Market Outlook

June 18, 2012

Dealers Diary
The Indian markets are expected to open in the positive territory taking cues from positive opening in all the Asia markets as Greece's cliffhanger election delivered a slim parliamentary majority to pro-bailout parties, a result seen as crucial to European leaders' efforts to hold the euro together. US markets ended steadily higher during Friday as markets continued to benefit from optimism about the likelihood of further stimulus measures from the world's central banks. Continued buying interest was generated by a report from Reuters indicating that central banks from major economies are prepared to take necessary steps to stabilize the financial markets. Meanwhile, U.S. industrial production for May came in lower than expected at -0.1%, which provided further evidence that the economy needs additional stimulus to avoid a double-dip recession. Meanwhile, Indian shares rallied on Friday on speculation over race to the Raisina Hill after reports claimed that the Samajwadi Party and Congress have reached an agreement to nominate finance minister Pranab Mukherjee as the UPA's presidential candidate. The domestic markets will today watch out for the monetary policy review today.
Domestic Indices BSE Sensex Nifty MID CAP SMALL CAP BSE HC BSE PSU BANKEX AUTO METAL OIL & GAS BSE IT Global Indices Dow Jones NASDAQ FTSE Nikkei Hang Seng Straits Times Shanghai Com Chg (%) (Pts) (Close)

1.6 1.7 0.6 0.5 1.1 0.8 2.2 2.6 1.3 0.7 1.1
Chg (%)

272.0 16,950 84.3 33.9 29.0 69.3 55.2 230.5 55.2 63.9
(Pts)

5,139 5,959 6,351 6,580 6,997 9,214 7,825 5,766

(Close)

247.9 11,587 130.9 10,395

0.9 1.3 0.2 0.0 2.3 1.3 0.5

Chg (%)

115.3 12,767 36.5 11.8 0.4 37.2 10.9

(Pts)

Markets Today
The trend deciding level for the day is 16,873 / 5,118 levels. If NIFTY trades above this level during the first half-an-hour of trade then we may witness a further rally up to 17,045 17,139 / 5,167 5,195 levels. However, if NIFTY trades below 16,873 / 5,118 levels for the first half-an-hour of trade then it may correct up to 16,778 16,606 / 5,090 5,041 levels.
Indices SENSEX NIFTY S2 16,606 5,041 S1 16,778 5,090 PIVOT 16,873 5,118 R1 17,045 5,167 R2 17,139 5,195

2,873 5,479 8,569 2,811 2,307

(Close)

425.5 19,234

Indian ADRs

INFY WIT IBN HDB

Advances / Declines Advances Declines Unchanged

1.4 1.6 1.5 2.3

0.6 0.1 0.5 0.7

BSE

$45.0 $9.0 $30.3 $30.5

NSE 807 593 98

News Analysis
Greek elections: Pro-bailout party wins, easing global economic fears Monetary policy preview SBI cuts its lending rates by 50bp to 350bp Tata Motors global sales up 12% in May 2012 Jyothy laboratories Henkel India merger Tata Steel announces open offer in Tata Sponge Iron
Refer detailed news analysis on the following page

1,504 198 26

Net Inflows (June 14, 2012)

` cr FII MFs Purch 1,282 187 Sales 1,192 462 Net 90 (275) MTD 449 408 YTD 42,387 (6,058)

Volumes (` cr) BSE NSE 1,723 9,496

FII Derivatives (June 15, 2012)

` cr
Index Futures Stock Futures

Purch 1,487 1,226

Sales 1,289 1,418

Net 197 (193)

Open Interest 10,529 23,174

Gainers / Losers
Gainers Company
India Cements Grasim Industries Tata Motors United Spirits Indiabulls Real Estate

Losers Company
Hindustan Copp CESC Sterlite Inds Apollo Hosp Uco Bank

Price (`)
82 2,489 240 688 56

chg (%)
6.6 6.3 5.8 4.7 4.3

Price (`)
258 268 100 635 77

chg (%)
(2.1) (1.6) (1.6) (1.5) (1.5)

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Market Outlook
June 18, 2012

