Economy Report Oct 2009

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MAIA FINANCIAL SERVICES PVT LTD

ECONOMY 360 DEGREES INDIA: OCTOBER2009

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Economy Report- October 2009 Economy Report: Index 1) Market Pulse …………………………………………………………3 2) Economic Indicators a. GDP growth and its projection………………………………5 b. Credit growth…………………………………………………6 c. IIP………………………………………………………………7 d. Commercial Vehicle sales……………………………………..7 e. Auto Sales……………………………………………………...8 f. Cement Dispatches……………………………………………8 g. Capex growth…………………………………………………9 h. Yield curve……………………………………………………10 i. Corporate Bond spreads…………………………….............10 j. 10 year government bond yield……………………………..12 k. Currency movement(Indian Rupee vs USD)………………12 l. Inflation ………………………………………………………12 m. FII Flows……………………………………………………..13 n. Domestic Fund Flows………………………………………..13 3) Economy Pulse……………………………………………………….14

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Market Pulse: One needs to understand that:“Bull markets are born on Pessimism, Grow on Skepticism, Mature on optimism and Die on Euphoria”. According to us we are right now at the stage of skepticism so there is still room for an upside. So for an investor having an investment horizon of 5-10 years should grab the opportunity to enter the markets on dips. We think that worst is behind us and we have made a base for Nifty at around 4000 levels. However one needs to adopt a cautious approach now. We have seen our Indian indices rally a whopping 98% considering a time frame of 6 months starting March 2009. We are cautious because we foresee the following things:1) Inflation fears increasing due to shortfall in monsoon. 2) Decline in government consumption in the first quarter of 2009-10. 3) Fear of interest rates increasing due to increasing government borrowing plan as well as inflation fears. 4) The fear of increasing interest rates will lead to increase in cost of debt of companies. 5) This will not be good for the corporate sector at these initial stages of recovery. 6) Credit off take not taking place-well below RBI’s target of 20 %( currently at 15%). 7) We feel that dollar would be most likely oversold now. There is inverse relationship between the dollar and our equity markets. So if the dollar shows improvement it is likely that our equity markets could possibly correct. 8) Lower capex growth. However there are certain positive triggers also:1) Improved global cues 2) Improving domestic conditions-reflected in IIP numbers, 3) Improvement in Business Confidence, 4) Growth in money supply 3

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5) A possibility of pick up in credit growth next quarter. 6) Reduction in debt levels and inventory levels by most of the companies 7) Improvement seen in Automobile market-which is reflected in auto sales figures 8) Improvement seen in housing market. We need to apply weight of evidence approach to all of the positive and negative points mentioned above. So we advise our clients to take a cautious approach in the sense that they should participate in the uprise in the sensex by keeping strict stop losses as the above reasons will affect markets sooner or later and it is just the matter of time. - In the short term, markets might trade sideways or can see a correction of about 5-10% depending on global cues as well as the above mentioned fears of inflation and interest rates rising. However, for investors who have a longer term horizon, there are still good opportunities available in the market.

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Economy Pulse GDP: Indian economy grew at 6.1% in 1QFY10 (Q4FY09 GDP: 5.8%; Q1FY09: 7.8%).

GDP by activity: The agricultural sector, representing around 16% of GDP in Q1, grew at 2.4% yoy (Q1FY09: 3%).Within Industry, manufacturing sector improved, as expected from IIP numbers, and grew at 3.4% vs -1.4% yoy in previous quarter. Even Electricity, construction and specially Mining improved significantly. Low rainfall in June helped mining and construction. •

Services sector moderated to 7.8% yoy in Q1FY10 vs. 8.6% in Q4FY09. Trade, Hotels and Transport improved but community, social services slowed to 6.8% in Q1FY10 from 12.5% in Q4FY09.

GDP by expenditure o Private consumption growth remained subdued at 1.6%yoy and Govt consumption declined from multi year high of 56.6%yoy in Q3 and 21.5% in Q4 to 10.2% in Q1FY10.

