MAIA Financial Services Pvt Ltd

MAIA
FINANCIAL ECONOMY 360 DEGREES
SERVICES INDIA: OCTOBER2009
PVT LTD

1
 MAIA Financial Services Pvt Ltd

Economy Report- October 2009

Economy Report:

Index

1) Market Pulse …………………………………………………………3

2) Economic Indicators
a. GDP growth and its projection………………………………5
b. Credit growth…………………………………………………6
c. IIP………………………………………………………………7
d. Commercial Vehicle sales……………………………………..7
e. Auto Sales……………………………………………………...8
f. Cement Dispatches……………………………………………8
g. Capex growth…………………………………………………9
h. Yield curve……………………………………………………10
i. Corporate Bond spreads…………………………….............10
j. 10 year government bond yield……………………………..12
k. Currency movement(Indian Rupee vs USD)………………12
l. Inflation ………………………………………………………12
m. FII Flows……………………………………………………..13
n. Domestic Fund Flows………………………………………..13
3) Economy Pulse……………………………………………………….14

2
 MAIA Financial Services Pvt Ltd

Market Pulse:

One needs to understand that:-

“Bull markets are born on Pessimism, Grow on Skepticism, Mature on optimism and Die
on Euphoria”.

According to us we are right now at the stage of skepticism so there is still room for an
upside. So for an investor having an investment horizon of 5-10 years should grab the
opportunity to enter the markets on dips.

We think that worst is behind us and we have made a base for Nifty at around 4000 levels.
However one needs to adopt a cautious approach now. We have seen our Indian indices
rally a whopping 98% considering a time frame of 6 months starting March 2009. We are
cautious because we foresee the following things:-

1) Inflation fears increasing due to shortfall in monsoon.

2) Decline in government consumption in the first quarter of 2009-10.

3) Fear of interest rates increasing due to increasing government borrowing plan as well as
inflation fears.

4) The fear of increasing interest rates will lead to increase in cost of debt of companies.

5) This will not be good for the corporate sector at these initial stages of recovery.

6) Credit off take not taking place-well below RBI’s target of 20 %( currently at 15%).

7) We feel that dollar would be most likely oversold now. There is inverse relationship
between the dollar and our equity markets. So if the dollar shows improvement it is likely
that our equity markets could possibly correct.

8) Lower capex growth.

However there are certain positive triggers also:-

1) Improved global cues

2) Improving domestic conditions-reflected in IIP numbers,

3) Improvement in Business Confidence,

4) Growth in money supply

3
 MAIA Financial Services Pvt Ltd

5) A possibility of pick up in credit growth next quarter.

6) Reduction in debt levels and inventory levels by most of the companies

7) Improvement seen in Automobile market-which is reflected in auto sales figures

8) Improvement seen in housing market.

We need to apply weight of evidence approach to all of the positive and negative points
mentioned above. So we advise our clients to take a cautious approach in the sense that they
should participate in the uprise in the sensex by keeping strict stop losses as the above reasons
will affect markets sooner or later and it is just the matter of time.

- In the short term, markets might trade sideways or can see a correction of about 5-10%
depending on global cues as well as the above mentioned fears of inflation and interest rates
rising. However, for investors who have a longer term horizon, there are still good
opportunities available in the market.

4
 MAIA Financial Services Pvt Ltd

Economy Pulse

GDP:

Indian economy grew at 6.1% in 1QFY10 (Q4FY09 GDP: 5.8%; Q1FY09: 7.8%).

GDP by activity:

The agricultural sector, representing around 16% of GDP in Q1, grew at 2.4% yoy (Q1FY09:
3%).Within Industry, manufacturing sector improved, as expected from IIP numbers, and grew at
3.4% vs -1.4% yoy in previous quarter. Even Electricity, construction and specially Mining
improved significantly. Low rainfall in June helped mining and construction.

• Services sector moderated to 7.8% yoy in Q1FY10 vs. 8.6% in Q4FY09. Trade, Hotels and
Transport improved but community, social services slowed to 6.8% in Q1FY10 from 12.5%
in Q4FY09.

GDP by expenditure

o Private consumption growth remained subdued at 1.6%yoy and Govt

consumption declined from multi year high of 56.6%yoy in Q3 and 21.5% in Q4
to 10.2% in Q1FY10.

5
 MAIA Financial Services Pvt Ltd

o Growth in investments slowed to 4.2% yoy in Q1FY10 from 6.4% in Q4FY09.

Both private consumption and fixed investment growth is weakest in 7 years.

o The only improvement in GDP growth was much higher contribution of net
exports as imports fell much more (-21.2% in Q1FY10 vs. -5.7% in Q4FY09)
than exports (-10.9% in Q1FY10). This is first time in 16 quarters that net-exports
figure was positive (in absolute terms).

o Inventories have also moved up 3.2% in Q1FY10 after massive de-stocking in

Q4FY09 (-0.9%).

o GDP in Q1FY10 improved from previous two quarters despite Govt expenditure
becoming half of previous quarters. Fiscal stimuli given in previous two quarters
had increased Govt expenditure.

o Poor monsoon will result in a decline in Agri growth this fiscal, but reduced
contribution of Agriculture to GDP together with rise in non-agri rural income
will cushion the damage.

Credit and deposit growth

While the growth in the non-food credit continues to be lower at 13%, the deposits growth
remained higher at 21.3%.This implies that the industry still hesitates in taking additional loans
for their investment plans.

Also these poor figures of Credit growth are indicative of the fact that banks are reluctant to
extend financial support to industries that have poor credibility due to slowdown.

