Hexagon Wealth

April 15, 2013

Markets Last Week

During the week, the Sensex fell by 1.1%. The slight increase in the IIP (Index of Industrial Production) and the fall in inflation were overshadowed by Infosys’ lower revenue guidance.

The S&P BSE IT Index was the biggest loser and fell by 10.3% during the week.

IT stocks fall as Infosys lowers its revenue outlook.

The earnings season started on a negative note as Infosys disappointed the market with its FY14 revenue guidance. India's second largest IT services exporter expects revenue growth of 6-10% - significantly lower than market expectations and NASSCOM’s estimate of 12-14%. Operating profits and top-line growth were also weak, as revenue was flat on a sequential basis.

Shares of Infosys fell more than 20% - the biggest intraday fall in the company’s stock since 2003. The company’s valuations may now correct to sustainable levels, as the stock’s run up since the last earnings release was predominantly momentum-driven. This rally was unjustified, relative to the earnings growth.

Between 11th April and 12th April, the P/E of the stock has fallen to 14.5 from 18.6 (based on FY 13 earnings).

Challenges ahead for India’s automobile sector

A few years ago, India’s car market enjoyed rapid growth and the country attracted several investments from leading global automobile companies. However, the demand for cars has been hurt by weak economic conditions, rising fuel prices and high interest rates. Consequently, annual car sales fell for the first time in a decade in the financial year 2012-13. The Society of Indian Automobile Manufacturers (SIAM) projects only a modest 3-5% expansion for the current fiscal year.

Over the last year, the BSE Auto Index generated a return of -0.22% and has underperformed the Sensex*. Currently, our recommended equity funds are not overweight on auto stocks. As the auto sector is rate sensitive, demand may revive if interest rates fall.

Growth in Car Sales
RBI Governor attributes higher inflation to rising rural incomes

After rising for five consecutive months, CPI inflation cooled to 10.39% in March from 10.9% last month (y-o-y). However, India still has the highest inflation rate amongst the BRICS economies - China, in particular, has successfully reduced inflation to sustainable levels. High inflation hurts Indian consumers and producers, and also prevents the RBI from reducing interest rates – these are just a few of the problems. At its monetary policy review last month, the central bank warned that there would be limited room for further easing, because of high food inflation, which has “driven a wedge between wholesale price inflation and consumer price inflation”. At a recent meeting with the Federation of Karnataka Chambers of Commerce & Industry (FKCCI), Dr D. Subbarao said that higher rural incomes were responsible for food inflation.

Does India have a current account surplus?

This question seems incredible. However, in his address to the FKCCI, Dr Subbarao said India would have a 4% surplus on its current account, without oil and gold imports. The RBI governor said that lower exports and higher imports had pushed up India’s current account deficit (CAD) to a record high of 5.4% (April-December 2012). Dr Subbarao expressed three concerns about the CAD:

  1. Quantum - The CAD currently exceeds the sustainable level of 2.5% of GDP
  2. Quality - The deficit predominantly consists of gold imports, which do not add to productivity.
  3. Financing the CAD – Currently, the CAD is being funded through FII flows, which are more volatile relative to FDI flows.
*Return as on 11 April 2013.
Domestic Indices: BSE/ Accord Fintech

FII/MF data: SEBI/ Accord Fintech


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