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Monthly Communiqué
March 2011
Fund Manager Report – Feb 2011
Indian equity markets stemmed the slide somewhat in February (down 3.14%) after the sharp correction in Jan, but the Middle-East crisis and the consequent
surge in crude prices kept Indian investors on the edge. Back home, and as indicated in our previous communication, market attention shifted to the Union Budget
in February - end, as the corporate quarterly results season drew to a close. The highlight of the month was the mega deal signed between Reliance Industries (RIL)
and British Petroleum (BP) wherein RIL will transfer 30% of its stake in 23 of its key gas blocks to BP for an upfront consideration of US$7.2bn. The Union Budget for
FY12 delivered on the last day of the month, didn't exactly create headlines though it kept itself to moving ahead on its key task of fiscal consolidation.
Here is how the cookie crumbled in Feb:
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Macroeconomic Roundup
- Growth:
December Industrial output, as expected, was weak at 1.60% YoY growth due to the base effect, with Capital Goods being the drag again. The
Govt. released its growth estimates - 2011 GDP has been pegged at 8.60%, while FY12 growth is expected to be in the range of 9.00-9.25%, higher than
consensus estimates. Factors cited for the positive estimate are sustained trends in savings and investments and rebound in farm output.
- Inflation:
Headline Inflation remained sticky at 8.23% in January, with Food and Fuel indices staying firm, but manufactured products inflation showed broad-based
deceleration. A new and better CPI Index was released, combining both rural & urban inflation.
- Policy:
There was no RBI policy meeting in February and the next monetary meet on March 17 is widely expected to hike policy rates by an additional
25bps.
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Political roundup
- Budget:
The Union Budget on February 28 was the main talking point this month. The Govt. also agreed to the opposition's demand for a Joint
Parliamentary Committee probe into the 2G scam to facilitate the smooth run of the Budget session. The Budget did beat the bearish expectations, but
generated enough skepticism on the Fiscal arithmetic i.e. on the expenditure forecast, especially the subsidy provisions which look overtly optimistic. Steps
towards implementation of the Direct Tax Code, Goods and Services Tax and Direct Cash Transfers instead of Indirect Fuel Subsidies, were encouraging on
the Reforms front, but skepticism persists on execution. Autos and Consumer sectors were main beneficiaries given no hike in excise duties. The Rail
Budget stayed on the populist track, with 5 assembly elections in the vicinity.
- Scams:
The 2G scam continued to widen its net with ex-Telecom Minister A. Raja and the promoter of a prominent real estate firm taken into custody and
business heads of frontline corporates being interrogated. In an unprecedented move, Prime Minister Manmohan Singh, called the media for a direct
interaction where he urged the media not to highlight India as merely a scam-fest but touch upon the growth strides as well. However the exercise failed to
enthuse markets as limitations of 'Coalition politics' were cited everywhere for non-performance.
- Middle East:
First it was Egypt and then Libya that stoked unrest in the Middle-East, and the contagion risk of more turmoil in surrounding autocracies
pushed up oil prices, and consequently inflation and deficit fears in India. Though Mubarak finally gave in and stepped down, Libya's Gaddafi continues to
be resilient. The way events unfold in the region over the next few weeks will likely be crucial to the direction of the Indian markets given the Indian
economy's high leverage to oil prices.
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Performance
Sector-wise
February continued to be a difficult month for India, as its underperformance vis-à-vis global peers continued, though the pace dropped. The big spoilsport
was the 11% jump in Brent Crude, while a tepid Budget at the month end kept overall conviction low.
- FMCG
was the standout sector this month as its perceived defensive virtues in a falling market came to the fore. Added to the mix was the lack of any
excise duty hike in cigarettes, whereas market was factoring in a 10% hike
- Energy
was an outperformer this month, for a change, led by Reliance. RIL announced a $7.20 bn. deal with BP Plc. to sell 30% stake in its E&P block.
Consensus viewed the deal as a near-term positive, as it gives RIL much needed technical expertise to improve the tapering production profile of KG,
though RIL's use of its cash pile remains a concern
- Property
Still no respite in sight as another 10% evaporated this month (33% fall in last 3 months) and governance continued to be a sore point. The
tightness in the money markets did not help funding pressures ease.
- Infrastructure
also continued to be similarly weighed down by the challenging macro outlook. The Budget did provide some fillip to the sector by raising
the FII limit for investments in infrastructure bonds issued by corporates from $5bn. to $25bn. and allowing a further INR 300 bn. in tax-free infra bonds.
But no concrete measures were announced on the execution front, which is the main issue plaguing the sector.
- Autos
underperformed for the major part of the month on fears that excise duty would be hiked from 10% to 12% in the Budget. But the respite in the
Budget means the sector is likely to post a short-term bounce in March
- Banks
were able to stem the slide in February. The lower than expected Govt. borrowing program budgeted for FY12, potential issuance of new banking
licenses and INR 200 bn. capital infusion planned for PSU banks in the next fiscal, all collectively aided sentiments for the sector.
- Cement
continued to see some cartelization led sporadic price hikes in certain regions, while the move from Excise duty to Ad Valorem duty in the Budget
turned out to be a non-event.
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Capital Flows
The deal drought in India continued even in Feb, with Mahindra & Mahindra Financial Services being the only one – raising $94mn in a QIP at a 1% discount.
FIIs continued to exit India in Feb, selling another $1bn to take the YTD selling figure to $2.1bn (vs $29bn inflow for 2010). Domestic institutions however
continued to absorb the FII selling buying $1.2bn of stocks during the same period.
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3QFY11 Earnings Review: On track
The MOAMC Universe (ex-RMs) 3QFY11 Sales grew 21% (est 20%), EBITDA 21% (est 21%), and PAT 24% (est 25%). The aggregate performance of the
Sensex companies too was in-line, with EBITDA growth of 20% (est 19%) and PAT growth of 22% (est 23%).Sales remain strong but costs did start showing on
margins. Energy as a sector outperformed, while Banks and IT held their ground. Autos were a mixed bag while sectors such as consumer and capital goods
were affected by higher costs. Market sentiment does seem to suggest slower earnings growth going forward as the impact of higher interest rates and cost
inflation take hold. However, we believe 3QFY11 has not showed enough evidence of the same leading to our current EPS forecast for FY12 being virtually
unchanged post the result season. MOAMC forecasts an EPS growth of 19.7% for FY12 and a further 17.8%% for FY13 for the Sensex-based companies.
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Outlook
Post a fairly heavy calendar of domestic corporate and political events in February, we expect market attention in March to once again turn to international
events, key amongst them being the evolving situation in the Middle East and its resultant impact on oil prices, besides the debt refinancing and outcome of
elections in parts of Europe. We expect volatility to moderate compared to the recent past but expect Indian markets to continue seeing risk aversion and a
preference for frontline large-cap stocks in select domestic sectors and global cyclicals.
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