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Home > Knowledge Centre > India Markets - An Overview

Indian Markets - An Overview

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August 2009

After a strong performance in July, Indian equity markets consolidated in August. While on back of stronger than expected first quarter corporate results and strong data on manufacturing, markets tried to break into a new high for the year, continued worries on monsoon kept it under check. While the large cap indices the Nifty and the Sensex declined marginally by 1.07% and 1.64%, the CNX Midcap Index moved up by 1.16% (all returns in USD terms).

Capital goods, realty, energy, healthcare, and technology stocks outperformed in August, while banking, consumer, utilities and telecom under performed.

Sensex Performance – Aug 2009

Consolidation mode

Source: Bloomberg

Index of Industrial Production –

The results of the fiscal stimulus have now started showing in the economy. After struggling for the past few months, the index of industrial production surged to a 16 month high at 7.8% for the month of June 09(consensus 3.8% - source Bloomberg). Even the IIP number for July is much better than expectations at 7% (announced ahead of schedule).

Source: Central Statistical Organization, compiled by Kotak Institutional Equities

There is a strong correlation between IIP growth, sales and profit growth and as such better than expected growth in real activity is likely to result in upsides to sales and earnings growth forecast for corporates.

Net Sales and IIP Growth	Earnings and IIP Growth
Note: BSE 100 ex-banks and oil & gas Source:Capiteline, Bloomberg, Nomura research	Note: BSE 100 ex-banks and oil & gas Source:Capiteline, Bloomberg, Nomura research

Monsoon

The rain gods continued to play spoilsport. While the monsoon did pick up during the later half of the month, overall the monsoon has been 23% deficient. Sowing data showed no improvement and remained ~8% lower than last year. However, with some late rains, the prospects for the winter crops have improved.

Equity markets have been worried about impact of poor monsoons on rural incomes. However, expanded NREG is expected to come to the rescue of the rural economy and this may mitigate the impact.

Net to net, better than expected IIP growth is expected to offset the potential impact from the poor monsoon and the central bank is maintaining GDP growth estimates at around 6%. In addition Government announced that it will release the balance $3.5bn 6th Pay Commission arrears. We expect this to be released during the festive season and this will aid consumption.   

Disinvestments – budgeted target surpassed

With the successful IPO of NHPC which was oversubscribed 24 times, the budgeted disinvestment target of Rs11.2bn for FY10 has been surpassed. In addition to NHPC, the Oil India IPO which is opening shortly is expected to further realise disinvestment proceeds of between Rs.20 bn and Rs.22.5 bn. Further as already indicated, we expect the disinvestment process to gain momentum through follow-on issues and offer for sale of already listed Public Sector Units.

Reforms

One of the better performing segments in the recent times has been the Indian public sector oil & gas segment. While benign crude prices have helped, this is largely on the back of few indications coming from the policy makers of removing the subsidy burden from the oil marketing companies. The petroleum secretary has stated that the government will bear this entire burden of cooking fuels subsidy through issue of oil bonds to the downstream companies. This may lead to downstream companies reporting strong earnings in FY2010 and beyond and remove uncertainty of earnings.

The finance ministry released the draft direct tax code which may be implemented from fiscal year 2012 if approved by Parliament. While the new tax code, in its present form, aims to simplify and reduce the direct tax burden for tax paying units, some proposals may not be favourable to investors. The code, while expected to improve compliance and widen the tax net, may also lead to a more disposable income at the hand of the consumer.

Inflation & interest rates

While inflation remained in the negative territory, a worrying sign is the rise in the 10 year G-Sec yield which has hardened to 7.4% at the end of August. Further with the government borrowings likely to remain high, interest rates could harden further. Also after remaining in a negative zone for quite some time, we expect inflation to move up sharply. (Kotak estimates).

Source: Government of India; Kotak Institutional Equities estimates, (after Aug 22, 2009)

However, we don’t expect the RBI which had kept the policy rates unchanged in the last monetary policy statement to move to a tightening policy rapidly, maintaining a pro-growth bias.

Institutional flows

After more than $2 bn net inflows in July, FII flows were strong during the month at around $1 bn (Source: SEBI). An interesting feature of the FII flows is that while YTD almost $8 bn has been invested by FIIs, only ~$750m has flown into the secondary markets, and bulk of inflow is in QIP and IPOs (source CLSA).

Capital raising by corporate India continues though the pace has abated a bit and we are seeing more public issues than QIPs which signals the return of the retail investor.

Mutual Fund Net Investments (Equity) - India (INR Mn)

Source: SEBI

FII Net Investments - Equity (USD Mn)

Source: SEBI

Outlook

After July’s big rally, the Indian market consolidated in August. While at one end manufacturing data points were very healthy, monsoon worries and volatility in global equity markets kept markets in check. We believe that the markets will remain in a consolidation mode in the near term. Large swings in some of the emerging markets particularly China is also playing on the markets.  On earnings upgrade, as the analysts digest better than expected economic recovery, the street continues to upgrade the numbers. While not representative, the below table clearly points out the extent of upgrades. We maintain that despite the recent upgrades, there remains an upside risk to earnings estimates. At current levels the markets are trading at 16.2X FY10E and 13.6 X FY11E earnings.

In this consolidation zone, we have seen risk appetite increasing and as such midcaps have continued to outperform the large cap space. Since the beginning of fiscal 2010, midcaps have significantly outperformed the large caps and with liquidity and risk appetite back, we expect the outperformance of the midcaps to continue in the near term.

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