Market In Wait And Watch Mood

Kartik Mehta
AVP- Research
Sushil Financial Services

Currently, the market is in consolidation mode after witnessing a sharp run-up in the last two months ahead of the budget. The reason for this is a valid one. With inflation, interest rates and fiscal deficits on the higher side and the slowing GDP growth, there were high expectations that the Union Budget would usher in fiscal consolidation and bring in big ticket reforms such as subsidy rationalisations and an increase in the FDI limit for key sectors. However, the budget is not necessarily the only time to spell out all the reforms, and many bills are scheduled to be tabled in the upcoming Parliamentary sessions as well. The pace at which this happens needs to be hastened in order to avoid a further fiscal calamity.

Overall, we feel that the market should remain in the range of 4900-5600 in the next two to three months before it makes any further highs. Till then, it would be keenly watching a couple of factors such as (a) the pace of the government’s decision-making process (b) the outcome of the elections in Greece and (c) international crude oil prices amidst the ongoing geo-political tensions.

The numbers for Q4 FY12 will largely be in line with those that came in during Q3, with slightly more pressure on the margins due to the weakness of the rupee and higher interest costs. Revenue growth is likely to be around 15-17 per cent as a result of sluggish investment activities and the lag effect of inflation over consumption.

We have seen in the past that subsidies end up proving all the budgetary estimates wrong. For FY2012, the fuel subsidy bill was approximately three times higher than the budgeted one, showing the inability of the government to tackle the fuel price hike. In FY2013, the food subsidy bill is again estimated to rise by three per cent to Rs 750 billon, while the fertiliser subsidy is expected to fall by 9.2 per cent to Rs 609 billion. According to revised estimates, the subsidy on petroleum products is budgeted to fall by 36.4 per cent to Rs 435 billion over FY2012. This bill clearly indicates an impending fuel price hike. The fiscal deficit target of 5.1 per cent looks ambitious amidst the various political challenges. As a result, the government borrowing figure also came in high (4.9 per cent of the GDP). This higher borrowing, coupled with the likely inflationary pressures amidst the hike in taxes, might lead to a delay in the rate cut cycle as compared to what was earlier envisaged. We believe that an approximately 150 basis points’ rate cut would come in the next 12-15 months.

The INR is expected to remain in the range of 49-52 until the point that there is limited clarity on the government’s ability to successfully achieve fiscal consolidation and the crude prices sustain above USD 115. Any weakness in the crude oil prices and visibility of reforms would strengthen the INR faster. Overall, we do not see the INR getting weaker beyond the 52-mark on a sustainable basis. Our target for the INR in the next 12 months is 47-48.

Triggers for the market will be a fall in crude oil prices, faster interest rate reversal, a roadmap for fiscal consolidation and key reforms such as GST, oil price deregulations and an increase in FDI limits in aviation and multi-brand retail. Apart from these big ticket reforms, many ground level actions towards stimulating the investment cycle and rejuvenating corporate confidence will be key triggers for a sustainable bull phase.

The global markets continue to remain volatile due to the still high discomfort of debt problems and the elevated crude oil prices. Negative data on Greece’s inability to implement austerity measures and the slowing Chinese growth rate, coupled with geo-political tensions in Iran would keep the global markets jittery over the next six months. We recommend that retail investors should use sharp dips to buy into quality companies with good managements and balance sheets.

MARKET WATCH

• Overall, we feel that the market should remain in the range of 4900-5600 in the next two to three months before it makes any further highs.

• The numbers for Q4 FY12 will largely be in line with those that came in during Q3, with slightly more pressure on the margins due to the weakness of the rupee and higher interest costs.