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India Equity Research Reports, IPO and Stock News
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July’s headline yoy WPI of 9.2% was in line with market expectations, with seasonally adj.
core mfg. inflation moderating to 3.8% from 5.0% in June.
July headline yoy WPI of 9.2% in line with Bloomberg consensus
Yoy WPI inflation moderated from the 9.4% reading for June.
Looking at the details, yoy total food inflation declined to 8.0% from 8.4% in June as
manufactured food products inflation declined to 7.6% from 8.5% while primary food
inflation was stable at 8.2% (down a bit from 8.4% in June).
Yoy fuel and power inflation dipped to 12.0% in July from 12.8% in June.
Yoy core manufacturing inflation inched up to 7.5% in July from 7.2% in June.
Muted upward revision to May core manufacturing inflation
May yoy headline WPI inflation was revised up to 9.6% from 9.1%, as the headline WPI index
was revised up by 46 basis points to 152.4. The upward revision was mainly linked to
minerals (upward revision of 18%) which lead to an upward revision of 1.6% in the primary
articles index. Importantly, the core manufacturing inflation reading (a focus for the RBI) for
May was revised up by only 7 basis points.
Seasonally adj. (sa) core manufacturing inflation moderated further
The core manufacturing price index increased only 20 basis points from June. On a
seasonally adjusted basis, the core manufacturing price index increased 32 basis points from
June, which suggests an annualized rate of only 3.8%, below the RBI’s comfort range of 4-5%
and significantly below the current yoy rate of 7.5%. The sa core mfg. inflation rate for June
was 5.0%.
We were positively surprised by the muted sa core mfg. inflation in July, as we were
expecting the retail fuel price hikes of late June to be passed through to core mfg. inflation. It
seems weakening domestic consumption (as reflected in the weak June IIP numbers), waning
corporate pricing power, and lower global commodity prices more than offset the impact of
higher fuel prices.
As the following chart comparing seasonally adjusted and yoy core manufacturing inflation
shows, we think core manufacturing inflation peaked on a seasonally adjusted basis earlier
this year (February/March).
Yoy inflation could peak at c10% in Aug. due to base effect and higher fuel prices
Although higher fuel prices did not seem to flow through to core mfg. inflation in July, they
could flow through with a lag into August core mfg. inflation numbers, which could lead to an
increase in yoy core manufacturing inflation to around 8% in August from 7.5% in July. As
such, we expect yoy headline inflation to increase to 9.6% in August from 9.2% in July and
then moderate to around 9% in September.
Bullish markets and rate sensitivities but …
We continue to be buyers of Indian equities as valuations are now at a discount to historical
averages (12M forward P/E of c13x vs. historical average of c14.5x) and we believe interest
rates are close to peaking out (we expect only 25-50 bp of further policy rate hikes from the
RBI) as inflationary pressures are moderating with a slowdown in domestic demand. Our
model portfolio is overweight interest rate sensitive stocks (wholesale funded banks and
financial institutions and autos).
… Mr Anna Hazare’s “arrest and release” could disrupt Parliament
We also hold the view that reforms could surprise versus low investor expectations as the
Congress-led government is seeking the cooperation of the principal opposition party, the
Bharatiya Janata Party (BJP), to facilitate the passing of key reforms related legislation in the
parliament. The BJP has also signalled a more constructive approach to the monsoon
session by focusing on debates and censure motions rather than disrupting the Parliament’s
proceedings. The monsoon session of Parliament commenced on 1 August 2011 and is
expected to conclude on 8 September 2011.
This increases the likelihood that reform legislation for the Pensions, Insurance and the
Goods & Services Tax (GST) can be passed either in the monsoon session or the winter
session (mid November to mid-December) of Parliament (although related legislation has not
been included in the published agenda of government bills for the monsoon session).
However, the “arrest and release” of Mr Anna Hazare by the Delhi police to prevent his
hunger strike has lead to significant public as well as political outrage. To review, Mr Hazare
planned to start his hunger strike the morning of 16 August to force the government to accept
his version of the anti-corruption Lokpal Bill. This could disrupt the monsoon session of
Parliament and lead to delays in reforms related legislation.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
July’s headline yoy WPI of 9.2% was in line with market expectations, with seasonally adj.
core mfg. inflation moderating to 3.8% from 5.0% in June.
