The markets are expected to edge higher following strong opening across most of the Asian bourses. The markets clocked modest gains yesterday, reacting to sharp fall in December inflation numbers led by cheaper food items. The headline inflation (WPI) falling to two-year low of 7.5% triggered hopes that RBI will likely reverse its rate-tightening cycle in upcoming review.
Global cues showed some improvement. European stocks rallied after early losses, led by strong French bond auction which eased fears about the eurozone’s ongoing debt crisis. Despite the recent downgrade of its long-term sovereign rating, France was able to garner enough demand for its debt – it sold €8.6bn of short terms bonds, against a target of ~€8bn indicated at the start of the auction. US markets remain closed on account of a national holiday.
After prolonged pessimism, the markets seem to have breathed easy, majorly due to easing of inflationary pressure which had impacted the sentiments. The coming weeks will be watchful, as the crucial earnings season will gather steam. The investors will closely track the quarterly performance as well as the management commentary, in order to gauge future outlook. In addition, developments in the eurozone will weigh on the markets.
Markets Today
The trend deciding level for the day is 16,147 / 4,861 levels. If NIFTY trades above this level during the first half-an-hour of trade then we may witness a further rally up to 16,257 – 16,324 / 4,894– 4,914 levels. However, if NIFTY trades below 16,147 / 4,861 levels for the first half-an-hour of trade then it may correct up to 16,080 – 15,970 / 4,840 – 4,807 levels.
WPI inflation eases to two-year low of 7.5%; though manufacturing inflation remains stubborn
Wholesale price-based inflation for December 2011 eased to 7.5% yoy, falling significantly from the 9.1% yoy level registered in November 2011. The figure of 7.5% yoy was slightly above the Bloomberg estimate of 7.4%. Core (non-food manufacturing) inflation – which the RBI tracks closely – came in at 7.5% yoy as against 7.8% in November 2011.
Primary articles inflation came in at a low 3.1% yoy, ~545bp lower than 8.5% yoy witnessed in November 2011. Food articles inflation moderated considerably to 0.7% yoy from 8.5% yoy registered in November 2011. Non-food articles inflation, which was as high as 18.2% yoy in August 2011, declined to 1.5% yoy (3.2% yoy in November 2011). However, over November 2011, non-food articles index rose by 1.3% mom (annualized growth of 15.7%) on account of higher prices of gaur seeds, flowers, linseed, soyabean and rape and mustard amongst others. Inflation for minerals rose at a faster pace of 21.9% yoy compared to 18.0% yoy in November 2011. On an annualized three-month basis, growth stood at 9.1%.
Fuel and power inflation continued to be high at 14.9% yoy (average of 14% over the last six months), which can be partly attributed to the sharp INR depreciation. Within fuel and power, only mineral oil index showed an increase of 0.8% mom (annualized growth of 9.5%) over November 2011, while both coal and electricity index remained unchanged.
Manufactured products, which have a weightage of ~65% in the overall WPI inflation, continued to be stubborn at 7.4% yoy (average of 6.3% over the past two years). The mom growth in manufacturing index was also high at 0.6% (highest over the past seven months), leading to annualized growth of 6.9%. Manufacturing articles inflation was driven by higher prices of beverages, metals, wood and chemical products. On the other hand, inflation in textiles, machinery and rubber products moderated vis-à-vis November 2011.
The spread between primary articles and manufactured products inflation, which was as high as 13.1% at the start of CY2011, fell into the negative territory (4.3%) for the first time in nearly four years. In fact, the negative spread is the lowest since the inception of the new base year 2004-05.
Inflation figures came in more or less in-line with street’s estimates. With both IIP (6.1% for November 2011 compared to contraction of 5.5% in October 2011) and manufacturing PMI (54.2 for December 2011 compared to 51.0 for November 2011) showing improved performance sequentially and manufacturing inflation still resisting near the 7.5% levels, the RBI may stick with status quo on its policy rates stance in the January 24, 2011, monetary policy. However, that said, with liquidity crunch persisting in the system and OMO operations not reaping the desired benefits, chances of a CRR cut in the monetarily policy on January 24, 2011 cannot be ruled out, in our view.
