The Government’s FIRST STEP IN RIGHT DIRECTION enough cause for optimism

The Government seems to be pushed to the walls as they have restarted some economic reforms once more, come what may be. We are convinced this is the dawn of a new age of reforms in India, potentially as momentous as the ones in 1991. However still many amongst us reacts decidedly ho-hum, and who think that the government has done little and quite late and will actually be able to operationalise little of what it has announced.

There’s some truth in both views and from here on. The government measures announced so far will only take care of 25 to 35 per cent of the diesel losses. The other announcements, if and when followed up by actual changes in laws and regulations, might will entice some foreigners to invest.

Everything else, like the softer attitude on retrospective taxation and GAAR are some time from fruition. And the less said about myriad issues from infrastructure to inflation the better. The investment markets are operating on hope or softer interest regime & retrospective higher bottom-line for India inc., along with the news from the US and Europe that their currency would be depreciating going forward for long time to come.

All of which still means that the outlook is still much better than it appeared to be a week or two back. Investors are eternal optimists, and a promise of some real reforms, some chance of actual implementation, plus some hope of liquidity—that adds up to cause for a great deal of optimists.

Awakening of Stock Exchange on back of goodies:

·         Govt. Bold Policy Measures

·         Ex-gratia of Stimulus announce by Federal

·         Expected low interest regime going forward

·         Bear Panicky – Short covering

·         Setting of Bullish under-tone

All these doesn’t means market will not look backward – reasons

1.       Once bear Short Covering is over – collectively they will try to pull back again & with them so called Bull would be accompanying resulting – CORRECTION – to the extent 17500 BSE / 5300 NIFTY is not ruled out going forward before real bullish undertone sets in say by couple of months time frame if other parameter remains constant.

2.       Euro zone crisis handling not on expected lines or slowdown of US recovery – i.e. if sustain +ve wibes are not pouring in, Indian Market can’t march only on its own credential in isolation.

3.       Govt. rolling back policy measures on account of Ally / Opposition pressure.

Our Submissions:

·         Initiate SIP as much as possible as it has proven track record in all adverse scenario with Long Term objective.

·         Wait for correction we have not missed the Bus. Having said that buy with each fall.

·         Short Term Income Fund has and should continue delivering 8.50% Tax Free returns whether interest rate cut is immediate or if postponed to adjust inflationary pressure by increase in diesel prices.

Why hate Indian Economy - (when its delivering 8.50% Tax Free returns to investors year after year after year...)

SERIES - 1

Corporate Margins at 8-Year Low Signal Earnings Bottom:

Indian equities have attracted the highest foreign flows in the region as global investor believes that the worst (SENSEX) may be over for the nation’s biggest companies after profitability slumped to an eight-year low.

Offshore funds plowed a net $12.3 billion into Indian shares till date, the most among 10 Asian markets outside China tracked by Bloomberg. The average profit margin before interest, taxes, depreciation and amortization of the 30 companies in the BSE India Sensitive Index, or Sensex, narrowed to 19.5 percent in the June quarter, the lowest since December 2003, data compiled by Bloomberg show.

Earnings forecasts this year are being cut at a faster pace in Brazil, China and Korea, while profit for companies in the MSCI India Index has stayed stable, Deutsche Bank AG said in an Aug. 24 report. Government data last week showed Asia’s third- largest economy unexpectedly rebounded from the slowest pace of expansion in three years after the Reserve Bank of India cut borrowing costs to support growth.

With China’s growth slowing, India looks the best among BRIC countries year to date. India’s economy is less dependent on exports to Europe than China and Russia

Slowing down:

The last time profit margins for Sensex companies were this low, in 2003, the benchmark index soared 73 percent as economic expansion exceeding 8 percent lured foreign inflows of $6.7 billion into equities. This year, the gauge has climbed 12 percent, compared with the 0.2 percent gain in Brazil’s Bovespa (IBOV) Index. The Shanghai Composite Index (SHCOMP) has fallen 7.1 percent after China’s economy grew at the slowest pace in three years last quarter.

Overseas funds were buyers of local stocks for 23 straight days through Aug. 30, the longest stretch of net buying since a record 41-day streak through Oct. 27, 2010, according to data compiled by Bloomberg.

Funds have flowed into India even as Prime Minister struggles to revive his reform plan amid a logjam over attempts to open up the economy, corruption scandals and elevated inflation. The $1.8 trillion economy expanded 6.5 percent in the year ended March, the slowest pace since 2003, government data show.

India’s main opposition party has stalled parliament for 11 days, demanding Singh’s resignation after the chief auditor Aug. 17 said the government may have lost $33 billion awarding coal blocks without holding auctions. Singh was relying on the parliamentary session to pass legislation to allow foreign investments into retailing, aviation, pensions and insurance.

‘Terrible Macro’:

Foreign investors are decoupling macro from the micro. The macro has been terrible in terms of the GDP growth, but in the micro you can still find good quality, long-term stories. We are not breaking the big news but we think India will do well relative to the other emerging markets.

Bottoming Out:

Earnings forecasts for the MSCI India Index have been cut by 2 percent this year, compared with a 15 percent reduction for MSCI Brazil and 5 percent for MSCI China indexes, according to Deutsche Bank. Sensex earnings grew 14.6 percent in the June quarter, exceeding Bank of America Corp.’s estimate of a 13.7 percent gain.

Falling margins have driven downgrades in the past 18 months, and we reiterate margins may be close to bottoming out. Earnings will be slow and there will be downgrades but lower than what we have seen in the past five quarters.

The Sensex trades at 13.7 times estimated earnings. While that’s 30 percent more than the MSCI Emerging Markets Index’s valuation of 10.7 times, it’s still below the 15.8 multiple the gauge traded at in February, data compiled by Bloomberg show.

India has always traded at a much higher multiple versus China or even some of the Asian or other BRIC markets. Globally sentiments are not as negative about India as we have developed being Indian.

Cooling of Inflation:

Government data on Aug. 31 showed gross domestic product grew a faster-than-expected 5.5 percent in the June quarter as the Reserve Bank of India cut interest rates in April after raising them a record 13 times from March 2010 to October last year. Wholesale-price inflation eased for a second month in July to a 32-month low, spurring forecasts that the central bank may pare funding costs when it reviews policy on Sept. 17. SBI has already announced cut in borrowing rate with maximum of 8.50%.

A combination of slowing revenue growth, falling EBITDA margins and rising interest costs has caused earnings growth to slow. Macro indicators are showing positive change for these drivers and hence, incrementally, a better earnings picture.