March turned out to be a good month for Indian equity markets. In the first two months of CY11, Nifty ended on a negative note with an outflow of 9000 crores by FII. This changed in the month of March with a gain 9.4%. FIIs returned in the last Iek of March with almost 9000 cr invested in 7 days. The FII buying was seen across quality large cap names and a few mid-cap ideas.
On the macro economic front, consumer demand continues to hold up quite well across both rural and urban India. March witnessed strong auto sales numbers growth. All manufacturers’ sales surpassed expectations as retail demand continues to remain buoyant with two wheeler and four wheeler sales numbers Ill ahead of expectations.
The sector which has seen the most difficult times last year was infrastructure. There were various issues in terms of environmental clearances, lack of new orders, land acquisition and commodity prices. There seems to be some movement on the first two issues. Last month saw several coal mine development plans being cleared by the environment ministry. A few commodity green field projects also got clearances. There was a revival in order announcements by key infrastructure vendors like PGCIL which announced its largest ever Transmission & Distribution order of 5000 crores. NHAI is also expected to announce highway development orders to the tune of 2000 crores in this quarter. This momentum, if continued, will provide a much needed fillip to infrastructure development of the country and would be a big positive for the infrastructure stocks. Concerns related to commodity prices and interest rates have already been priced in by the market. The government also seems keen to press ahead with key reforms and introduced GST and Pension Reform bill in parliament.
Crude continues to be a cause of concern with Nymex crude touching 112$/barrel driven by continued unrest in Middle East and North Africa. Fighting continues in Libya with no side emerging as a clear winner. It would be prudent to assume that Libyan supplies would be disrupted for some time. Saudi Arabia has increased supplies to make up for that. HoIver, concerns remain on the unrest in Yemen and Bahrain spreading to Saudi Arabia which is the world’s largest crude producer.
Food price inflation in end-March again touched the double digit levels due to firm price trend seen in protein rich items like milk, cereals and fish. I now expect WPI inflation in april to cross 8%. I would expect inflation to stay at elevated levels led by firm food price trends and high commodity prices and average around 8% in Fy12. RBI is expected to announce its forecast for full year inflation in the May review. I would expect a further hike of 25bps when RBI next meets with a total hike of 50 to 100 bps for FY12. This view would change if there is any big spike in retail fuel prices led by continued upside to global crude prices.
Despite, the concerns about the three 'I's, the market seem resilient and are trading at reasonable valuations of around 16 times based on FY12 earnings. I believe that in Q4 FY11, I would witness steady earnings growth of 17-18% for Nifty companies. Similar to the scenario in Q3FY11, manufacturing sector might face some earnings disappointments due to high commodity prices and interest rates, but that should get compensated by the increase in earnings of Metal companies. I would continue to maintain a strict vigil on crude prices and inflationary expectations in the economy. I like sectors with earnings visibility, growth,superior capital efficiency of the businesses & good corporate governance and have maintained overIight position on Financials, Metals, Healthcare & Capital Goods.
