Friday, March 6, 2009

>Weekly Review (INDIA INFOLINE)


Key indices continued to trudge lower this week, shrugging off lower infaltion and rate cuts. The RBI reduced short-term rates by 50 bps in its continuing bid to nudge banks to lower borrowing costs. The BSE 30-share Sensex lost 6.4% to 8,326 and the NSE Nifty lost 5.2% to 2620. The rupee's sharp depreciation against the dollar also continued to make matters worse for Indian stocks, leading to acceleration in selling by the FII's.

Banking stocks tumbled, even after the RBI cut rates to bolster lending. Fears of rising defaults in a weakening economy kept banking stocks under pressure. FMCG stocks succumbed to heavy selling pressure, led by HUL, ITC and Colgate-Palmolive. Real estate stocks fell on apprehension that falling interest rates will fail to revive housing demand.

World economy continues to be in a bad shape in the wake of the unprecedented finacial crisis. Over the week, Dow Jones and S&P 500 slipped to new 12-years lows. Corporate picture got worst after GM warned it may soon have to seek bankruptcy protection. Similar concerns saw Citigroup's stock fall below $1. ECB slashed its GDP forecast as well. Meanwhile, Chinese stock market surged by over 5% on reports that the government would announce another stimulus package to steer the economy. However Prime Minister Wen Jiabao didnt make any statements on extra spending.

To see full report: Weekly Review

>Market Insight (RELIGARE)


Dow closed in the negative and all other Asian markets are negative. Citigroup, once the world’s biggest bank in terms of value, traded below US$ 1. Also, Geithner said that the economy will worsen from current levels before any revival is seen. We continue to believe that the situation globally will become worse from current levels. However, we believe that at any sharp fall in our market must be used as an opportunity to invest from a long-term perspective, in fundamentally sound companies. For the day, we expect the market to open down and see the selling pressure continuing.

  • Dow : Negative
  • Asia: Negative
  • Day’s view: Negative

To see full report: Market Insight 06-03-2009

>India Banks (CITI)


Rate Cuts = Stock Performance?

* Consensus appears to be positioned for a Repo Rate Cut — India's bond yields have been implying a reduction in policy rates for some time, recent weakness in economic data (GDP growth, inflation) has led to firming up of these expectations – both ours and consensus. Consensus is for a 50bps cut; we expect 100-150 bps (staggered over 1HCY09). But do rate cuts really drive stocks in the short term?

* Stock performance suggests policy rate cuts have minimal impact — Repo rate cuts have a positive impact on stocks – but only marginal. Banks have outperformed by an average +2% in 1 month post such cuts (PSU banks slightly better at +4%). Importantly in 3 of the past 4 instances stocks have outperformed 1 month before the cuts (underperforming 1 month after cuts) suggesting that the market has been increasingly efficient in anticipating possible rate cuts.

* CRR cuts also not a significant positive — Fundamentally, we believe the possibility of CRR cuts are relatively low given amply liquidity – in the system and on banks balance sheets. Even so, reduction in reserve requirements are likely to provide more operating gains (Higher NIMs; +5-6 bps for 50bps cut) than stock performance (+2% avg. outperformance post CRR cuts previously).

* Rate cuts: Impact on lending/deposit rates — Policy rates set direction for movements in lending/deposit rates, however, impact usually comes with a lag (1- 3 months). Currently ample system liquidity, slower growth and government talk has led banks to reduce loan yields ahead of deposit rates. Good economics suggest more aggressive deposit rates cuts ahead, which could be better for stock prices.

To see full report: India Banks

>Strategy Note (ELARA CAPITAL)

Elara Strategy Note - March 2009

Fundamental View....

The impact of the global financial meltdown is now clearly visible on the healthy of majority of Indian companies with deceleration of both the top line and bottom line. Sales growth for many companies ia at record low levels with negative price and volume growth. The reported profits for the listed companies have declined by almost 20% by almost 20% in Q3 FY09. We expect poor numbers again in Q4 FY09 resulting in a lower than expected growth in FY09.

The revised Sensex earnings (post the constitutent changes in the index) have fallen 13% in Q3 FY09 hinting at poor pricing power with declining volumes.Reported profits are also down 11%. The TTM EPS is down to Rs 704 at the end of Q3 FY09 from Rs 809 as at Q2 FY09.

With expectations of decelerating revenue and profit numbers in Q4 FY09, we expect Sensex earnings to be below Rs 700 for FY09. At 8,600, Sensex is trading 12.3x TTM earnings. Considering the other emerging equity markets in the world, Indian equity markets look expensive on a PE basis. Given the increased correltaion of Indian markets with other global markets, Sensex is likely to see a downward bias.

To see full report: Strategy Note

>Hindustan Unilever Limited (EDELWEISS)


Building Its Defences....

Rural areas leading growth; volume growth to remain focus area
HUL management expects the FMCG industry’s revenues to continue to grow at around 15-18% in FY10. Though growth has been well balanced between urban and rural areas, the latter have somewhat remained insulated from the current global turmoil and have been leading growth. Additionally, low level of penetration in many personal care segments has been driving fairly good volume growth. The company is trying to boost volume growth via higher promotions and discounts, giving higher volumes for the same price, while also reducing prices in select lower-end (mass) brands. HUL expects this strategy to boost volume growth in the coming months.

Re-innovating distribution for efficient demand forecasting
HUL has over 1,200 SKU’s—650 of these are active while only 75-90 are available at most small retailers. Any small retailer generally stocks on an average 35% of the store capacity with HUL’s products. So, for better servicing and demand forecasting, HUL has been working on building a more efficient distribution system with investments in its IT infrastructure and technology. The company has introduced a new system of demand forecasting with a hand held device for each member of sales team to gather store level SKU data. This could help the company in better sales forecasting and servicing its retailers, and boost sales through analysis of this data. The system could also help in reducing both turnover time and working capital.

To see full report: HUL