Greek elections: Pro-bailout party wins, easing global economic fears

The New Democracy party came in first in Greeces election on Sunday and immediately proposed forming a pro-euro coalition government, a development that eased, at least briefly, deep fears that the vote would unleash an economic tsunami. The euro jumped to a one-month high after Greece's cliffhanger election delivered a slim parliamentary majority to pro-bailout parties, a result seen as crucial to European leaders' efforts to hold the euro together. Greek election result has come in as a relief for world leaders who are due to kick off a G20 meeting in Mexico today. The new government will be formed in the next 2-3 days. The outcome of Greece results has eliminated fears of exit of Greece from Euro Zone which is positive for the markets.

Monetary policy preview

Inflation levels were on expected lines for May 2012
Inflation levels for May 2012 were on expected lines, with manufacturing inflation (at 18-month low of 5.0% yoy) easing further, albeit marginally, and primary articles inflation persisting at higher levels (10.9% yoy for May 2012 compared to 9.7% yoy for April 2012). Food articles inflation, which had moderated considerably between October 2011 and January 2012, before rising back sharply also remained at elevated levels (10.7% yoy) during May. However, on the positive side, the food index declined marginally by 0.05% mom (annualized 0.6%) compared to sharp growth of 4.7% mom (annualized 56.6%) in April 2012. The fall in food article index is only the second instance of a mom decline in the past 12 months. Supply-side constraints have been dominating the rise in food inflation, which has led to subdued effect of monetary tightening on food prices. However, with current forecasts suggesting good monsoons for the current year, we expect higher supply along with a weakened demand environment to lead to lower food inflation in the coming months. Manufacturing inflation levels, where supply-side factors have a lesser role to play, have trended downwards, in-line with monetary tightening. Further, global commodity prices have eased off significantly in the past 2-3 months and with global demand expected to remain weak as the Euro overhang continues, we expect further moderation in manufacturing inflation levels as well. Global crude prices have also been declining in-line with other commodities. In fact, WTI levels have fallen sharply by over 30% in the past 2-3 months. The dip in crude prices globally, however, has not contributed to the decline in domestic inflation at the same pace due to the counter effect of depreciating INR. However, with INR stabilizing at current levels (~55), the positive effect of lower global crude prices should become more visible in the coming months.

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Market Outlook
June 18, 2012

Exhibit 1: Falling commodity prices to reflect in WPI

60.0 40.0 20.0 (20.0) (40.0) (60.0)
Aug-08 Mar-08 Nov-09 Dec-11 Apr-10 Oct-07 Feb-11 Sep-10 Jul-11 May-07 May-12 Jan-09 Jun-09

Exhibit 2: Manufacturing inflation falls further in May

Primary Articles
20.0 15.0 10.0 5.0 0.0
Dec-11 Jun-11 Aug-11 Jan-12 Nov-11 May-11 Mar-12 Oct-11 Sep-11 Feb-12 Apr-12 Jul-11 May-12

CRB Index yoy (%)

WPI (%, RHS)

12.00 10.00 8.00 6.00 4.00 2.00 0.00 -2.00

Fuel & Power

Manufactured Products

Source: Company, Angel Research

Source: Company, Angel Research

Expect RBI to deliver a repo rate cut; CRR cut might not come
The Indian economy grew at its weakest pace in nearly nine years in 4QFY2012, suggesting the impact of high inflation and interest rates as well as added supply constraints and execution slowdown due to the government's policy impasse. India's GDP grew by 5.3% yoy in 4QFY2012 in comparison to 9.2% yoy expansion witnessed in 4QFY2011 due to continued poor performance of the manufacturing and agriculture sectors. GDP growth for FY2012 also moderated to 6.5% from 8.4% growth registered in FY2011. On the inflation front, manufacturing inflation has been on a declining trend over the past 8-9 months. Food inflation, which has spiked up again over the past three months, is also expected to start easing again as normal monsoons lead to higher supply. Commodity prices have eased off considerably; and with the global macro outlook remaining weak, declining-to-stable commodity prices should aid in pushing WPI levels down even further. The RBI in its last monetary policy had cited slowdown in growth and headroom provided by moderating core inflation as the primary motivators behind the largerthan-expected reduction in policy rates. In our view, the recent weak set of economic data (IIP disappointing at 0.1%, moderation in GDP growth to 5.3% and weakening global macro scenario) coupled with softening inflation (especially core inflation) improves the probability of rate cuts in the monetary policy on June 18, 2012.

