The IBR Newsletter (2013 / Vol2)

B R IE F COM M E NTS ON R E CE N T N E W S A ND R E S E A R CH

4 FEB13

MARKETS TAKE A BREATHER

Sensex ends relatively flat after hitting a new 52 week high Sensex hits a new 52 week high in Jan, but does not react much to the RBI rate cut The BSE Sensex stayed relatively flat in January, despite the RBI finally announcing a 25 basis rate cut on 29 Jan. This was its first rate cut since Apr12. In fact, in the last week the Sensex was marginally down, ended Jan below the 20K mark. The Sensex did hit a new 52 week high of 20203.66 in January
31-Jan-13 Value IT 6393.63 Oil & Gas 9359.16 Telecom 1430.03 Realty 2238.57 Bankex 14580.26 BSE Sensex 19894.98 Media 5633.22 FMCG 5921.89 BSE 500 7665.74 Healthcare 8016.93 Power 1951.22 BSE Midcap 6970.88 Auto 10993.92 Capital Goods 10495.62 BSE Smallcap 7074.07 NBFC 27127.36 Cement 13750.25 Metal 10606.13 Auto Ancillary 13143.33 Construction 14142.59 Sugar 8531.79 Source: BSE, ET, IBR Research 1 Day -0.3 -0.4 -1.9 1.4 -0.4 -0.6 0.7 0.6 0.0 0.4 0.5 0.5 -0.1 -0.2 -0.1 -1.0 -0.8 0.0 -0.3 -0.7 1.0 1 Week -0.3 -1.9 -5.8 2.5 0.1 -1.0 1.7 1.5 -0.4 0.3 -1.4 -0.1 -0.7 -2.5 -1.0 -1.9 -1.0 0.1 -0.6 -4.0 2.7 30 Days 3 Months 6 Months 12.5 10.3 19.5 8.3 11.9 15.5 4.0 23.7 19.6 3.1 23.5 36.6 1.6 12.6 22.4 0.9 6.1 15.7 0.7 16.4 36.6 -0.2 4.2 16.5 -0.5 6.2 15.9 -2.1 3.9 10.2 -3.6 -1.8 1.3 -3.7 4.9 14.8 -5.5 2.8 21.9 -5.9 -5.6 7.8 -5.9 0.1 8.1 -6.0 5.0 15.7 -6.2 -5.8 10.6 -6.8 2.8 4.0 -7.9 -1.7 1.3 -8.4 -7.4 7.4 -8.9 -17.2 -19.1 1 Year 9.1 8.9 -8.4 28.2 27.6 14.1 42.9 45.8 15.3 27.2 -8.4 16.8 16.4 2.6 7.0 17.4 23.5 -11.7 4.9 8.0 -17.3

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THE IBR NEWSLETTER

4 Feb13

STRONG FII FLOW CONTINUES

FY13 could end as the best year ever for FII flows FY13 could end up as the year of highest FII flows in the history of Indian capital markets. So far, over Rs 100,000 crore (over $19bn) has come in, and the months of Feb and March remain. The amount invested by FIIs so far is barely 5% less than the all the high recorded in FY10; FY11 had almost a similar figure as well.

Monthly FII Investments Sensex Returns

35,000.00 FII Investment 30,000.00 Sensex Change (%) 10.0 15.0

25,000.00
20,000.00

5.0

(Rs crore)

15,000.00 10,000.00 5,000.00 0.00 -5,000.00 -10,000.00 -15,000.00 -15.0 -5.0 0.0

-10.0

Source: SEBI, BSE, IBR Research A trend coming out in recent years is that it can take substantial FII investments to move the markets.

Source: SEBI, BSE, IBR Research

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However, even a $20bn FII inflow need not make more strong Sensex movement, if valuations are not cheap

THE IBR NEWSLETTER

4 Feb13

This point is more obvious from the annual chart above, which shows the annual FII investments and the market return. In the last 2 years, and in FY13 so far, consistently strong FII investments have kept the markets positive, but the returns are not substantial, they are still in the 10-15% range. In fact, in FY12, the Sensex was down 10%, despite net FII inflows of almost $10bn. Almost $20bn of FII inflows in FY10 lifted the market by just about 10%. It was only in FY10, when the year started with the Sensex at a trailing PE of 12x, and therefore was highly undervalued, that the market responded sharply to FII flows. Moral of the story: At current levels of the market, when it is by no means cheap, even strong FII flows will not give sharp returns. Return expectations of more than 15% for 2013, or for FY14, would not be realistic.

