Money & Banking
BofA-ML sees lending rates falling by 50 bps more by March

BofA-ML said improvement in bank liquidity may pull down lending rates by another 50 basis points by March 2013

Mumbai: Within a couple of days of the country's largest lender State Bank of India (SBI) announcing an interest cut, Bank of America Merill Lynch (BofA-ML) on Thursday said lending rates will come down further by 0.5% before March end, reports PTI.


"Improvement in bank liquidity should pull down lending rates by 50 basis points (bps) by March atop the 25-75 bps done," its India economist Indranil Sen Gupta said in a note.


SBI cut its minimum rate of lending or the base rate by 0.25% on Tuesday, citing the cash reserve ratio (CRR) cut the previous day by the Reserve Bank of India (RBI) by a similar quantum and ease in liquidity.


BofA-ML expects the RBI to cut the CRR by a further 0.5% in its third quarter policy review on 30th October, the note said, adding, the central bank may also infuse an additional liquidity of Rs1 lakh crore by March through open market operations (OMOs).


This is likely to push up the deposit growth to 16% from the present 14%, it said.


However, the softening of rates will not result in an uptick of credit growth as the rates will still continue to be elevated, the note said. "High lending rates will likely continue to soften loan demand to 15% by December from the current 16.7%," it added.


The lending rate cuts are, however, key to economic recovery, Sengupta noted, adding growth will pick up in the March quarter to the 6.5% from the current 5% once the lending rates come down by up to 0.50%.


Welcoming the recent reform measures like diesel price increase and foreign holding liberalisation, the BofA-ML note said.


Though they will help boost sentiment, the real impact of those will be felt in the medium-term, it added.


Sensex, Nifty may move sideways: Thursday Closing Report

Uptrend paused; market may go sideways move until it finds a direction once again

Resuming trade after a day’s break, the market settled in the red for the second day on political concerns and unsupportive global cues. On Tuesday we had mentioned that the uptrend is likely to remain intact if the Nifty manages to hold itself above the previous day’s low of 5,586. Today the index traded below this level for the entire day. We may see now the uptrend taking a breather and we may now see days of sideways move until it finds a direction once again. A decline below 5,550 will further confirm sideways movement of the index. The National Stock Exchange (NSE) saw a lower volume of 75.27 crore shares and the advance decline ratio of 660:1123. 


The market opened in the red on concerns about the stability of the UPA-2 (United Progressive Alliance-2) government at the Centre after its ally Trinamool Congress (TMC) on Tuesday evening decided to withdraw support to the government over the opening of FDI in multi-brand retail and hike in diesel prices.


The Nifty opened 63 points lower at 5,537 and the Sensex started off at 18,292, a cut of 204 points from its previous close. The benchmarks dropped to their lows in initial trade itself with the Nifty going to 5,535 while the low on the Sensex was its opening figure.


Select buying soon helped the indices recover from their lows. The upmove saw the market hitting its intraday high in late morning trade. The Nifty rose to 5,581 and the Sensex went up to 18,443. But profit booking at the highs led the indices lower in subsequent trade.


A weak opening of the European indices kept the domestic market under pressure in the second half of trade. The countrywide strike against the government’s reformist policies also worried investors.


With the political uncertainty gaining momentum as the TMC ministers set to tender their resignations to the prime minister on Friday, the market settled in the negative for the second day, after a nine-day winning streak.


At the close, the Nifty fell 46 points to 5,554 and the Sensex settled 147 points down at 18,349.


Among the broader markets, the BSE Mid-cap index declined 0.65% and the BSE Small-cap index fell 0.53%.


BSE IT (up 0.84%); BSE TECk (up 0.73%) and BSE Fast Moving Consumer Goods (up 0.15%) ended higher while all other sectoral gauges were in the negative. They were led by BSE Metal (down  2.28%); BSE Capital Goods (down 1.94%); BSE Power (down 1.63%); BSE Oil & Gas (down 1.43%) and BSE Bankex (down 1.10%).


Ten of the 30 stocks on the Sensex closed in the positive. The key gainers were Bajaj Auto (up 2.31%); TCS (up 1.62%); ONGC (up 1.21%); Wipro (up 0.93%) and ITC (up 0.92%). The losers were led by BHEL (down 3.62%); GAIL India (down 3.58%); Coal India (down 2.99%); Sterlite Industries (down 2.80%) and Tata Steel (down 2.73%).


The top two A Group gainers on the BSE were—M&M Financial Services (up 6.70%) and HPCL (up 3.37%).

The top two A Group losers on the BSE were—TTK Prestige (down 5.99%) and GMR Infrastructure (down 5.45%).


