28 Feb 2015

Indian equity, 30%+

Indian equity markets have generated returns of 30% over the past year but that doesn’t mean the opportunity is lost. Macroeconomic conditions, combined with stable politics, a government committed to market-favourable reform plus interest rate cuts provide plenty of scope for another two to three years of excellent returns. Next week’s Union Budget should serve to emphasise the prospective outlook; next week’s Trading Day is an opportunity to buy Himalayan Fund in anticipation.

27 Feb 2015

Prices in reverse

Wholesale prices have gone into reverse now, the WPI print for January was -0.4%; the major drivers were fuel and power but declines were fairly broad-based. This week though, the prices of petrol and diesel were increased for the first time since last August. Service exports were 11% higher year on year in December at $14.3bn. PM Modi repeated his encouragement to domestic defence industries, promising that domestic products would be given preference in procurement programmes. He added that the tax code would be used to ensure that domestic producers would be on a level playing field with importers.

Company news, not bad at all

Pidilite has taken advertising slots during the current ICC Cricket World Cup for its Dr. Fixit and Fevikwik products having found the audience numbers compelling. Infosys has acquired Panaya, a US software service company for $200mil; Panaya provides cloud-based software automation services for users of the likes of SAP and Oracle software. Infosys also announced a new multi-year contract from ABN AMRO to provide IT services in retail and commercial banking. Lupin is launching a new version of its asthma delivery device in the US in cooperation with InspiRx, a respiratory R&D company. Lupin has also contracted with Celon Pharma of Poland to develop and market a generic version of GSK’s Advir Diskus asthma treatment in global markets. ONGC has signed a MoU with Super Wave Technology to jointly develop and alternative to hydraulic fracturing for extracting shale oil and gas.

26 Feb 2015

Liquidity to support market

Global liquidity as well as domestic reform, with the prospect of more to come, support the market for now. The market valuation stands at 16.8 times twelve month forward earnings, compared to a long-term average of 15.6 times. The implementation of nationwide GST, successful auctions of coal mine licenses and mobile spectrum and the probability of continued monetary easing should provide a basis for further rerating over the next couple of years.

25 Feb 2015

Third quarter profits disappointment?

Overall, third quarter profits have been a disappointment for India, but compared to the rest of the world... Revenues advanced by just 5% in aggregate as many sectors faced continued soft demand conditions at home and economic weakness abroad. Profits only improved by 2.5%. Sectors reporting declining sales overall included Industrials, Metals and Mining and Utilities. Top performers for sales growth were IT, Media and Healthcare. This may prove to be the low-point for quarterly earnings as the macroeconomic environment is improving nicely: the current account deficit is down, the fiscal deficit is in decline and inflation is well down. 

Third quarter results season

The third quarter results season has drawn to a close, with three results of interest this week. Predictably, ONGC, the PSU energy heavyweight saw sales down by 9% and profits 50% lower, hit by sharply reduced realizations due to the oil price. Balkrishna Industries, after last quarter’s disappointment, declared sales ahead by 9% and profits by 5%; some of its weaker markets are recovering already. HDFC Bank sustained its reputation as the market’s favourite banker with a gain of 23% in net interest income and a 20% gain in profits. 

24 Feb 2015

Chicken, deflation and premium to cash

Greece’s game of chicken with Germany continues to hold markets in thrall. And deflation concerns started to weigh on the conventional wisdom about the timing of US rate increases. Meanwhile, India is being propelled by optimism for the Union Budget next week, as the Nifty added 28 points to close 0.3% up at 8834 after trading in a range of 1.3%. Daily trading volumes stayed above average this week, at $3.8bn as we witnessed the rare coincidence of FIIs (+$569mil) and domestic investors (+$66mil) all net investors in cash equities. Market breadth was thin however, with advances and declines in balance. Three stocks worth 18% of Nifty capitalization added 169 points to the index while two, worth just 8% of market cap deducted 76 points. Volatility was stable, the India VIX trading mostly between 20 and 21 where it closed. Three month index futures closed at a premium of 1.5% to cash.

