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April view: New fiscal; new hopes
Leverage at 32-month low; FIIs unwind F&O ahead of GAAR issue
Market volume shows initial signs of drop as P-Note activity halts
FII derivative positions shrink, index futures OI at 5-year low
Sensex drivers in FY13; bet on rate cycle reversal
Annual policy review; RBI holds the trigger, rate cut at the door
INR conundrum: CAD at 4.3% of GDP; Brent adds to the woes
Leverage at 32-month low; FIIs unwind F&O ahead of GAAR issue
March was full of important events such as the LTRO, state elections, RBI policy
announcement, union budget and GAAR. Nifty moved in a broad range of 10% to end
with a monthly drop of just 1.66%. Also, the dark clouds of FII selling P-note positions
have dispersed, at least for the moment. Though there are some initial signs of drop in
market volumes, this could be owing to the long weekend just gone by. However, lack
of P-Note activity may impact market volumes going forward. Derivative markets
witnessed strong deleveraging with FII Open Interest (OI) in derivative market dropping
~43.4%. We believe with the kind of light derivative market that we have currently had,
coupled with the resilience shown by Nifty at the 200 DMA, markets should remain
bullish in April. Important levels to watch out are 5380/5630 on the upside and
5250/5150 on the downside.
The March derivative expiry witnessed substantial unwinding by FIIs on the F&O
position. Uncertainty surrounding the P-Note issue was clearly at play during the expiry
week. The reduction in open positions going into the April series clearly showed the
reluctance on the part of investors to take incremental exposure. The 32-month low
value of market wide futures open interest at ~INR376bn was amidst relatively less
rollover at ~67%. The FII Index futures open interest at the start of April series was the
lowest since March, 2007.
A much awaited event is the central bank’s review of the monetary policy on April 17, when we expect RBI to kick start the rate
cut cycle by reducing key rates by ~25bps. However, for inflation and rising crude, the magnitude of cuts will be much muted this
year contrary to the earlier expectations. Liquidity crunch has been exerting pressure on the yields; the 10-year bond yields have
crossed the 8.70% mark reflecting tight liquidity conditions. In H1FY13, govt borrowing at ~INR3.7tn (65% of the gross budgeted
plan) is likely to keep yields on its toes for the rest of the year.
Interestingly, the Edelweiss Leverage Index (ratio of stock futures OI to total futures OI) has been consistently drifting since the
recent high in November 2010. The index is at 0.65 vs the November 2010 high of 0.70 which is clearly indicative of some risk
aversion approach by the derivative traders. We believe this to be a healthy stage of market with the P-Note issue taking a back
seat and a strong support level for the Nifty being place at the 200 DMA.
INR conundrum: CAD at 4.3% of GDP; Brent adds to the woes
Balance of Payments (BoP) slipped into deficit of USD12.8bn in Q3FY12, the first time since December 2008, as weak capital flows
(USD6.6bn) could not fund the widening Current Account Deficit (CAD) of ~USD19.4bn (4.3% of GDP). Trade deficit widened to
10.5% of GDP (from ~9.9% in Q2), as exports slowed in the wake of deteriorating external economy and imports held up on rising
gold imports. Thus, we see little fundamental support emerging for INR in Q2 as capital flows are likely to be inadequate to fund
CAD. In fact, the economy with large CAD should not rely mainly on portfolio inflows to finance the deficit due to uncertainty and
too many moving parts in flows. INR’s recovery in January was partly due to RBI’s aggressive currency intervention and its anti
speculative measures, and deregulation of NRI deposit rates. FII flows have also been robust in January and the trend has
continued in February month although INR has been weakening against USD since early February.
Budget hangover subsides, GAAR gives headache
March met everyone’s expectations of being one of the most eventful months in the recent past. As we had expected, the union
budget has set the tone for the rest of the year. The important announcements in the budget that were directly related to the
equities were: (1) General Anti-Avoidance Rules (GAAR), (2) permitting two-way fungibililty in Indian Depository Receipts subject
to a ceiling and (3) introduction of Rajiv Gandhi Equity Saving Scheme (for an investment up to INR50,000 directly in equities and
annual income below INR10lakhs) which will be allowed an income tax deduction of 50% (subject to a lock-in of 3 years). GAAR
holds tremendous significance, as markets have been shaky in the aftermath.