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Market Outlook
June 18, 2012

Exhibit 3: GDP growth at nine-year low

(%) 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0
4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12

Exhibit 4: IIP has been disappointing lately

(%) 12.0 8.0 6.7 6.1 5.3 10.0 8.0 6.0 4.0 2.0 Dec-11 Jun-11 Aug-11 Jan-12 Mar-12 Nov-11 Oct-11 May-11 Sep-11 Jul-11

9.8

9.4 8.5 7.6 8.2

9.2

9.5 6.2 3.7 3.4 2.5 6.0 4.1 2.7 1.0

Feb-12

7.5 5.9

7.4

0.1
Apr-12

(2.0) (4.0) (6.0)

(3.2)

(5.0)

Source: Company, Angel Research

Source: Company, Angel Research

However, we feel monetary easing might be limited to only repo rate cuts and the CRR cut, which the markets especially banks have been demanding/expecting, may not come through. Forex reserves have declined by ~US$9bn (`45,000cr-`50,000cr in INR terms) over the past three months on account of RBIs intervention to support the falling INR. The normal requirements in primary liquidity to support the economy every quarter is ~`45,000cr, which has mostly been accounted for with ~`48,000cr of OMOs by the RBI in the past three months. Although the deficit of `45,000cr`50,000cr due to the decline in forex reserves warrants a CRR cut of 25-50bp, liquidity conditions have improved over the past three months, which may prompt the RBI to just go ahead with a 25bp CRR cut or postpone the cuts in CRR for future when liquidity conditions tighten again. The outstanding LAF borrowings have dropped off sharply (average daily borrowings at ~`87,500cr since May 14 compared to ~`1.1 lakh cr between April 14, 2012, and May 14, 2012, and ~1.3lakh cr between January 1, 2012, and May 14, 2012). The three-month CD rates, which had spiked above the 12-month CD rates on account of tight liquidity conditions, have eased off and have dropped below the 12-month CD rates, indicating easier and cheaper access to short-term funds. Thus, while a CRR cut may not be ruled out, we believe RBI might hold on and use the CRR cut when liquidity conditions tighten again to maximize its impact.

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Market Outlook
June 18, 2012

Exhibit 5: Liquidity pressures have come off

(` cr) 250,000 200,000 150,000 100,000 50,000 (50,000)
Oct-11 Nov-11 Feb-12 Sep-11 May-12 Jun-11 Aug-11 Dec-11 Jan-12 Mar-12 Apr-12 Jul-11

Exhibit 6: 3-month CD rates below 12-month CD rates

7.00 6.00 5.00 4.00 3.00 2.00 1.00 (%)

LAF borrowings

CRR (RHS)

12.0 11.0 10.0 9.0 8.0 7.0 6.0

Aug-11

CD 3M

CD 12M

CRR (RHS)

7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00

Dec-11

Nov-11

Mar-12

Oct-11

Sep-11

Feb-12

Apr-12

Jul-11

May-12

Jun-11

Source: Company, Angel Research

Source: Company, Angel Research

SBI cuts its lending rates by 50bp to 350bp

State Bank of India (SBI) has reduced its lending rates by 50bp to 350bp w.e.f. June 1, 2012, mainly for the SME and agriculture segments. The reduced rates would not be applicable to personal segment loans, export credit and loans sanctioned under specific schemes, for which a separate interest rate structure is already in existence. The banks total SME and agriculture advances stood at ~29% of its total loan book as of March 31, 2012. Management has maintained its NIM guidance of over 3.5%, as it expects effect of 10-15bp reduction in NIM due to lower interest rates to be compensated by the likely increase in advances. Meanwhile, management has also guided that the bank would raise a sum of up to US$2bn through an overseas bond sale in the next three months so as to augment its tier-II capital adequacy ratio, which stood at 4.07% as of March 31, 2012. At the CMP, the stock is trading at 1.2x FY2014E ABV (after adjusting for value of subsidiaries). Due to the recent surge in the stock, we recommend an Accumulate rating on SBI with a target price of `2,469.