18 Feb 2015

Conditions positive for monetary easing

With CPI remaining well below the RBI medium term target of 6%, conditions remain conducive to further monetary easing. The RBI governor is keen to see a strong commitment from government to fiscal consolidation, however, so we will probably have to wait for the Budget to be digested before we see another move. Mr. Rajan may be more likely to move again outside the cycle of policy review meetings, having set the pattern. Consensus thinking now expects another 50 basis points of repo rate cuts by mid-year. Moving from 7.75% down to a probable target of 5% in 25 basis point steps will probably take two years, so, barring unexpected surprises, India’s stock markets should enjoy monetary policy support for some time to come.

17 Feb 2015

Infosys wins Dutch contract

Tech companies dominated the corporate news this week. Infosys has won an IT services contract from Dutch insurer asr, to provide back office services for the company’s pension administration services. Infosys will take on close to 100 asr staff. Infosys also reported a new multi-year contract with ICA Gruppen, a top Swedish retailer, to manage its IT operations with a view to saving $10mil a year in costs. TCS was also in the news, working with Singapore Airlines to introduce CrewCollab, a tablet-based application for cabin crew. The app is to help personalize passenger relations and streamline in-flight procedures. ICICI Bank is repatriating capital from its Canadian subsidiary for the second time in two years, to boost its capital ratios. The private sector bank is also planning to withdraw surplus capital from its UK subsidiary.

16 Feb 2015

Telecom subscriber base in India: 970 million

India’s trade deficit improved in January, to an eleven-month low of $8.32bn, thanks to a 17% drop in the cost of oil imports. A $10 fall in the oil price is estimated to help the current account deficit by 0.5% of GDP and reduces the fiscal deficit by 0.1%. The new time series for Indian GDP will deliver a growth number of 7.1% for the current fiscal year, driving total GDP to $2trn. January’s CPI print was 5.1% compared to 4.9% in December but still a positive surprise. December’s IIP was 1.7% compared to 3.9% in November and 0.1% a year earlier. Mining contracted again, still affected by closures as the market awaits the re-auction of coal licenses. More importantly, a decline of 9% in the Consumer Durable sector shows that the government has a tough job ahead to drive growth: re-igniting public sector investment as a primary driver is expected to feature in the Union Budget. The Budget is expected to include an aggressive programme of disinvestment, including some IPOs, to raise some $7.5bn for the treasury, to help balance the fiscal deficit as well as providing funds for infrastructure investment. A study has shown that Maharashthra and the National Capital Region attracted 49% of all Indian FDI between them in the period since 2000. India’s telecom subscriber base grew to 970 million by December 31st, 2014.

15 Feb 2015

Late results

Two Indian companies published results this week. Magma Fincorp saw revenues grow by 40% as it focussed on financing products experiencing strong demand. Profits were hit by additions to loss reserves, however, growing by just 9.6%. Nestle India saw its recent focus on higher margin products pay off as sales advanced by 12% and profits by 17.6%.

Recover upward momentum

Last week, China’s trade data showed a decline in exports combined with a major collapse in imports leading to an unprecedented trade surplus. This emphasises the failure of policy efforts to drive consumer demand. This worried markets but an apparent cease-fire deal in the Ukraine boosted sentiment later in the week so equities closed on an upswing. India broke a seven-day losing streak to recover its upward momentum, the Nifty adding 145 points to close 1.7% up after trading in a range of 4.1%. Daily trading volumes were in the $3.5bn range, slightly above the trailing average in spite of net sales of $434mil by FIIs; domestic investors bought a net $349mil. Market breadth was strong, with advances outrunning declines by more than three to one. There was some heavy concentration on the buy side, however: four stocks worth just 13% of index capitalization contributed 50% of the points’ gain for the week, half in the banking sector. Volatility was steady with the India VIX trading around last week’s close before softening on Friday, to close a point lower at 20. Index futures again indicate a positive opening next week, closing at a premium of close to 2%.