GAAR is applicable on tax transactions of FIIs routing money through tax havens like Mauritius (with or without P
‐
Notes) which
lack commercial substance. Despite a plethora of conference calls and inquiries on the topic, substantial evidence as to what the
final framework would be, still appears hazy. If news reports are to be believed, the P-Note related flows are likely to be kept out
from the bracket for the purpose of direct taxation (since P
‐
Notes are contractual in nature and do not constitute any transfer
of shares/interest in any entity registered outside India). However, it will lead to indirect tax on P-Notes. FIIs investing in Indian
equities through tax heavens (without commercial substance) will be taxed @ 15% for short-term capital gain and nil for long
term which in turn will be passed on to the P-Note holder. We believe that indirect regulation on P-Note flows via GAAR will
definitely curb the incremental flows into equity markets at least for the time being. The expiry day volatility was a testimony to it.
Sensex earning drivers for FY13; bet on rate cycle reversal
Our in-house estimates peg Sensex EPS for FY13E at INR1271 with banks, metals and technology perceived to be the main
contributors.
Key triggers:
BFSI: BFSI will be a key beneficiary of the reversal in the rate cycle. However, uncertain macro and asset quality will remain
major hindrances for the industry. Nevertheless, lower rates should come as a respite.
Auto: Apart from BFSI, auto will be another major beneficiary of the rate cycle reversal. Lower interest rates and pricing
power should be the major factors driving the rerating story.
Technology: A weakening bias in rupee, coupled with defensive nature (high RoE, low earnings cyclicality), makes IT a
preferred play. Upward revisions to global growth will also help.
Metals: Chinese demand and global growth hold the key.
Capital Goods: Pick up in the investment cycle and economic growth will be the key triggers.
Auto: On the fifth gear (Our auto analyst – Sachin Gupta)
Automobile sales in the last month of FY12 ended on a high note with a few original equipment makers (OEMs) hitting all-time
high sales volumes. OEMs in the passenger car segment outpaced companies in the 2W segment as the month witnessed higher
dispatches of vehicles ahead of the Union Budget 2012-13. OEMs in the passenger car segment having diesel portfolio of vehicles
witnessed maximum growth. Medium and heavy Commercial vehicle (MHCV) sales last month were disappointing with Ashok
Leyland and Tata Motors reporting fall in sales. In the 2W segment, Hero MotoCorp and Bajaj Auto reported sales growth of 2.4%
& 9% Y-o-Y, respectively, while TVS Motor Company reported a decline of 4.5% Y-o-Y. As the budget has spared diesel vehicles
from the much feared additional tax, auto firms such as M&M, Hyundai and Maruti Suzuki are expected to press ahead with plans
to expand engine capacities in this segment. We believe the auto sector would come back as the flavour of the market with
reversal in interest rate cycle. We like M&M for: (1) its inexpensive valuation, trading at 10x FY13 core EPS; (2) strong UV demand,
aided by new launches; and (3) revival in tractor demand May onwards as cash flow of winter crop starts accruing to farmers and
crop prices recover.
IT: Weak rupee to aid recovery (Our IT analyst – Sandip Agarwal)
We expect the IT sector to be much preferred on the back of expectations of weaker rupee and its defensive nature. Also,
expectations of upward revisions in global growth (especially US) should help lift discretionary spending. For the quarter ending
March 2012, we expect volume growth of 1-3% Q-o-Q with HCLT and Wipro reporting the highest growth and Infosys the lowest.
Reported pricing is likely to remain flat with slight decline in INR revenue and earnings number due to ~2.2% average INR
appreciation. EBITDA margins are likely to decline for both TCS and Infosys due to unfavorable currency movement (150bps and
110bps respectively) and slightly lower volume growth. HCLT is likely to post ~3% sequential revenue growth, followed by 2%
growth by Wipro and 1.5% and 1% by TCS and Infosys, respectively, in USD terms.
