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Home > Knowledge Centre > India Markets - An Overview

Indian Markets - An Overview

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June 2009

Indian equity markets took a breather in June 2009 after surging post election results in May. Weakness in global equity markets coupled with a delayed monsoon weighed heavily on investor's minds. The large cap indices; the Sensex and the Nifty returned -5.14% and -2.53% respectively, while the CNX Midcap Index retuned -0.3% (all in USD terms, the Midcap index was positive in rupee terms).

Sensex Performance – June 2009

Source: Bloomberg

Monsoon Progress

The Indian Meteorological Department (IMD) had initially predicted that the South-West monsoon would be 96% of its normal long term average. However the monsoon which typically hits the Indian west coast around the beginning of June was delayed and when it did arrive, rainfall was below forecasts. A poor monsoon could impact agricultural production which in turn could reduce the purchasing power in rural areas. Rural consumption has been a significant driver of growth in the last 12 months keeping up consumer staples and auto sales and mobile subscriber growth.

Fuel Price Hike

Early in July, the Indian government raised retail prices of petrol and diesel by Rs4 (~ 9%) and Rs2 (~6%) respectively. This should reduce the under recoveries of oil marketing companies and thus reduce the need for government subsidies via oil bonds. This is a positive step towards correcting India’s high fiscal deficit and shows the willingness of the new government to take tough but necessary measures.

Current Account Turns Positive

India’s current account (CA) turned positive for the first time in 2 years in the last quarter of FY2009 (Jan – Mar’09) helped by lower oil prices. Net invisibles receipts of US$19.3bn more than offset trade deficit of US$14.6bn. Contraction in imports and a deceleration in exports resulted in trade deficit shrinking significantly to under US$15bn mark from an average of US$35bn per quarter in the first three quarters (source: Kotak Institutional Equities). Invisibles decelerated for the second successive quarter, with both software exports and remittances falling in 4QFY09. We expect software exports and remittances to remain under pressure as the global economy struggles to come out of a long recession. Furthermore given that oil prices rose in Q1FY10, the current account surplus could turn into a deficit again next quarter; India’s Balance of Payments (BoP) remains highly sensitive to the price of crude oil.

On the capital account side, while portfolio flows were sharply negative, inward Foreign Direct Investment (FDI) increased to US$8.0bn in Q4FY09 from US$6.3bn in Q3FY09 (Source: Kotak Institutional Equities). It is worthwhile to mention that capital flows, particularly on the portfolio front have picked up sharply during the recent quarter ended June 2009 (see table below).

Portfolio Net Flows (in USD mn) 

Source: SEBI

Qualified Institutional Placements

Buoyed by the success of a couple of large QIPs in May, a number of cash strapped companies tried to tap the Qualified Institutional Placements (QIPs) market in June. While many of them were successful, a few issues found it difficult to sail through due to lower demand or unattractive pricing. Between 23rd April and June 30th a cumulative USD3.3 bn of capital raising/promoter stake sale has been completed (Source: Credit Suisse).

June also saw the revival of the primary market with a mid-sized hospitality chain kicking off its public issue. Besides, there is a significant pipeline of IPOs/QIPs in the offing over the coming months.

Q1 FY10 result season

We expect earnings in Q1 FY10 (Apr – Jun ’09) to decline on YoY basis. We expect earnings in the FMCG and auto sectors to show decent growth on the back of strong demand from rural India. Utilities are also expected to show good earnings growth. However, earnings in the metal commodities and oil & gas space will likely show declines on account of lower commodity prices. Earnings growth in the real estate sector will also likely be negative as actual transactions have not yet retuned to earlier levels.

Union Budget 2009

On July 6th, the Government of India presented the Union Budget, an annual exercise outlining its economic and fiscal policies for the year 2009-2010. In the backdrop of a weak global economic environment, an area of key significance is that the government’s budget continues with fiscal-related stimulus to consumption and thrust on investment. It has endeavored to stimulate consumption by reducing personal taxes and leaving indirect taxes largely unchanged. It has sought to address investment through higher allocations to various projects from the FY2010 budget and greater thrust on public-private partnerships. Compared to the interim budget presented by the same government in February 2009, in our view this budget is more realistic in terms of its assumptions on economic growth and attempts to provide a more credible picture of the state of public finances. The budget assumes a nominal GDP growth of 10.05% which, in our opinion, is reasonable. Implicit in this assumption is a 7% real GDP growth with a slightly higher average inflation – it may be noted that the Government’s assumption on nominal GDP growth stood at 11% in the interim budget of Feb 2009.

The budget however appears to have disappointed most sections of the market on two key counts -

1. Economic reforms: A roadmap for key economic reforms (such as FDI, PSU disinvestment etc), an area widely expected from this government in the aftermath of its huge election victory in May 2009, did not figure prominently in this budget. While some of the reforms related announcements could have been part of the budget, it may be noted that most reforms from the government typically take place through legislative bills which do not necessarily need to form part of the annual budgetary exercise. For example, the Finance Minister clearly stated the importance of disinvestment in his budget. He even announced a phased introduction of a rule to increase the free-float of all listed companies, which may entail large stock sales in many government companies.
2. Fiscal Deficit: Another key area of disappointment in the Budget was the projection of 6.8% central fiscal deficit v/s 6.5% earlier (which would implicitly lead to a total deficit of around 11% of GDP including the states). In post-budget interviews, the Finance Minister has however mentioned that fiscal deficit is targeted to move down by 1.5% in each of the next two years (5.5% in FY11 and ~4% in FY12). The 13th Finance Commission report, expected in October 2009, is likely to provide the map for such fiscal consolidation.

Overall, we regard the budget as pragmatic given that it has been put into place in a very short period after the government assumed office and has a relatively shorter window of 9 months in the current fiscal for delivery and implementation, though clearly short on big bang announcements. We are enthused by the fact that the budget has recognized the importance of infrastructure, equitable growth, fiscal management, disinvestment and foreign investors though it contained little in terms of implementation measures which we expect will likely follow through in the coming future. We continue to stay invested and reckon that the near-term market reaction (key stock indices fell nearly 6% post the budget declaration) is excessive and provides medium to long-term investors with a fresh investment opportunity into the Indian markets at more attractive valuations now than they have been a month earlier. Going forward, market attention will now focus on –

(a) The June quarter corporate results season
(b) Progress on the monsoon as it can have an impact on inflation and GDP growth and
(c) Global cues

We expect the Indian corporate sector to see a substantial earnings recovery in FY2011 and in our view India continues to be a compelling story riding on its structurally powerful themes of domestic consumption and infrastructure investment available at reasonable valuations.

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