12 Feb 2015

Business news, very dynamic

ONGC will invest about $4bn to add 17mil tonnes of oil production and 56billion scmd of gas production. Gas output will jump by 81% to a total of 116mmscmd by 2019, when new wells in the eastern and western offshore fields come on stream. Kotak Mahindra Bank will acquire just less than 20% of Airtel M Commerce Services Ltd. subject to the company winning a Payment Bank license under the RBI’s new scheme. Airtel M Commerce is market leader Bharti’s mobile payments business. HDFC Bank moved quickly into the markets after final approval of its 74% FII holding structure: it raised just short of $100mil in a share placement combined with a placement of 22 million ADRs. 

11 Feb 2015

Government and business

The government is to amend the base year for GDP comparison from FY05 to FY12 and switch to market prices from gross value added in the calculation. This has resulted in FY13 GDP growth being restated as 5.1% and FY14 as 6.9%. Direct tax collection in the first nine months of FY15 has risen by 12.9%, short of the Budget target but there appears to be enough going on to ensure that the amended fiscal deficit target of 4.1% of GDP will be met..The sale of 10% of Coal India was completed, raising $4bn for the Treasury, more than half of the annual target. A further 5% sale is slated for next year. The 3G spectrum auction is scheduled for the first week of March and the floor price suggests that a cumulative $16bn will eventually be raised. In a move to soothe foreign investors’ nerves, the government has decided not to challenge the high court finding in favour of Vodafone in the long-running share transfer dispute. It has also instructed the tax authorities to apply the precedent set in other cases.

Forget China

Whereas China's workforce began to shrink in 2012, more than half of India's current population is younger than 25. The Economist expects the Indian economy to make a huge jump forward. Read more The Economist.

10 Feb 2015

Last results trickle in

Late results continued to trickle in. Our favoured Healthcare sector was a little disappointing. Torrent Pharma reported sales ahead by 15.1% but profits only advanced by 5.7% as sales of new formulations in the US disappointed. Lupin reported sales ahead by only 5.4% as the pace of USFDA approvals slowed late in the year. Profits gained 26.3% however and the pace of approvals has recovered: the USFDA has just approved Lupin’s generic version of Vancocin, a diarrhoea treatment, in two strengths. Pidilite saw sales ahead by 12.5% and profits by 27.9%. ICICI Bank reported net interest income ahead by 13.1% and profits by 14.1%; the market was disappointed by a 13% increase in gross non-performing loans. Overall, at this stage, earnings reports which were equal to or better than forecast are running at a slight majority but the aggregate forecast for Nifty earnings for the current fiscal year has been cut to just over 12%.

Repeat performance this year!

The first quarter often sees investors switching between markets on the back of strategists’ recommendations for the year. Investors who exited Himalayan Fund a year ago missed a return of more than 40%. Beneficial reforms as well as favourable fiscal and monetary policy action may deliver a repeat performance this year!

9 Feb 2015

RBI: inflation still a threat

The RBI held its periodic monetary policy review. Following January’s repo rate cut, the governor said they will wait for the Budget before making any further decisions. Meanwhile, he reiterated that inflation was still a threat but announced a 50 basis point cut in the Strategic Liquidity Ratio (SLR) to 21.5% to prompt banks to accelerate lending. The Union Budget will be announced on February 28th, following the economic review and the railway budget earlier that week.

Restoration of upward momentum

Since our last commentary, S&P has downgraded Russia’s debt to junk for the first time in ten years and the Fed has upgraded its US economic outlook, supported by strong employment numbers. Greece has rattled the EU by voting in an anti-austerity government and China has cut bank reserve requirements in an attempt to stave off deflation. Against this background, equity markets have been fairly sanguine, but India’s Nifty has given back 175 points, retreating by 2% to close at 8661 after trading in a range of over 4%.  Daily trading volumes have been strong, above average. Foreign institutional investors injected a net $562mi, yet domestic investors sold $627mil. Volatility has shaken off its lethargy, as the India VIX spiked upwards to 21 where it closed. Breadth was narrow, as declining counters outran advances by two to one. There were heavy concentrations in both directions as about ten heavyweight stocks swung back and forth on results announcements. At the end, however, index futures suggested a restoration of upward momentum next week as the three months’ contract closed at a premium of 2.25% to cash.