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Home > Knowledge Centre > India Markets - An Overview

Indian Markets - An Overview

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September 2009

September marked the anniversary of the fall of Lehman Brothers in 2008 and while the event of Lehman filing for its bankruptcy will clearly stand out as a defining moment, asset classes globally in September 2009 seemed hardly to be in a contemplative mood, as market after market, awash with a significant rise in liquidity.

Indian markets were no different, with the larger indices, BSE Sensex and CNX Nifty gaining 8.80% and 8.66% respectively. Midcap continued its outperformance to large caps as CNX Midcap index gained 11.08% in September 2009, since the election verdict in mid-May 2009; CNX Midcap has outperformed its large cap peer, CNX Nifty by more than 24%. Major sectoral outperformers were financial services (softening of yields and possible recapitalization of state owned banks), healthcare (play on inventory restocking in global markets) and materials, while the major sectoral underperformers were the consumer goods sector (on the back of weak monsoons – 23% below normal), utilities and the industrial sector. In corporate developments, stalemate continues on the Reliance Saga while the Bharti-MTN deal was called off after months of talks following South African government’s insistence on a ‘dual-listing’ structure. However, Bharti expressed its readiness to re-engage with MTN should the South African government re-visit its stand on the issue.

Liquidity Flows

Indian equity continued to attract foreign liquidity, with Foreign Institutional Investor (FII) inflows YTD crossing US$ 12bn, surpassing the total inflow seen in CY2006. However, a significant chunk of this inflow has found its way into primary markets (IPO/QIP/GDR) as against the secondary markets. The month of September witnessed FII buying into Indian equities to the tune of US$ 3.8bn, even as domestic institutional investors pared some exposure into Indian equities by selling US$ 486mn.

Annual inflows into equities from FIIs and DIIs

Source: CLSA Asia-Pacific Markets

FII & DII Secondary Equity Market Inflows

Source: SEBI

While the recent rally has been driven by growth and earnings coming back and aided by foreign flows, we expect domestic institutions led by insurance companies to play a much more meaningful role from hereon. Given the increasing penetration of the financial services industry, particularly the insurance sector and equity broking outfits we expect increased allocation from the large Indian saving pool to get channelled into equity markets and in our view it is not far away that flows from domestic institutions may surpass foreign flows.

Domestic Investment in Equities

Source: Association of Mutual Funds in India AMFI), Reserve Bank of India RBI), CLSA Asia-Pacific Markets

India – Macro-economics

GDP Growth

India’s GDP grew 6.1% YoY during 1QFY10 (broadly in line with market expectations of 6.2%), higher than the 5.8% growth in the previous two quarters. The uptick in growth was driven by acceleration in industrial growth (up 5% YoY vs. 1.4% in 4QFY09) offset by moderation in services (7.8% vs 8.6% in 4Q) and agriculture (2.4% vs. 2.7% in 4Q). Quality of growth continued to improve, with contribution from government expenditure declining for the second consecutive quarter. Growth in community, social and personal services as well as government consumption was lower than in the previous two quarters, indicating relatively higher contribution from the private sector.

GDP Summary – Sectoral

Source: CSO, IIFL Research

Balance of Payments

On the Balance of Payments side, FDI, portfolio flows and invisibles continue to positively surprise. While the current account moved back into a deficit (US$5.8b) from a surplus (US$4.7b) in the previous quarter, overall Balance of Payments improved on the back of invisibles, comprising of software services exports and remittances. Capital flows driven by FII and FDI flows were also big contributors while capital flows on external borrowings remained negative and this could be the swing factor going forward. We expect capital flows and invisibles to remain strong and this could lead to large positive overall balance of payments after a dip in FY2009. This would have its logical impact on the rupee and we expect rupee to strengthen going forward.The INR appreciated by 2% during the month.

Trends in Invisibles and Current A/c Deficit (US$ bn, % GDP)

Source: RBI; Citi Investment Research and Analysis estimates

Vagaries of nature – From drought to floods

According to The India Meteorological Department (IMD) this was the country’s most severe drought since 1972 with a 23% rainfall deficit spanning over 60% of the country.

Just when one thought that the monsoon season in India was coming to a close, unexpected stormy weather and torrential rains have swept across parts of Southern and Western India in the first few days of October causing heavy damage to life and property in some areas. Though the impact of these torrential rains is yet to be assessed, it may perhaps not be good news for some of the standing crop and can further impact agricultural output this year.

Inflation - Back in positive territory

After three months of statistical deflation, the headline inflation is back in positive territory. We expect inflation to trend up to 9.2% by the end of the fiscal year (March 2010). Sequentially, inflation has been inching up since March2009. Given the weak agri-output and its subsequent fallout in inflation, a key event to watch out for will be the RBI meeting on credit policy on October 27, 2009. While we don’t expect any major changes in key interest rates in this session, signals to possible subsequent hardening of interest rates will be very keenly watched.

Expected YoY headline WPI inflation, March fiscal year-ends, 2008-2010E (%)

Source: Central Statistical Organization, compiled by Kotak Institutional Equities

Bond market

Government security yields witnessed a sharp fall this month, on speculation that the central bank – Reserve Bank of India might consider relaxing limits for bank purchases of government bonds in the Held-To-Maturity bucket. The government also signalled its intent to recapitalise state owned banks by finalising negotiations for a US$1.2bn loan from World Bank. Both these developments lead to a strong re-rating in state owned banks, with CNX PSU Bank Index going up by more than 24% (in dollar terms) in September.

Market Outlook

Indian equity markets have surged to a new yearly high and have more than doubled from their March lows. While to some extent it is a liquidity driven rally and also aided by positive global sentiments, a large part of this rally, we believe, is attributable to revival of growth. With certain key sectors like automobiles, cement, housing, seeing significant growth, it is the return of growth which is fuelling optimism. EPS growth estimates for FY11 have moved from single digit to upper teens and upgrades are continuing as one is adjusting to in some cases dramatic reversal of fortunes. Earnings upgrades for MSCI India continued over the month and earnings were revised up by 0.8% and 1.5% for FY10E and FY11E respectively. Consensus earnings growth expectation for FY10E and FY11E now stand at 8% and 24% respectively (Source: JP Morgan). On the BSE Sensex, the consensus earnings growth estimates are 6.6% and 19.5% for FY10E and FY11E respectively (Source: KIE).

Expected growth in Sensex earnings over time, March fiscal year-ends, 2006-11E %)

Source: Kotak Institutional Equities estimates

As we move into the result season for 2Q FY10, the next leg of market movement is likely to be driven by the corporate delivery which had surprised on the upside last quarter. However, this time around, stock prices are already factoring in some bit of better than expected result and thus the extent of outperformance would be keenly monitored.

Apart from the keenly watched quarterly results, another key event this month would be the RBI’s Quarterly Credit policy review meeting on Oct 27th. While we expect status quo and don’t think that the central bank would start reversing its easy monetary policy, a higher than anticipated inflation could spring a surprise.

While cautious, we remain invested and believe that the Indian economy is looking to come back to its 2006-2008 growth phase (if the rain gods don’t play spoilsport again) and if the market reacts to any disappointments in the quarterly numbers, it may give the right opportunity to buy into the markets.

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