Tata Motors global sales up 12% in May 2012

Tata Motors (TTMT) reported healthy global volumes for May 2012 to 96,089 units (up 12% yoy and 10% mom) led by growth in the global passenger vehicle sales which were boosted by strong performance by Jaguar and Land Rover (JLR). Global CV volumes grew by a modest 3% yoy to 45,025 units due to weakness in the domestic CV volumes. Global passenger vehicle however, reported a strong volume growth of 21% yoy to 51,064 units driven primarily by JLR performance. JLR volumes rebounded sharply in May and posted slightly better-than-expected growth of 35% yoy (20% mom) to 30,094 units led by 42% yoy growth in Land Rover sales driven by Evoque. Jaguar sales however, were up by a moderate 3% yoy. At the current market price of `240, the stock is trading at 5.3x and 3.1x FY2014E earnings and EV/EBITDA, respectively. We maintain our Buy rating on the stock with an SOTP-based target price of `299.

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Jan-12

Jun-12

Market Outlook
June 18, 2012

Jyothy laboratories Henkel India merger

On Friday, 15th June, the Jyothy Laboratories (JLL) board approved the proposal for merger of Henkel India Ltd (HIL) with itself. The share swap ratio is decided to be 1:8, i.e. shareholders of HIL will get 1 share of JLL for every 8 shares of HIL, subject to adjustment for impending issue of bonus shares in the ratio of 1:1 by JLL, which if approved in AGM the swap ratio will be 1:4. The shares held by JLL in HIL will be extinguished post merger and the equity of JLL will increase by 2.87%. According to the management, it will take 6-8 months for the completion of the consolidation process. This merger is expected to provide synergies in cost, marketing and distribution. The management expects the combined entity to post a growth of 50%. The acquisition of HIL has provided JLL - 1) a combined basket of 10 brands, three of its own (Ujala, Maxo and Exo) and seven brands of HIL (Henko, Pril, Fa, Margo, Mr. White, Neem and Chek), 2) a strong entry in the urban market as HILs ratio of rural and urban presence is 30:70, which is 75:25 for JLL; and 3) strong combined distribution network complementing both the companies, and facilitating them to enjoy a pan-India presence at a low cost. With the HILs turnaround plan in place, we expect the synergies to start showing results in coming years. We recommend accumulate on the stock with a target price of `268 based on SOTP valuation.

Tata Steel announces open offer in Tata Sponge Iron

Tata Steel, which currently holds 39.74% stake in Tata Sponge Iron (TSIL) has announced an open offer on 15th June 2012 to the shareholders of TSIL to acquire upto 17,34,040 equity shares of face value of `10 at a price of `375, constituting 11.26% of the equity share capital of TSIL, amounting to `65cr. The non-promoter holding currently stands at 56.8%, providing a minimum acceptance of 19.8% at `13 on CMP of `307, assuming all non-promoters tender in the offer. If the open offer is successful, stake of Tata Steel would increase to 51% with total number of shares at 78,54,000. Tata Steels step to increase its stake could be to incorporate TSILs numbers under IFRS. We maintain our Buy recommendation on the stake with a target price of `420 based on a target P/B of 0.9x for FY2014E.

Economic and Political News

Government sets limit on fertilizer movement from ports, plants Government hikes US debt exposure, holds over US$50bn securities Differences in NDA, decision on Prez poll deferred

Corporate News
Aurobindo Pharma to sell Tamil Nadu unit Coal India cancels pacts with 60 captive power units Havells to invest `500cr, eyes `10,000cr turnover Government starts 10% stake sale process in NALCO NMDC starts talks to revive joint venture with Rio Tinto SAIL set to hike capacity
Source: Economic Times, Business Standard, Business Line, Financial Express, Mint

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