Analysis of various factors that affected the market & its performance this week

1. The World This Week
April 08 – April 12, 2013

2. Equity View:
Last week the equity markets ended on a flattish note. Nifty had a downside of 0.4% for the week. As
we’ve seen for the last few weeks, there has been a corrective mode largely on the back of expectations
of weak results and of course political uncertainty that we’ve seen unfold.
In terms of the earnings season, we saw the first result coming out on Friday with Infosys declaring its
results. Infosys results on a whole came out on a negative side, although the full year and the Q-o-Q
revenue growth were broadly in line with expectations, the margins showed a sharp decline. The
management has guided for a 6% - 10% dollar-revenue growth for FY14 which is below NASSCOM’s
projection for the full year. The company has not guided anything on the EPS number and also not
mentioned what kind of the margin profile the company is expected to maintain. As we’ve seen for last
several quarters the margins for Infosys have constantly been under pressure. The company is finding it
difficult to maintain the pricing at current levels. In this quarter too, both onshore and offshore prices
had a sharp dip. The company had a full year EPS of around Rs 165 for FY13. Our estimates would put the
FY14 EPS at Rs 175 a share which would put the valuation of the company close to Rs 2500 on a 12 month
training basis.
We don’t believe there’s a lot of downside in Infosys from the current levels, although the stock might
not perform in the short to medium term. We believe this as more of a company specific issue and do not
expect IT space as a whole to witness this kind of pricing pressures. We would have the results of both
TCS and HCL Technologies during this week and we will be looking out for any margin pressures, if at all
they are visible in these two companies also.
In terms of macroeconomic data points, we had the IIP numbers for February coming out last week. The
numbers surprised on the positive, with a 0.6% growth v/s largely an expectation of a de-growth. In the
month of January, the IIP growth was around 1.2%. On a 11 month basis in FY13, IIP has been hovering
around 1 -2% range, which is a very soft manufacturing growth number. We believe that we have been
slipping around the bottom from quite some time now. The growth has been in this range and we believe
that gradually the growth is going to pick up in the next few months. The biggest surprise of this month
was a very sharp growth in capital goods number which we believe is more because of bunching up of
orders and we don’t expect it to be a sustainable growth. Hence, we continue to maintain a cautious
stance on the capital goods space.
The Consumer Price Inflation (CPI) for the month cooled off to 10.39%. There are a lot of concerns about
the prices of food and vegetables in the last few months and this is the first time in the four months that
the CPI number has taken a downward direction. We would be watching these numbers very carefully.

3. There is a RBI policy meeting on the 3rd of May to discuss the strategy for the full financial year (FY14).
Although the RBI has mentioned that they would be looking at reduced possibility for further rate cuts,
we believe that if inflation continues to cool off and we see very soft IIP numbers that we’ve seen
recently, there might be a 25 bps cut in CRR and perhaps a cut in repo also, but that is still a low
probability event as of now.
In terms of global news, we saw China’s Q1 GDP numbers come out at 7.7% which was below
expectations. We have been continuously seeing moderation in Chinese growth for last several quarters
and it looks like Chinese GDP growth for this year is going to be between 7% -7.5%. There is a lot of talk in
the Chinese political establishments as to how to re-balance their economy from an ‘investment and
export’ lead model to a ‘consumption’ model. We believe the days of 10% GDP growth by the economy
are over and we would witness probably 7% -8% GDP growth this year and the next few years. The
ramifications of this de-growth in Chinese economy would be felt on the commodity prices.
As we’ve mentioned earlier this year, we expect the commodity space to be soft as a whole. We continue
to be bearish on commodities and metal stocks in general. Crude oil too has cooled off in the last few
weeks. Brent crude currently trades around $101 a barrel. The good thing for India is that if crude oil
cools off, there’s going to be a significant cushion on the Current account as well as the Fiscal account.
The current diesel subsidy is Rs 6.5/litre and our sense is that in the next few days diesel price is going to
be re-calculated again and the diesel subsidy might come down to almost Rs 4/litre; which is a significant
cool off from the Rs 10/litre subsidy burden in January.
If the 50 paisa price increase in diesel continues for the next few months, we believe that the diesel
subsidy will become zero much sooner than what the market is broadly expecting. On the back of this
and the cool off in crude oil prices, we have a positive stance on oil and gas space now and we like the
upstream oil and gas companies like ONGC, Oil India, etc. which would see significant reduction in
subsidy burdens if the diesel subsidy were to become zero in the coming months.

4. News:
DOMESTIC MACRO:
India's annual consumer price inflation slowed to 10.39% in March from the previous month,
government data showed on Friday. Consumer prices rose an annual 10.91% in February.
Food prices for consumers rose 12.42% on year in March, slower than an annual rise of 13.73% in
February.
The Index of Industrial Production (IIP) slumped to 0.6 per cent in February as compared to 4.3
per cent in same period a year ago coming at the back of contraction in power and mining output
and dismal performance of the manufacturing sector.
GLOBAL MACRO
EURO
Greek bank deposits are safe and the country's lenders are protected due to a recapitalisation
scheme which will be completed by the end of April, Prime Minister Antonis Samaras said on
Saturday.
US
President Barack Obama proposed a $3.77 trillion budget on Wednesday that combines
controversial cuts to social safety net programs with tax increases on the wealthy in a package
the White House hopes will jumpstart deficit-reduction talks.
Initial claims for state unemployment benefits dropped 42,000 to a seasonally adjusted 346,000,
the Labor Department said on Thursday.
China
The consumer price index showed an annual rise of 2.1%. China's annual consumer inflation
cooled in March as food prices eased from nine-month highs and producer price deflation
deepened, data showed on Tuesday, leaving policymakers room to keep monetary conditions
easy and nurture a nascent recovery.

5. Satadru Mitra Varun Goel Jharna Agarwal
Abbas Naheed Kinjal Mehta
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