2. Equity View:
The Q3 result season continued last week with many companies across various sectors announcing good
results. After Infosys Q3 results announcement both TCS and HCL announced good set of results with
commendable quarter on quarter growth. After several quarters we have seen an uptake in pricing. As
far as the IT industry is concerned, the volume growth has seen lesser pressure as compared to the last
few quarters. Based on the results that we have seen, we have changed our stance for the IT space from
underweight to equal weight and believe that the IT space has the potential to be an equal weight and
may be a market performer from this point onwards.
Reliance Industries Limited declared its Q3 results on Friday. The company did surprise all with a 24%
year-on-year increase in profits. It has demonstrated very strong gross refining margins at $9.5 per barrel
as compared to expectation of around $8.5 per barrel. The chemical margins were also strong. This would
lead to upgrade of Reliance industries across brokerage houses. We have upgraded our target price for
Reliance from Rs 950 to Rs 1100 per share post the results.
In the BFSI space we continue to see private sector banks coming up with very good set of numbers. After
Axis bank’s strong performance, we saw HDFC bank coming up with a 30% year-on-year increase in
profits. That is the 22nd consecutive quarter in which HDFC bank has delivered 30% profit growth which
is stellar by any standards. However, the bank witnessed some pressure on NIMs. The NIMs fell by almost
10 bps but this was more of a result of re-pricing of some assets and we expect margins to remain largely
flat over the course of this year. We continue to maintain a positive stance for private sector banking
space.
In terms of key macro economic events we have the RBI Monetary Review policy on 29th January. We
expect a 50 bps repo cut, despite the governor expressing his reservations about inflation numbers. We
believe that the growth has cooled off significantly and there is significant monetary easing expected
during the course of this year. We expect 100-150 bps cut in repo rate during the calendar year 2013. If
the 50 bps rate cut is not done in the January review, then we could see a 25 bps cut in January and
another 25 bps cut in March Review. There is lot of talk about a cut in CRR by 25 bps as the liquidity has
remained extremely tight in the system. We continue to have a positive stance as far as the monetary
easing is concerned.
The government on Thursday authorised oil marketing companies (OMCs) to hike diesel prices from time
to time. This in effect translates into a partial deregulation of diesel prices. As we are maintaining that
diesel subsidy is the biggest subsidy the Government of India (GOI) has to bear, for the current fiscal the
expected diesel subsidy is of the order of Rs. 1,00,000 crores and if we are moving towards the
environment where diesel price will be fully deregulated, then going forward i.e. by FY 2014-15 there will
be a significant reduction in subsidies, which in turn would reduce the fiscal deficit. This of course is
contingent to the kind of political risks that the current government is willing to take. The first 45 paise
hike in diesel prices was effective from Friday. There is still an under-recovery of around Rs.9, which
means that GOI will have to carry out price increase for the next 15-18 months to become at par (this is
assuming the crude oil prices would stay at the current levels).
We believe that from a fiscal perspective it is a right step and any significant reduction or expectation of
reduction in the fiscal deficit will be taken as a big positive not just by the rating agencies but would also
3. reflect in the currency market as we have already seen see rupee appreciate by almost 100 paise in the
last 15-20 days and is currently trading at a 3 month high. We could see a further upside in rupee if
reform measures continue.
We also expect further movement as far as the disinvestment program is concerned between now and
mid March. We might see a lot of disinvestments in PSUs like Oil India, ONGC etc.
One of the big cushions from the fiscal deficit perspective is the announcement of new dates for the
auction of 2G spectrum. The cabinet has also approved a 50 percent cut in the auction reserve price for
airwaves used by phone carriers on the CDMA platform. This could add another Rs. 10000-15000 crore in
fiscal consolidation and help in reducing some concerns about the fiscal deficit numbers. Hence, with all
the positives that we are getting from the macro perspective, fiscal perspective and earnings perspective,
we maintain a positive stance on the Indian equities and reiterate our year end Sensex target on 25,300.
News:
DOMESTIC MACRO:
The wholesale price index (WPI), India's main inflation indicator, rose an annual 7.18% in December, the
slowest since December 2009 and below analysts' forecast of 7.4% rise in a Reuters poll. Wholesale
prices rose 7.24% in November.
India's annual consumer price inflation accelerated to 10.56% in December from the previous month
9.90%
The government told fuel retailers to raise the price of subsidised diesel in small amounts every month
starting Friday in an attempt to prop up public finances without causing a popular backlash before
elections.
The General Anti-Avoidance Rules (GAAR), aimed at companies and investors routing money through tax
havens such as Mauritius, had been scheduled to be implemented from April 2014. They will now come
into effect from April 1, 2016.
GLOBAL MACRO
EURO
The European Central Bank held interest rates at a record low of 0.75% on Thursday, refraining from a
cut following fledgling signs of life in the euro zone economy and with inflation still above target.
US
The U.S. House of Representatives will consider a bill next week to extend the debt limit by three months
in order to force the Senate to pass a budget, Republican House Majority Leader Eric Cantor said on
Friday.
Initial claims for state unemployment benefits fell 37,000 to a seasonally adjusted 335,000, the lowest
level since January 2008, the Labor Department said. It was the largest weekly drop since February 2010.
The United States faces a "material risk" of losing its triple-A status if there is a repeat of the wrangling
seen in 2011 over raising the country's self-imposed debt ceiling, credit ratings firm Fitch said on
Tuesday.
China
China's foreign direct investment inflows fell last year for the first time since the global financial crisis,
slipping 4% as a troubled world economy curbed investor enthusiasm for deals in emerging markets.
4. Satadru Mitra Varun Goel Jharna Agarwal
Abbas Naheed Kinjal Mehta
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