Technical view: Nifty on a role (Our technical analyst -Tejas J Shah)
The 2-month rally from the start of the year hit a peak of 5630 in February after which the indices went into a corrective phase for
the entire March. The previous month was critical to the preceding rally as it was going to be full of important events like the UP
state election results, followed by the RBI monetary policy and the union budget. However, after much skepticism the markets
managed to retrace a little more than 38.2% of the up move and even exhibited a smart rally in the final week from the lows. The
month ended with marginal loss of 1.6% for the Nifty after two consecutive months of steady gains. March also marked the end
of the first quarter of the calendar year with gains of ~12.65%, snapping the four consecutive quarterly losses in the previous year,
suggesting an end to the bear-market that started from the peak of 6338 in November 2010.
Coming back to the intermediate and short-term charts, Nifty has managed to gold above the crucial 15-month falling trend line
from the peak as well as the 200 DMA at 5149 indicating a continuation of the uptrend from the low of 4530 in December 2011. A
‘Golden Crossover’ (i.e. a technical signal from the 50 and 200 day SMAs that indicates bulls markets) had been achieved in the
first half of the month solidifying our intermediate bullish bias. Momentum oscillators on the weekly chart have maintained their
bullish stance, whereas the five week corrective price action has negated the short-term oscillator setup a bit, but that too is
under repair after the late rally by the end of the month. In the coming month, we expect Nifty to climb higher towards the
February high of 5630 with minor resistance at 5445 and, on sustenance of trade above 5630, it can possibly even rally upto 5740.
Seasonally, April has proved to be a month of “risk on” where equities have given favorable returns.
The downside will be protected by the 200 DMA at 5148 and will act a pivot for the ongoing rally. Only a sharp move below will
negate our constructive outlook. As was evident, the defensive sectors outperformed in the previous month led by gains in FMCG
(+7.8%) and healthcare (+4.5%) indices. The biggest cut was witnessed in oil & gas (-7.17%), Metals (-5.8%) and cap goods (-3.8%)
indices. Once again, the markets have turned up from the lows and, hence, we can expect the high beta sectors to outperform
and the defensive sectors to take a backseat. Bank Nifty is poised to lead the rally followed by metals and cap goods. The power
index is building a base to resume the rally from the December lows. IT sectors is likely to trade in line with the index, whereas
Pharma and FMCG are expected to underperform due to their defensive nature.
Global events
PMI data were generally strong ex-Eurozone, with the US, China and Japan posting gains in headline indices. The jump in the
Chinese PMI may be seasonal in nature, showed the services sector grew last month to extend a healthy pace of expansion
seen this year, with the index hitting ~58 in March.
In his recent speech, Federal Reserve Chairman, Mr. Bernanke, expressed his doubts whether the recent gains in the U.S.
labor market can be sustained without further stimulus. To bring next round of easing, there are two possibilities. First,
lengthening the duration of the current book by using maturities and interest receipts to buy longer-dated bonds. Second, the
Federal Reserve will intervene directly in the mortgage market by buying securities in the mortgage-backed securities market.
This should have the effect of lowering the margin between Treasury bond rates and the interest paid in new mortgages by
homeowners.
Performance of emerging markets was mixed. Positive gainers were SET (up ~3.1%), KLCI (up ~1.7%), and STI (up ~0.5%) while
among negatives were Shanghai (down ~6.8%) and TAIEX (down ~2.3%).
In contrast with February month’s trend, Nifty and Sensex gave negative returns of ~1.7% and ~2.0% respectively.
Hang Seng (down ~5.2%) was the biggest loser amidst developed markets.
Gainers among developed markets were, NASDAQ (up ~4.2%) followed by Nikkei (up ~3.7%) and S&P 500 (up ~3.1%).
FII flows remain positive
FIIs were net buyers in India (cash + futures) in March. Thailand, among emerging markets, posted the highest FII inflow
of ~USD1.05bn.