The top two B Group gainers on the BSE were—NEPC India (up 20%) and Indian Acrylics (up 19.50%).

The top two B Group losers on the BSE were—Gennex Laboratories (down 13.16%) and GSL Nova Petrochemicals (down 13.07%).


Out of the 50 stocks listed on the Nifty, 14 stocks settled in the positive. The major gainers were BPCL (up 2.53%); Bajaj Auto (up 2.14%); TCS (up 1.24%); ONGC (up 1.19%) and Ranbaxy Laboratories (up 1.06%). BHEL (down 4.27%); GAIL (down 3.89%); Reliance Infrastructure (down 3.39%); Tata Steel (down 3.13%) and Axis Bank (down 3.11%) settled at the bottom of the index.


Markets across Asia closed weak on renewed signs of slowdown from within the region. The HSBC China Flash PMI for September stood at 47.8 from 47.6 in August. The index has remained below 50 for the 11th straight month. Also, Japanese exports fell 5.8% in August from a year earlier while manufacturers' sentiment hit its lowest since February. Meanwhile, The Bank of Japan boosted its asset buying and lending scheme by 10 trillion yen on Wednesday and its governor Masaaki Shirakawa warned economic recovery could get delayed by six months.


The Shanghai Composite tumbled 2.08%; the Hang Seng tanked 1.20%; the Jakarta Composite declined 0.64%; the KLSE Composite dropped 1.25%; the Nikkei 225 contracted by 1.57%; the Straits Times fell 0.42%; the Seoul Composite dropped 0.87% and the Taiwan Weighted settled 0.70% lower.


At the time of writing, the key European indices were down between 0.44% and 0.79% and the US stock futures were in the negative.


Back home, foreign institutional investors were net buyers of shares totalling Rs1,049.18 crore on Tuesday while domestic institutional investors were net sellers of equities amounting to Rs670.72 crore.


Glenmark Pharmaceuticals’ US arm Glenmark Generics Inc has received tentative approval from the US health regulator for its generic Rizatriptan Benzoate tablets used for treating migraine attacks. The tablets, which are generic version of drug major Merck's Maxalt tablets, achieved sales of $315 million for the 12 month period ending June 2012, as per IMS Health data. Glenmark rose 1.55% to settle at Rs418 on the NSE.


Gitanjali Gems, India’s leading branded jewellery producer and retailer, has created a separate e-commerce site for each of its existing brands in order to sell ornaments customized. Besides, the company has tied up with leading online jewellery retailers including, and to tap their lakhs of customer base. The company has targeted Rs150 crore worth of business by March 2013 from a mere Rs5 crore now. The stock closed at Rs342.95 on the NSE, down 2.28%.


Lanco Infratech has informed the BSE that Udupi Power Corporation, a subsidiary of the company, has declared the commercial operation of its 600 MW unit II located at Udupi in Karnataka. The 1200 MW thermal power project is based on imported coal. With this development, both the units of the project are in operation. Lanco Infratech tumbled 6.52% to settle at Rs12.90 on the NSE.


Stocks of consumer companies may remain strong

Broking firm Nomura believes that over the next few quarters, the growth outlook for consumer companies in India continues to remain strong. Volumes are likely to remain buoyant in the medium term, concerns such as delay in monsoons and economic slowdown notwithstanding

In 2012, the consumer sector has been the best performing sector in India, with the FMCG (fast moving consumer goods) index up 35.8% YTD (as of 14th September) compared to the benchmark Sensex +19%. This outperformance of 16.8% has been on account of continued delivery on the operational front from companies across the sector as well as a risk-off environment, where defensive sectors have been the flavour with investors, according to a report by Nomura Equity Research. This is also reflected in the performance of other defensive sectors such as pharmaceutical companies, which has also had a strong run with the healthcare index at +28.3%, outperforming the Sensex by 9.3%.


Nomura believes that over the next few quarters, the growth outlook for consumer companies in India continues to remain strong. Unlike its previous expectations, the global brokerage firm is yet to witness any meaningful slowdown or trading down in the staples sector. The on-the-ground feedback and company commentary suggest that volumes are likely to remain buoyant in the medium term, concerns such as delay in monsoons and economic slowdown notwithstanding.


Stocks of Consumer companies are trading currently at an average of 27x FY14F P/E, higher than the long-term average of around 24x. Nomura expects valuations to remain at current elevated levels in the near to medium term due to: a) continued strong growth, and b) prevailing risk-off environment.