GOVERNMENT ACTION THE FM TALKS ABOUT A 8% GROWTH BY FY15

FM wants 8% growth in FY15, but it seems wishful thinking at this stage A note by Citibank had this to say about the likely actions of the finance Minister PC Chidambaram: He suggests the fiscal deficit target will be met, taxes will not be raised the tax regime will be stable, and while policy will and should be biased towards the poor, the budget will offer a lot. Importantly, there was a lot of focus on the longer term a 4-5 year perspective: Fiscal deficit reduce 60bps per year, Infra building top priority, CCI Should clear all approval bottlenecks (First meeting in Jan), GST legislation by December - and is targeting 8% GDP growth in FY15. For 8% or more growth, Investment Demand needs to Return Investment demand needs to return for that For FY14, it is clear, not even the government is talking about a strong growth environment. Current expectations among analysts are a GDP growth in the range of 6.3 6.7%. For growth to break out of this range to over 7% by FY15, investment demand has to returns. In the last 12-18 months, capital investment has slowed down dramatically. In the power sector, already planned capacity worth 20,000 MW is stranded for lack of stable and pricecompetitive fuel linkages. Several projects which did come up in the last 2-3 years are operating below capacity due to lack of fuel. Similarly road program of NHAI is operating much below targets this year. Leading developers GMR and GVK recently pulled out of road commitments citing various reasons, but essentially due to financial unviability. A return to 8% kind of growth essentially full cycle reversal investment cycle needs to turn, and that will depend on several steps:

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THE IBR NEWSLETTER

1.Policy reforms 2.Interest rate cycle turn 3.And change in corporate profit cycle

4 Feb13

We have reproduced a chart below from a Macquarie report, which points out: Reforms 3.0 is needed. We agree, with the rider: that is but one, atleast 3 important pre-conditions for growth to return.

The government has taken some policy action finally

Some policy action taken, more needed

As the table below shows, the government has taken a slew of steps in the last 6-12 months, the most important of them being action on multi-brand retail, and recapitalisation of State Electricity Boards (SEBs), and some spine with regards to raising fuel prices to bridge fiscal deficit. This means there is some action of the kind needed in Reform 3.0 is happening.

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THE IBR NEWSLETTER

4 Feb13

Rate cycle turn: RBI cuts policy rates after some 9 months

RBI cuts rates, by a small amount

After a lull of 9 months, the Reserve Bank of India (RBI), undertook a small cut in policy rates. In its quarterly review of monetary policy on January 29, lowered the repo rate and reverse repo rate by 25bp each to 7.75% and 6.75%, respectively. The marginal standing facility (MSF) rate stands adjusted to 8.75%. The RBI reduced cash reserve ratio (CRR) by 25bp to 4.0% (effective February 9). Most economic analysts expect a 100 basis point cut over 2013. The RBI may do somewhat less than that. It has repeatedly indicated government policy measures are what will lead to a growth revival, its own ability to cut rates is hampered by high inflation and high current account deficit. The statement highlighted: With headline inflation likely to have peaked and non-food manufactured products inflation declining steadily over the last few months, there is an increasing likelihood of inflation remaining range bound around current levels into 2013-14. This provides space, albeit limited, for monetary policy to give greater emphasis to growth risks. The above policy guidance will, however, be conditioned by the evolving growth-inflation dynamic and the management of risks from twin deficits. In its statement on Jan 29, the RBI also revised GDP growth expectation

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THE IBR NEWSLETTER

for FY13 to 5.5% from earlier 5.8%.

4 Feb13

Q3 results Earnings Cycle Seems to Be Turning This could be the better news earnings cycle could be bottoming out While several Q3 results are yet to come, but based on trends so far (around 50-60% results are out), the consensus amongst brokers is that earnings cycle is turning.
As the following chart from a Citibank report shows, negative surprises are reducing, and according to the report, are at a 15 quarter low.

Corporate Sentiment Improving Business sentiments also could be have bottomed out Leading indicators like PMI and Business Confidence Indices have shown some uptick in the last 1-2 quarters. Check for example the CII BCI trend.

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THE IBR NEWSLETTER

4 Feb13

Summing up, there are early signs of a cycle reversal. The stocks markets seem to have already factored it, given that they hit a new 52 week high in Jan.

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THE IBR NEWSLETTER

4 Feb13

IPO MARKET DATA

Given the secondary market is showing some spine, we checked up IPO data trend. Here is the data (IPOs, FPOs and OFSs): Amount (Rs Crore) 2,522 1,450 1,400 5,651 10,824 12,928 8,723 4,372 1,132 504 2,975 2,380 1,082 1,039 17,807 21,432 23,676 24,993 52,219 2,034 46,941 46,182 23,982 16,176 No of Issues 186 140 195 526 765 1336 1402 684 58 22 56 110 6 6 28 29 102 85 90 21 44 57 36 28

Conditions are right for the return of the IPO

1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 (as on 31/01/13)

Source: Prime Database, IBR Research

As can be seen, the peak in amount collected remains FY08, the last year of the great bull market from 2004 to 2008. FY10 and FY11 were also good, when around $20bn of FII money poured in. However, FY13 has seen much lower activity that those two years, despite attracting similar (likely even more) FII money. Time for IPO market to pick up.

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THE IBR NEWSLETTER Check our website to see more research

4 Feb13

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