In India, FIIs were net buyers of ~USD0.66bn (cash + futures) in March. In the cash segment, FIIs bought ~USD1.55bn
while in futures they were net sellers of ~USD0.88bn.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
April view: New fiscal; new hopes
Leverage at 32-month low; FIIs unwind F&O ahead of GAAR issue
Market volume shows initial signs of drop as P-Note activity halts
FII derivative positions shrink, index futures OI at 5-year low
Sensex drivers in FY13; bet on rate cycle reversal
Annual policy review; RBI holds the trigger, rate cut at the door
INR conundrum: CAD at 4.3% of GDP; Brent adds to the woes
Leverage at 32-month low; FIIs unwind F&O ahead of GAAR issue
March was full of important events such as the LTRO, state elections, RBI policy
announcement, union budget and GAAR. Nifty moved in a broad range of 10% to end
with a monthly drop of just 1.66%. Also, the dark clouds of FII selling P-note positions
have dispersed, at least for the moment. Though there are some initial signs of drop in
market volumes, this could be owing to the long weekend just gone by. However, lack
of P-Note activity may impact market volumes going forward. Derivative markets
witnessed strong deleveraging with FII Open Interest (OI) in derivative market dropping
~43.4%. We believe with the kind of light derivative market that we have currently had,
coupled with the resilience shown by Nifty at the 200 DMA, markets should remain
bullish in April. Important levels to watch out are 5380/5630 on the upside and
5250/5150 on the downside.
The March derivative expiry witnessed substantial unwinding by FIIs on the F&O
position. Uncertainty surrounding the P-Note issue was clearly at play during the expiry
week. The reduction in open positions going into the April series clearly showed the
reluctance on the part of investors to take incremental exposure. The 32-month low
value of market wide futures open interest at ~INR376bn was amidst relatively less
rollover at ~67%. The FII Index futures open interest at the start of April series was the
lowest since March, 2007.
A much awaited event is the central bank’s review of the monetary policy on April 17, when we expect RBI to kick start the rate
cut cycle by reducing key rates by ~25bps. However, for inflation and rising crude, the magnitude of cuts will be much muted this
year contrary to the earlier expectations. Liquidity crunch has been exerting pressure on the yields; the 10-year bond yields have
crossed the 8.70% mark reflecting tight liquidity conditions. In H1FY13, govt borrowing at ~INR3.7tn (65% of the gross budgeted
plan) is likely to keep yields on its toes for the rest of the year.
Interestingly, the Edelweiss Leverage Index (ratio of stock futures OI to total futures OI) has been consistently drifting since the
recent high in November 2010. The index is at 0.65 vs the November 2010 high of 0.70 which is clearly indicative of some risk
aversion approach by the derivative traders. We believe this to be a healthy stage of market with the P-Note issue taking a back
seat and a strong support level for the Nifty being place at the 200 DMA.
INR conundrum: CAD at 4.3% of GDP; Brent adds to the woes
Balance of Payments (BoP) slipped into deficit of USD12.8bn in Q3FY12, the first time since December 2008, as weak capital flows
(USD6.6bn) could not fund the widening Current Account Deficit (CAD) of ~USD19.4bn (4.3% of GDP). Trade deficit widened to
10.5% of GDP (from ~9.9% in Q2), as exports slowed in the wake of deteriorating external economy and imports held up on rising
gold imports. Thus, we see little fundamental support emerging for INR in Q2 as capital flows are likely to be inadequate to fund
CAD. In fact, the economy with large CAD should not rely mainly on portfolio inflows to finance the deficit due to uncertainty and
too many moving parts in flows. INR’s recovery in January was partly due to RBI’s aggressive currency intervention and its anti
speculative measures, and deregulation of NRI deposit rates. FII flows have also been robust in January and the trend has
continued in February month although INR has been weakening against USD since early February.
Budget hangover subsides, GAAR gives headache
March met everyone’s expectations of being one of the most eventful months in the recent past. As we had expected, the union
budget has set the tone for the rest of the year. The important announcements in the budget that were directly related to the
equities were: (1) General Anti-Avoidance Rules (GAAR), (2) permitting two-way fungibililty in Indian Depository Receipts subject
to a ceiling and (3) introduction of Rajiv Gandhi Equity Saving Scheme (for an investment up to INR50,000 directly in equities and
annual income below INR10lakhs) which will be allowed an income tax deduction of 50% (subject to a lock-in of 3 years). GAAR
holds tremendous significance, as markets have been shaky in the aftermath.