Tata Motors' global sales continues its strong momentum in December 2011
Tata Motors reported better-than-expected global volumes for December 2011 led by strong growth across the product segments. Total global volumes registered a strong 27.3% yoy (6.4% mom) growth to 114,920 units. While, global commercial volumes (CV) grew 11.8% yoy (8.3% mom), driven largely by growth in the domestic CV sales, global passenger vehicle volumes grew by a robust 45% yoy (4.7% mom) on the back of strong domestic and continued momentum in Jaguar and Land Rover (JLR) performance. Wholesale volumes of JLR posted an impressive 45.1% yoy (6.2% mom) growth in volumes to 30,981 units, led primarily by 54.3% yoy (10% mom) growth in Land Rover volumes. Jaguar volumes, however posted a sedate 9.1% yoy growth. JLR sales continued its stellar performance backed by strong demand momentum in China and Russia. We expect JLR to sustain its volume performance driven by success of its recently introduced models. At current market price of `213, the stock is trading at 7.2x and 4.6x FY2013E earnings and EV/EBITDA, respectively. We maintain our Neutral view on the stock.
Result Review
South Indian Bank
For 3QFY2012, South Indian Bank reported a healthy set of numbers. The bank’s net profit grew by 35.7% yoy to `102cr, in-line with our estimates. Aided by an 8bp sequential rise in reported NIM to 3.1%, net interest income registered healthy growth of 5.7% qoq (up 33.5% yoy) to `273cr. Non-interest income was also strong, registering growth of 31.0% yoy (6.9% qoq) to `333cr. Gross NPA ratio as of 3QFY2012 stood at 0.94% (0.99% in 2QFY2012), while net NPA ratio stood at 0.24% (0.25% in 2QFY2012). Provisioning expenses witnessed a decline of 25.6% yoy to `22cr. Business momentum was strong during the quarter, with advances growing by 30.6% yoy (strong 7.3% qoq) and deposits growing by 25.4% yoy (2.4% qoq). At the CMP, the stock is trading at 1.1x FY2013 ABV. Currently, we have a Neutral rating on the stock.
Result Preview
HCL Technologies
HCL Technologies is slated to announce its 2QFY2012 numbers. We expect the company to post revenue of US$1,036mn, registering 3.4% qoq growth, led by volume growth of 4.6% qoq. In INR terms, revenue is expected to grow by 13.2% qoq to `5,263cr. EBITDA margin is expected to expand by 255bp qoq to 19.6%. PAT is expected to come in at `625cr. The company is one of our preferred picks in the IT sector. We maintain our Buy rating on the stock with a target price of `535.
TCS
TCS is slated to announce its 3QFY2012 results. We expect the company to post revenue of US$2,611mn, with 3.4% qoq growth, led by volume growth of 4.4% qoq. In INR terms, revenue is expected to grow by 14.0% qoq to `13,256cr. EBITDA margin is expected to expand by 164bp qoq to 30.7%. PAT is expected to come in at `2,936cr. TCS remains our preferred pick amongst tier-I IT companies. We recommend Buy rating on the stock with a target price of `1,294.
Economic and Political News
- Exports for December 2011 up 6.7% at US $25bn
- Inflation to fall to 6-7% by March end : Finance Minister
- India to launch US$1bn fund to invest in ideas to uplift poor
- GoM to meet today to review Air India’s turnaround plans
Corporate News
- Iron ore export duty hike unlikely in Budget: Steel Ministry
- Singapore govt. stake in RIL rises to 1.09%
- SBI gets approval for `8,000cr infusion
- CIL to invite fresh bids for exploration of Mozambique blocks
- Mahindra to reopen XUV500 bookings
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