In the current environment, the brokerage prefers companies with a history of consistent delivery. ITC is a top buy in the large cap space where mid-teens EBIT growth in the key cigarette business is seen continuing in the next few years. Nomura has upgraded Hindustan Unilever to a neutral on the back of continued strong operational performance. Among the mid-cap names, it prefers GCPL, as its performance across geographies has been robust. It also recommends Jubilant Foodworks despite its high relative valuations. We believe its earnings will continue to surprise the street positively.


Among the stocks in the coverage universe, we see that the outperformance Vs the

Sensex is across the board with United Spirits the top performing stock and Nestle India being the only underperformer. United Spirits is +88% YTD (on the back of a sharp move in recent months on news reports of an M&A deal with Diageo; Source: The Economic Times,

25 April 2012). On the other hand, Nestle, where underlying performance on the volume front, has been underwhelming, has underperformed the Sensex.


Even when we look at valuations of the consumer companies against the Sensex, the premium is at multi-year highs. The consumer sector trades at a 117% (as of 14 September 2012) premium to the Sensex compared to the long-term average of 73%. This premium has moved up from 100% at the start of the year, which indicates that even if we see this on a short-term basis, valuations across the consumer sector have seen a significant re-rating, says Nomura Equity Research.


The brokerage believes tat one of the key reasons for this re-rating has been the consistent track record across companies in terms of delivery on operational performance. If we look at volume growth performance over the last few quarters, companies across the sector have shown consistent delivery in terms of volume growth, which investors have rewarded with higher multiples.


It can be noted that this performance has been delivered across a full cycle. If we look at sector performance since the financial crisis in 2008, we see that sales growth has been fairly robust, despite the swings in commodity prices and threat of softening demand over the past three to four years. The only quarter where sales growth was sub-10% was in 2008, in the first quarter after the financial crisis.


FY12 saw a significant level of pricing action across categories, particularly as companies tried to balance the increasing commodity costs with price increases. A look at some of the key segments, such as soaps, detergents and shampoo, indicates that the pricing action is now showing signs of slowing down. This trend is likely to sustain in the near term, as commodity cost pressures have eased significantly. Pricing is also a function of the demand situation and inflation, both of which have seen a slowdown in recent months. In FY13F, the majority of the impact on revenue growth will be in the form of volume growth with price/mix element being a smaller contributor.


A look at EBITDA margin trends across the consumer sector shows a significant level of variation across the time period. This is a reflection of two key variables: first, the commodity price trends and, second, the investment in advertising and promotion (A&P) in the sector. Over the past few quarters, there has been a recovery in EBITDA margins led primarily by softening of commodity costs.


However, there have been some recent spikes in commodity costs particularly in commodities such as maize and wheat, which should temper some of the margin performance for food companies as well as in pockets of HPC categories such as oral care. Copra prices are still down substantially y-o-y, which should continue to benefit Marico into FY13F. Barley and milk prices being relatively stable are a positive for Nestle and GSK Consumer, opines Nomura.


Nomura Equity Research has upgraded Hindustan Unilever to ‘neutral’ from ‘reduce’ and raise its target price to Rs527 from Rs327 on the back of structural improvements in the business. It believes HUL has turned a corner and valuations are likely to sustain at higher levels than the long-term average in the near term.


While the regulatory environment has been uncertain, with large increases in excise duty in both FY10 and FY12 budgets, ITC has been able to pass on these price increases to consumers and deliver robust revenue and earnings growth. This has been the case for the last six to eight years, and ITC will continue to deliver mid to high teens earnings growth, even if there remains some uncertainly on the regulatory front. Given this resilience which the company has demonstrated, ITC should continue to be a core holding in the Indian consumer sector. Nomura reiterates ‘buy’ with an increased target price of Rs310.


Godrej Consumer Products (GCPL) has delivered strong operational performances both on the domestic and international front over the past couple of years. The performance to continue in the medium term, with management focused on delivering volume growth ahead of industry. International business is now a substantial part of the portfolio, where the inorganic route has worked well for GCPL. The agency maintains a ‘buy’ rating with an increased target price of Rs800, on the back of increases in our earnings forecasts as well as P/E multiples.


Jubilant Foodworks delivered strong same-store-sales growth (SSSG) of 29.6% for FY12. With penetration of pizza still low and consumption in major cities continuing to hold up, Nomura believes SSSG will continue to be in the 20% range over the next couple of years. The company has guided for 18%-20% SSSG for FY13, which could be conservative. The launch of Dunkin Donuts will likely add another leg of growth in the medium term.

Nomura maintains ‘buy’ with an increased target price ofRs1,490, implying 20.6% upside.


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