GAAR is applicable on tax transactions of FIIs routing money through tax havens like Mauritius (with or without P
‐
Notes) which
lack commercial substance. Despite a plethora of conference calls and inquiries on the topic, substantial evidence as to what the
final framework would be, still appears hazy. If news reports are to be believed, the P-Note related flows are likely to be kept out
from the bracket for the purpose of direct taxation (since P
‐
Notes are contractual in nature and do not constitute any transfer
of shares/interest in any entity registered outside India). However, it will lead to indirect tax on P-Notes. FIIs investing in Indian
equities through tax heavens (without commercial substance) will be taxed @ 15% for short-term capital gain and nil for long
term which in turn will be passed on to the P-Note holder. We believe that indirect regulation on P-Note flows via GAAR will
definitely curb the incremental flows into equity markets at least for the time being. The expiry day volatility was a testimony to it.
Sensex earning drivers for FY13; bet on rate cycle reversal
Our in-house estimates peg Sensex EPS for FY13E at INR1271 with banks, metals and technology perceived to be the main
contributors.
Key triggers:
BFSI: BFSI will be a key beneficiary of the reversal in the rate cycle. However, uncertain macro and asset quality will remain
major hindrances for the industry. Nevertheless, lower rates should come as a respite.
Auto: Apart from BFSI, auto will be another major beneficiary of the rate cycle reversal. Lower interest rates and pricing
power should be the major factors driving the rerating story.
Technology: A weakening bias in rupee, coupled with defensive nature (high RoE, low earnings cyclicality), makes IT a
preferred play. Upward revisions to global growth will also help.
Metals: Chinese demand and global growth hold the key.
Capital Goods: Pick up in the investment cycle and economic growth will be the key triggers.
Auto: On the fifth gear (Our auto analyst – Sachin Gupta)
Automobile sales in the last month of FY12 ended on a high note with a few original equipment makers (OEMs) hitting all-time
high sales volumes. OEMs in the passenger car segment outpaced companies in the 2W segment as the month witnessed higher
dispatches of vehicles ahead of the Union Budget 2012-13. OEMs in the passenger car segment having diesel portfolio of vehicles
witnessed maximum growth. Medium and heavy Commercial vehicle (MHCV) sales last month were disappointing with Ashok
Leyland and Tata Motors reporting fall in sales. In the 2W segment, Hero MotoCorp and Bajaj Auto reported sales growth of 2.4%
& 9% Y-o-Y, respectively, while TVS Motor Company reported a decline of 4.5% Y-o-Y. As the budget has spared diesel vehicles
from the much feared additional tax, auto firms such as M&M, Hyundai and Maruti Suzuki are expected to press ahead with plans
to expand engine capacities in this segment. We believe the auto sector would come back as the flavour of the market with
reversal in interest rate cycle. We like M&M for: (1) its inexpensive valuation, trading at 10x FY13 core EPS; (2) strong UV demand,
aided by new launches; and (3) revival in tractor demand May onwards as cash flow of winter crop starts accruing to farmers and
crop prices recover.
IT: Weak rupee to aid recovery (Our IT analyst – Sandip Agarwal)
We expect the IT sector to be much preferred on the back of expectations of weaker rupee and its defensive nature. Also,
expectations of upward revisions in global growth (especially US) should help lift discretionary spending. For the quarter ending
March 2012, we expect volume growth of 1-3% Q-o-Q with HCLT and Wipro reporting the highest growth and Infosys the lowest.
Reported pricing is likely to remain flat with slight decline in INR revenue and earnings number due to ~2.2% average INR
appreciation. EBITDA margins are likely to decline for both TCS and Infosys due to unfavorable currency movement (150bps and
110bps respectively) and slightly lower volume growth. HCLT is likely to post ~3% sequential revenue growth, followed by 2%
growth by Wipro and 1.5% and 1% by TCS and Infosys, respectively, in USD terms.
