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.