Tuesday, March 6, 2012

>EQUITY STRATEGY: Mixed earnings scorecard by biggies

Second rung stocks continue to outperform
For the second month in a row the markets closed on a positive note. February witnessed a secular rally, however, unlike January profit booking in the fag end of February clipped gains. The BSE Sensex closed with a gain of 3.3% while S&P CNX Nifty closed with a gain of 186 points at 5,385. Small and midcap stocks continued to outperform their large cap peers. The BSE Midcap and BSE Smallcap indices closed with gains of 8.8% and 6.1% respectively. Delisting candidates Oracle Financial Services, Alfa Laval and Goodyear India attracted buying interest.

Secular uptrend; realty leads rally
Most sector‐oriented indices on the BSE closed on a positive note, the BSE Healthcare index bucked the trend to close on a flat note. The Realty and Consumer Durables indices closed with double digit gains. The S&P CNX 500 gained 4.7%. Markets were skewed in favour of gainers with the advances‐declines ratio at 4:1. This was particularly strong in finance, industrials and utilities. Second rung stocks in the banking, NBFC and realty spaces played catch up with larger peers. Bargain hunting continued to be at play in the realty space; however, a slowdown in momentum was noted.

Global Markets
Major stock indices across the globe closed in the green, Asian indices were amongst the top gainers. In the commodity space bullion prices gold on a mixed note, while energy prices moved upwards. Steady HSBC PMI numbers from China augured well for industrial metals in the non‐ferrous space that closed on a mixed pack. European debt markets closed on a mixed note with yields on Italian paper dropping lower while that of Greece moved up.

Growth continues to falter, core inflation eases
GDP growth (on a quarterly basis) slipped to its lowest point in 11 quarters. For the December quarter of FY 2012, growth was reported at 6.1% YoY. As depicted by the sluggish IIP, the industrial sector was flat with utilities being the only silver lining. Services sector continued to be resilient at 8.7%YoY while the growth in the agriculture sector was reported at 2.7% (despite a high base in grain production). Output figures of the eight core industries for the month
of January were flat; IIP for the month of December was flat with electricity continuing to drive growth. Inflation continued to slide; for the month of January it was reported at 6.6% YoY. This was largely driven by a moderation in both the food and core‐inflation pack. The fuel component, however, continued to wreak havoc at 14% YoY.

 Fiscal pressure leads to novelty
Just as with necessity being the mother of all innovation; pressure on fiscal finances has led the government down the path of novelty. As a first of sorts the Government launched an offer for sale in ONGC through the secondary market. Central PSUs are estimated to have declared a 40% increase in dividend doll out for the year till date. The Government has also cleared a buyback policy for Central PSUs to shore up its fiscal position. The government has yet another weapon its armor via SUUTI’s (Special Undertaking of UTI) stake in Axis Bank, Larsen & Toubro

Chorus for a rate cut on the rise
The CRR cut that was carried out in January did not have much of an impact in the financial system. Liquidity continues to remain tight with the net reverse repo in the negative zone at Rs 1,920 bn (way beyond the RBI’s comfort zone). A further cut in the CRR is unlikely to trickle down into lower corporate borrowing costs; at best it could ease some of the pressure on liquidity. With the advance tax date (March 15th) approaching pressure on liquidity is set to get even tighter. Public debt has crowded out private sector debt; the banking system is sitting on excess SLR (appears to be rising with every passing fortnight). The down tick in GDP growth and sliding core inflation provides more room for a rate cut. The chorus for a rate cut appears to be getting louder.

Fuel likely to lay pressure on inflation
For quite awhile crude oil has been ruling at elevated levels; a further a rise in crude oil prices could throw a spanner in the works; however, such a move appears unlikely in the near term. However, we need to brace ourselves for higher fuel prices as suppressed prices have taken a toll on finances of oil marketing companies. Hike in prices of petrol and diesel would trim benefits of moderating food and core inflation.

To read full report: EQUITY STRATEGY