Technical view: Nifty on a role (Our technical analyst -Tejas J Shah)
The 2-month rally from the start of the year hit a peak of 5630 in February after which the indices went into a corrective phase for
the entire March. The previous month was critical to the preceding rally as it was going to be full of important events like the UP
state election results, followed by the RBI monetary policy and the union budget. However, after much skepticism the markets
managed to retrace a little more than 38.2% of the up move and even exhibited a smart rally in the final week from the lows. The
month ended with marginal loss of 1.6% for the Nifty after two consecutive months of steady gains. March also marked the end
of the first quarter of the calendar year with gains of ~12.65%, snapping the four consecutive quarterly losses in the previous year,
suggesting an end to the bear-market that started from the peak of 6338 in November 2010.
Coming back to the intermediate and short-term charts, Nifty has managed to gold above the crucial 15-month falling trend line
from the peak as well as the 200 DMA at 5149 indicating a continuation of the uptrend from the low of 4530 in December 2011. A
‘Golden Crossover’ (i.e. a technical signal from the 50 and 200 day SMAs that indicates bulls markets) had been achieved in the
first half of the month solidifying our intermediate bullish bias. Momentum oscillators on the weekly chart have maintained their
bullish stance, whereas the five week corrective price action has negated the short-term oscillator setup a bit, but that too is
under repair after the late rally by the end of the month. In the coming month, we expect Nifty to climb higher towards the
February high of 5630 with minor resistance at 5445 and, on sustenance of trade above 5630, it can possibly even rally upto 5740.
Seasonally, April has proved to be a month of “risk on” where equities have given favorable returns.
The downside will be protected by the 200 DMA at 5148 and will act a pivot for the ongoing rally. Only a sharp move below will
negate our constructive outlook. As was evident, the defensive sectors outperformed in the previous month led by gains in FMCG
(+7.8%) and healthcare (+4.5%) indices. The biggest cut was witnessed in oil & gas (-7.17%), Metals (-5.8%) and cap goods (-3.8%)
indices. Once again, the markets have turned up from the lows and, hence, we can expect the high beta sectors to outperform
and the defensive sectors to take a backseat. Bank Nifty is poised to lead the rally followed by metals and cap goods. The power
index is building a base to resume the rally from the December lows. IT sectors is likely to trade in line with the index, whereas
Pharma and FMCG are expected to underperform due to their defensive nature.
Global events
PMI data were generally strong ex-Eurozone, with the US, China and Japan posting gains in headline indices. The jump in the
Chinese PMI may be seasonal in nature, showed the services sector grew last month to extend a healthy pace of expansion
seen this year, with the index hitting ~58 in March.
In his recent speech, Federal Reserve Chairman, Mr. Bernanke, expressed his doubts whether the recent gains in the U.S.
labor market can be sustained without further stimulus. To bring next round of easing, there are two possibilities. First,
lengthening the duration of the current book by using maturities and interest receipts to buy longer-dated bonds. Second, the
Federal Reserve will intervene directly in the mortgage market by buying securities in the mortgage-backed securities market.
This should have the effect of lowering the margin between Treasury bond rates and the interest paid in new mortgages by
homeowners.
Performance of emerging markets was mixed. Positive gainers were SET (up ~3.1%), KLCI (up ~1.7%), and STI (up ~0.5%) while
among negatives were Shanghai (down ~6.8%) and TAIEX (down ~2.3%).
In contrast with February month’s trend, Nifty and Sensex gave negative returns of ~1.7% and ~2.0% respectively.
Hang Seng (down ~5.2%) was the biggest loser amidst developed markets.
Gainers among developed markets were, NASDAQ (up ~4.2%) followed by Nikkei (up ~3.7%) and S&P 500 (up ~3.1%).
FII flows remain positive
FIIs were net buyers in India (cash + futures) in March. Thailand, among emerging markets, posted the highest FII inflow
of ~USD1.05bn.
In India, FIIs were net buyers of ~USD0.66bn (cash + futures) in March. In the cash segment, FIIs bought ~USD1.55bn
while in futures they were net sellers of ~USD0.88bn.
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