Markets weekahead: Infosys results, IIP data to determine trend

October 8, 2011

(The views expressed in this column are the author’s own and do not represent those of Reuters)

The Nifty regained the 4,900 mark after plunging to approximately 4,750 levels during the week, as Indian indices played catch-up with a rally in global indices later in the week on hopes that Europe will recapitalise its banks to tame the euro zone debt crisis.

The key highlight of the week was the ratings downgrade of top Indian bank State Bank of India (SBI) by Moody’s to D+ from C- on account of low tier 1 ratio of 7.6 pct as against the required ratio of 8 pct and deteriorating asset quality. The SBI has been trying to raise 200 billion rupees through its rights issue which the government has been delaying for some time now. Moody’s report may expedite the same. The valuation of the bank has reached attractive levels and the risk-reward ratio is favourable in our view.

Coming to cues for the coming week, we have the government unveiling a much-awaited new telecom policy, which is expected to include rules on pricing of second-generation radio airwaves and mergers and acquisitions in the sector. This is expected to keep telecom companies in focus. The new telecom policy is being prepared at a time when there is confusion in the industry over issues on licensing, spectrum allocation, tariffs and pricing. We saw a correction in the telecom sector on Friday as reports suggest the new telecom policy may reduce margins on roaming for telecom players. Also last week, most players were hauled up for misrepresenting/misreporting revenues.

In terms of economic data, industrial production (IIP) for August is due on Wednesday and wholesale price index (WPI) for September on Friday.

There are expectations that IIP might have grown between 5-5.5 pct y-o-y in August as against 3.3 pct y-o-y growth in July. WPI data for September is importance as it will indicate the Reserve Bank of India’s (RBI) likely monetary policy stance at the half-yearly review on October 25. The RBI has raised its key lending rate 12 times since March 2010 as it tries to bring down stubbornly high inflation. Policymakers expect inflation to start easing from November due to base effect kicking in, if not due to measures taken by RBI or good monsoons. Majority of market participants expect the RBI to hike rates one last time in its current tightening cycle in October.

The coming week will also mark the onset of Q2 FY12 earnings season with Infosys declaring its numbers on October 12. There are expectations the company may cut its FY12 dollar revenue growth guidance on weakening global demand. However, Infosys is expected to raise its earnings and revenue guidance in rupee terms following a steep decline in rupee against the dollar recently. Weaker rupee is expected to boost margins of most players in the second half.

Investors will also keep a tab on the hiring plans of IT companies as it provides a sense of the demand environment. Watch out for management commentary regarding the demand environment.

As elaborated in earlier columns, markets have reached attractive levels with benchmark indices P/E trading at 13x FY12E earnings and currently below 10-year average P/E band. The trading band for Nifty still remains 4750/4800 to 5200/5250, but considering the current scenario, the bias is more toward the upside. The only weak link in the India story seems to be political imbroglio and the policy making limbo and one needs to watch out whether that could permanently derail our economy.

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