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Home > Knowledge Centre > India Markets - An Overview

Indian Markets - An Overview

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May 2010

The month of May saw the entire gains for the equity markets for the year till date being wiped out. Continued and heightened worries on Eurozone had its effect on the global equity markets and Indian markets also came of as the Nifty lost 3.63% and the CNX Midcap Index lost 3.79% in INR terms. During the month, Cement, Real estate, Telecom, Metals & Banks underperformed while Consumer Goods, Pharmaceuticals and Energy outperformed.

Sensex movement and key events during the month

Source:J.P Morgan

Apart from market retracement, the Indian rupee also had one of the worst months losing 4.5% against the USD taking the Nifty decline to 7.81% and the CNX Midcap index to 7.96% in USD terms. This was largely driven by global risk aversion and a resultant strengthening of the dollar rather than any local worries.

Fall in Rupee (YTD)

Source: Bloomberg

The Ambani brothers also arrived at a settlement scrapping their non-compete agreements. Between both the brothers, the Reliance group of companies account for around 15% of the benchmark index, the Nifty.

The Reliance Group Companies in Nifty

3G auction and Fiscal Deficit

The huge success of 3G license auction will go a long way in reducing the fiscal deficit for the current fiscal year. The 3G + Broadband Wireless (BWA) auction were budgeted at Rs 350bn. The 3G auctions itself was concluded at Rs. 677bn (14.55$ bn approx.) and all indications for BWA indicate that the exercise will fetch in additional $6-7bn, total additional revenues of around 0.7% of GDP. 3G + BWA licensing has been the biggest ever fund raise by Government of India and can bring the targeted fiscal deficit from 5.5% to 5%. An immediate result of the huge success of this exercise was the postponement of the borrowing schedule of the Reserve Bank of India.

In addition, the government is looking to reduce the subsidy burden of oil by increasing fuel prices. A long awaited gas price hike happened during the month and we expect fuel price revision for auto fuels also to happen shortly. While politically challenging, we feel even a part implementation of the fuel price review committee recommendations will go a long way in structurally bringing down fiscal deficit.

Fund flows

Foreign Institutional Investors after being buyers in April turned net sellers in May, selling US$2bn in equities. Domestic Insurance companies were net buyers to the tune of US$1.5bn while the domestic mutual funds sold worth US$90mn (net) in May (Source: SEBI, Kotak Institutional equities).

Net investments by domestic mutual funds and FIIs in the cash market (USD mn)

Source: Bloomberg, Kotak Institutional Equities

Led by strong industrial growth, the fourth quarter GDP number came in at 8.6% taking the fiscal FY10 (year ending Mar 2010) GDP growth to 7.4%, slightly higher than the consensus estimates.

Corporate results have been more or less on track. A stronger than expected economic growth has led to a marginal overall increase in earnings expectations for FY11 and FY12 with significant upgrades in banking, automobiles and technology sectors. 4QFY10 BSE-30 Index earnings grew by a robust 25.9% yoy (INR terms) ahead of street estimates (Source: Kotak Institutional Equities).

Monsoon is on track and has already hit the southern coast of India. While it is still early days, all forecasts indicate a normal monsoon. We expect further moderation in food inflation as monsoon picks up. With lower commodity prices we expect inflation to moderate downwards as we go into the second half of the year. It could possibly be lower than current estimates.

WPI inflation may fall to 7% by end -FY2011E from >10% in end-FY2010

Source:Goverment of India, Kotak Institutional Equities estimates

It’s worth repeating what we have been saying in the past few months - “We expect the markets, though volatile intra month, to remain range bound in the first half of the calendar year. While the global situation remains uncertain and the markets will be kept on tenterhooks, macro factors in India are improving and growth remains intact. Falling inflation, normal monsoon, reduced fiscal worries and thus lower interest rates, robust GDP growth and thus strong earnings growth, all indicate at the markets picking up in the second half of the calendar year. We continue to believe that midcaps are likely to outperform the broader markets after this consolidation phase. We believe that ‘contagion’ is the new buzz word in the global financial markets and as such a European crisis led correction would provide a good entry point in the Indian markets”.

Overall, we see several positives for the Indian equity markets

After a 7.4% GDP growth in FY2010, we expect a robust GDP growth of around 8.5% in the year ending March 2011.

A regular monsoon augurs well for lower inflation and a buoyant rural economy.

A net commodity importer, India, we believe will benefit from the collapse in commodity prices, especially from the correction in oil prices.

A highly successful 3G and BWA auction is expected to bring the fiscal deficit closer to 5% and a fuel price review, if happens, would bring in an additional trigger.

Around a 22% earnings growth over FY2010-FY2012. The markets are trading at an attractive valuation of around 15X FY11E earnings and 12.5X FY12E earnings estimates.

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