July headline yoy WPI of 9.2% in line with Bloomberg consensus
Yoy WPI inflation moderated from the 9.4% reading for June.
Looking at the details, yoy total food inflation declined to 8.0% from 8.4% in June as
manufactured food products inflation declined to 7.6% from 8.5% while primary food
inflation was stable at 8.2% (down a bit from 8.4% in June).
Yoy fuel and power inflation dipped to 12.0% in July from 12.8% in June.
Yoy core manufacturing inflation inched up to 7.5% in July from 7.2% in June.
Muted upward revision to May core manufacturing inflation
May yoy headline WPI inflation was revised up to 9.6% from 9.1%, as the headline WPI index
was revised up by 46 basis points to 152.4. The upward revision was mainly linked to
minerals (upward revision of 18%) which lead to an upward revision of 1.6% in the primary
articles index. Importantly, the core manufacturing inflation reading (a focus for the RBI) for
May was revised up by only 7 basis points.
Seasonally adj. (sa) core manufacturing inflation moderated further
The core manufacturing price index increased only 20 basis points from June. On a
seasonally adjusted basis, the core manufacturing price index increased 32 basis points from
June, which suggests an annualized rate of only 3.8%, below the RBI’s comfort range of 4-5%
and significantly below the current yoy rate of 7.5%. The sa core mfg. inflation rate for June
was 5.0%.
We were positively surprised by the muted sa core mfg. inflation in July, as we were
expecting the retail fuel price hikes of late June to be passed through to core mfg. inflation. It
seems weakening domestic consumption (as reflected in the weak June IIP numbers), waning
corporate pricing power, and lower global commodity prices more than offset the impact of
higher fuel prices.
As the following chart comparing seasonally adjusted and yoy core manufacturing inflation
shows, we think core manufacturing inflation peaked on a seasonally adjusted basis earlier
this year (February/March).
Yoy inflation could peak at c10% in Aug. due to base effect and higher fuel prices
Although higher fuel prices did not seem to flow through to core mfg. inflation in July, they
could flow through with a lag into August core mfg. inflation numbers, which could lead to an
increase in yoy core manufacturing inflation to around 8% in August from 7.5% in July. As
such, we expect yoy headline inflation to increase to 9.6% in August from 9.2% in July and
then moderate to around 9% in September.
Bullish markets and rate sensitivities but …
We continue to be buyers of Indian equities as valuations are now at a discount to historical
averages (12M forward P/E of c13x vs. historical average of c14.5x) and we believe interest
rates are close to peaking out (we expect only 25-50 bp of further policy rate hikes from the
RBI) as inflationary pressures are moderating with a slowdown in domestic demand. Our
model portfolio is overweight interest rate sensitive stocks (wholesale funded banks and
financial institutions and autos).
… Mr Anna Hazare’s “arrest and release” could disrupt Parliament
We also hold the view that reforms could surprise versus low investor expectations as the
Congress-led government is seeking the cooperation of the principal opposition party, the
Bharatiya Janata Party (BJP), to facilitate the passing of key reforms related legislation in the
parliament. The BJP has also signalled a more constructive approach to the monsoon
session by focusing on debates and censure motions rather than disrupting the Parliament’s
proceedings. The monsoon session of Parliament commenced on 1 August 2011 and is
expected to conclude on 8 September 2011.
This increases the likelihood that reform legislation for the Pensions, Insurance and the
Goods & Services Tax (GST) can be passed either in the monsoon session or the winter
session (mid November to mid-December) of Parliament (although related legislation has not
been included in the published agenda of government bills for the monsoon session).
However, the “arrest and release” of Mr Anna Hazare by the Delhi police to prevent his
hunger strike has lead to significant public as well as political outrage. To review, Mr Hazare
planned to start his hunger strike the morning of 16 August to force the government to accept
his version of the anti-corruption Lokpal Bill. This could disrupt the monsoon session of
Parliament and lead to delays in reforms related legislation.
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