However we also feel that Credit growth could improve sooner , from the current 15 per cent
and reach RBI’s projection of 20 per cent The expectation of credit pick up stems from

6
 MAIA Financial Services Pvt Ltd

encouraging GDP and IIP numbers, which in turn could boost further investment by corporate.
As the economy revives, the requirement for working capital and term loans by corporates could
go up, thereby reviving demand for credit. The credit growth could also probably pick up
because of the coming festive season (Diwali).

IIP:

Industry growth seems to be bottoming out

• Industry improved as expected and as already reflected by IIP numbers.

• Mining, Construction, electricity within Industry showed significant improvement in Q1

compared to Q4 due to reduced rainfall in June.

Commercial vehicle sales:

We have seen a revival in auto as well as the real estate sector. This is visible easily from
the charts below.

7
 MAIA Financial Services Pvt Ltd

Auto sales

Cement dispatches

8
 MAIA Financial Services Pvt Ltd

The growth trend in investments slowed to 4.2% in Q1FY10 vs. 6.4% in Q4FY09.

• It is also being reflected in the credit growth.

• Investment is expected to pick up from 2HFY10

Private consumption growth remained disappointing at 1.6%yoy in Q1FY10.

• The impact of various fiscal stimuli provided (farm loans, salary hikes, arrears etc) along with
reduced interest rate are still to come through.

• Poor monsoon may negatively impact rural consumption

9
 MAIA Financial Services Pvt Ltd

Zero Coupon Yield Curve:

Zero coupon yield curve seems to be normal.

Corporate bond spreads

10
MAIA Financial Services Pvt Ltd

11
 MAIA Financial Services Pvt Ltd

10 year yield

Currency-India vs. USD and EURO

Inflation

12
 MAIA Financial Services Pvt Ltd

As mentioned in our previous report, we had stated that we would soon see the WPI numbers
coming to Inflation. This would become a cause of worry for the RBI. There are many
supporting reasons for it. One the CPI number stands as high as 14-15% YOY. The money
supply stands well above the target of 20%. The WPI numbers have turned to a positive zone
from the negative figures reported for several weeks. This is one sign of inflation approaching.

As can be seen from the above charts of WPI and CPI, the WPI numbers (0.84%) are deceptive.
The CPI numbers are telling an altogether different story. The food price inflation is already in
double digits and remains at 14-15% currently. With lesser rainfall the threat that the inflation
would rise further gets elevated. At the moment when economy is on the path of recovery, this
kind of inflation would most likely hurt growth.

FII flows

Domestic fund flow

13
 MAIA Financial Services Pvt Ltd

As can be seen from the above figures FII’s have been the net buyers for the month of September
while the DII’s have been the net sellers for the month of September.

Analysis

Economic Indicator Type Comment

Yield Curve Leading Normal. Not a cause of worry

Corporate Bond Spreads Leading Corporate bond spreads for a

1 year rated AAA rated is
rising which shows that
inflationary concerns in near
term are reflecting in terms
of higher spreads. However
the 10 year bond spread is
falling.

Inflation Coincident Inflationary concerns are

rising with WPI also turning
in positive territory, it is for
sure now that RBI will start
raising the rates sooner than
later which would be bad at
this stage for the equity
markets.

Interest rates Coincident Currently stable, however

indicators are signaling that
RBI would soon start raising
the rates

10 year government bond Leading Rising. With the huge

yield government borrowing
programme and inflation
fears the yields have started
rising. This would be bad for
14
 MAIA Financial Services Pvt Ltd

equity markets

Non Food credit growth Leading Declining. It would prove bad

for the equity markets since it
is indicative of the fact that
either corporate are hesitant
of taking more loans for their
expansion plans or banks are
hesitant in giving financial
support to corporations
having low credibility

CCIL Bond Index Leading Falling. As the yields are

rising, bond prices are falling.
This would be bad for the
equity markets going down
the line

GDP Coincident Growth of 6.1% for the 1st

quarter of the FY10. Better
than the same quarter of the
previous year.

IIP Lagging Good.

Core Infrastructure Industries Lagging The rosy picture shown by the

core infrastructure industries
in the latest data
released(June 2009) could
have already being factored
in.

Auto Sector Leading The auto segment is clearly

showing signs of
improvement.

Real estate sector Leading There are definitely signs of

revival seen in case of real

15
 MAIA Financial Services Pvt Ltd

estate sector.

Indices-Shanghai Leading Bad. Weakness visible

Analyst Name: Avani Mehta Company Name: MAIA Finacial Services Pvt Ltd

Email Id: avani_513@yahoo.co.in Address: C wing, Bsel Tech Park, Opposite

Vashi Station, Vashi, Navi Mumbai.

Contact No: 022 27810674/75/76

Disclaimer: This report is purely for information purpose only. It contains information from
sources which we believe are reliable but we do not guarantee. It also includes analysis and
views expressed by our analysts. This report should not be construed to be investment
recommendation/advice. Investors should not solely rely on the information contained in this
report and must make investment decisions based on their own independent inquiry,
investigation and analysis and shall not have any claim on “Maia Financial Services Pvt Ltd”.
Efforts are made to ensure accuracy and to avoid errors and omissions, but errors and omissions
may creep in. It is notified that neither “Maia Financial Services Pvt Ltd” nor its employees will
be responsible for any damages or loss of action to any one, of any kind, in any manner,
therefrom. Moreover this report is the property of “Maia Financial Services Pvt Ltd”. No content
can be copied, reproduced, republished, uploaded, and/or distributed for any use without
obtaining prior written permission of “Maia Financial Services Pvt Ltd”. All legal disputes are
subject to Mumbai jurisdiction only.

16
MAIA Financial Services Pvt Ltd

17