Weekly Review---April 26, 2010

Markets consolidate

The Indian stock markets gained ground during the current week of trade, amidst sessions marked by high volatility, with both the benchmark indices, the BSE Sensex and the NSE Nifty, ending higher by 0.6% and 0.8%, respectively. The BSE Mid- and Small-cap indices also ended in the green, but continued to outperform their large cap counterparts, with both the indices gaining 1.5% and 2.0%, respectively. At an all important meet, the Reserve Bank of India (RBI) announced a small increase in the repo rate, reverse repo rate and CRR by 25bp each, against an expected 25-50bp hike at the monetary policy review. Moreover, corporate India continued to post a good set of numbers. On the sectoral front, most of the indices ended in the green, with the BSE Bankex gaining the maximum; however, the BSE Metal and IT index ended in the red.

BSE Bankex zooms ahead:

The BSE Bankex outperformed the Sensex this week, ending up by 4.9%, as against a 0.6% rise for the Sensex. A large part of this outperformance was driven by a strong movement in SBI, which was up on the speculation that it may get an extension of 6 months to meet the provision coverage of 70%. Axis Bank was up by 7.2% on the back of strong operating performance reported during 4QFY2010. On April 20, RBI's 25bp hike in key rates provided a sentimental comfort to banking stocks, as there was a fear of a possible 50bp hike in the CRR. ICICI Bank, Federal Bank, IOB and OBC (among others) gave returns in the range of 4 to 6%. We maintain our positive outlook on the sector, and retain HDFC Bank, ICICI Bank, Axis Bank and SBI as our top picks.

RBI's FY2011 Annual Monetary Policy Review:

The 25bp hike by the RBI in the key rates were in line with our expectations as we do not believe that urgent monetary tightening is required at this juncture. One, excluding inflation related to crops and fuel which is basically supply-driven, other inflation is so far comfortable at 4.7%. Secondly, on account of the high current account deficit, forex reserves have not been increasing much over the last couple of quarters, due to which there is no situation of surging liquidity that needs to be sterilized.

4QFY2010 Result Reviews:

Axis Bank:
Axis Bank reported a strong Net Profit growth of 31.5% yoy, which was ahead of our expectations, on back of lower-than-estimated provisions for NPAs. The core business growth recorded a strong improvement, with advances and deposits growth of 27.9% and 20.4%, respectively. We maintain a Buy on the stock.

RIL:
Company declared below expectation results due to lower-than-expected Refining margins of US $7.5/bbl as against our expectation of US $8.5/bbl. On account of strong growth in Profitability over the next couple of years, improvement in GRMs, positive news flows from the E&P Segment and inorganic growth prospects, we maintain a Buy on the stock.

Weekly Review---April 19, 2010

Markets tread cautiously ahead of RBI meet

The Indian stock markets lost ground during the current week of trade, amidst sessions marked by high volatility, with both the benchmark indices, the BSE Sensex and the NSE Nifty, ending lower by 1.9% each. The BSE Mid- and Small-cap indices also ended in the red, but continued to outperform their large cap counterparts, with both the indices losing only 0.9% and 0.5%, respectively. On the macro front, the Index of Industrial Production (IIP) grew by 15.1% in February 2010, as against a lackluster 0.2% in the same month last year, raising further expectations of monetary tightening by the RBI next week. On the sectoral front, most of the indices ended in the red, with the BSE Oil & Gas and BSE CG indices both losing 3.3% each; however, the BSE IT index was a clear outperformer, gaining 3.2%.

BSE IT Index - Strong 4QFY2010 performance of Infosys leads to positive momentum in IT

The BSE IT Index gained 3.2% over the previous week, outperforming the Sensex by 5.1%. The weekly momentum of BSE IT gathered strength with IT companies viz. Infosys, TCS, Wipro, HCL Tech and Mphasis gaining 4%, 2.8%, 1.7%, 2.6% and 3.2%, respectively. This is mainly attributed to the strong 4QFY2010 performance of Infosys and a slight 0.3% depreciation of the Rupee v/s the US Dollar over the week. Sequentially, the Top-line grew by 3.5% in Rupee-terms, while in US $-terms it grew by 5.2%, which was 3.9% and 3.7% ahead of its revenue guidance of Rs5,721cr and US $1,250mn, respectively, for the quarter. The company added a total of 47 new clients and entered two large transformational deals; thereby confirming the improved IT demand environment and the onset of discretionary IT spends. Our Top pick in the sector is Mphasis.

Simplex Infrastructure (SI) - Company Update:

SI has underperformed the BSE Sensex and its peers by ~15% YTD. Further, we believe that it has entered into a comfortable valuation zone and will catch the eye of investors. Therefore, we reiterate a Buy on SI, with a Target Price of Rs586.

Merchant  Tariffs - Sector Update:

Merchant Power rates have begun to surge since March 2010, as the intensifying summer has pushed up the mercury levels all across the country. The merchant rates are currently at their highest levels since August 2009, and have touched day-high rates of Rs10/unit. Companies like Jindal Power, JSW Energy and Tata Power are likely to be the key beneficiaries of the higher merchant tariffs.