward move.
INR depreciated a significant 5% over the month. The
depreciation is despite meaningful portfolio inflows and
can be attributed to elevated CAD.
India’s foreign currency reserves reduced marginally
to US$261 bn over the month.