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o Growth in investments slowed to 4.2% yoy in Q1FY10 from 6.4% in Q4FY09. Both private consumption and fixed investment growth is weakest in 7 years. o The only improvement in GDP growth was much higher contribution of net exports as imports fell much more (-21.2% in Q1FY10 vs. -5.7% in Q4FY09) than exports (-10.9% in Q1FY10). This is first time in 16 quarters that net-exports figure was positive (in absolute terms). o Inventories have also moved up 3.2% in Q1FY10 after massive de-stocking in Q4FY09 (-0.9%). o GDP in Q1FY10 improved from previous two quarters despite Govt expenditure becoming half of previous quarters. Fiscal stimuli given in previous two quarters had increased Govt expenditure. o Poor monsoon will result in a decline in Agri growth this fiscal, but reduced contribution of Agriculture to GDP together with rise in non-agri rural income will cushion the damage.

Credit and deposit growth

While the growth in the non-food credit continues to be lower at 13%, the deposits growth remained higher at 21.3%.This implies that the industry still hesitates in taking additional loans for their investment plans. Also these poor figures of Credit growth are indicative of the fact that banks are reluctant to extend financial support to industries that have poor credibility due to slowdown. However we also feel that Credit growth could improve sooner , from the current 15 per cent and reach RBI’s projection of 20 per cent The expectation of credit pick up stems from 6

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encouraging GDP and IIP numbers, which in turn could boost further investment by corporate. As the economy revives, the requirement for working capital and term loans by corporates could go up, thereby reviving demand for credit. The credit growth could also probably pick up because of the coming festive season (Diwali). IIP: Industry growth seems to be bottoming out • Industry improved as expected and as already reflected by IIP numbers. • Mining, Construction, electricity within Industry showed significant improvement in Q1 compared to Q4 due to reduced rainfall in June.

Commercial vehicle sales: We have seen a revival in auto as well as the real estate sector. This is visible easily from the charts below.

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Auto sales

Cement dispatches

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The growth trend in investments slowed to 4.2% in Q1FY10 vs. 6.4% in Q4FY09. • It is also being reflected in the credit growth. • Investment is expected to pick up from 2HFY10

Private consumption growth remained disappointing at 1.6%yoy in Q1FY10. • The impact of various fiscal stimuli provided (farm loans, salary hikes, arrears etc) along with reduced interest rate are still to come through. • Poor monsoon may negatively impact rural consumption

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Zero Coupon Yield Curve:

Zero coupon yield curve seems to be normal.

Corporate bond spreads

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10 year yield

Currency-India vs. USD and EURO

Inflation

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As mentioned in our previous report, we had stated that we would soon see the WPI numbers coming to Inflation. This would become a cause of worry for the RBI. There are many supporting reasons for it. One the CPI number stands as high as 14-15% YOY. The money supply stands well above the target of 20%. The WPI numbers have turned to a positive zone from the negative figures reported for several weeks. This is one sign of inflation approaching. As can be seen from the above charts of WPI and CPI, the WPI numbers (0.84%) are deceptive. The CPI numbers are telling an altogether different story. The food price inflation is already in double digits and remains at 14-15% currently. With lesser rainfall the threat that the inflation would rise further gets elevated. At the moment when economy is on the path of recovery, this kind of inflation would most likely hurt growth.

FII flows

Domestic fund flow

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As can be seen from the above figures FII’s have been the net buyers for the month of September while the DII’s have been the net sellers for the month of September. Analysis Economic Indicator

Type

Comment

Yield Curve

Leading

Normal. Not a cause of worry

Corporate Bond Spreads

Leading

Corporate bond spreads for a 1 year rated AAA rated is rising which shows that inflationary concerns in near term are reflecting in terms of higher spreads. However the 10 year bond spread is falling.

Inflation

Coincident

Inflationary concerns are rising with WPI also turning in positive territory, it is for sure now that RBI will start raising the rates sooner than later which would be bad at this stage for the equity markets.

Interest rates

Coincident

Currently stable, however indicators are signaling that RBI would soon start raising the rates

10 year government bond Leading yield

Rising. With the huge government borrowing programme and inflation fears the yields have started rising. This would be bad for 14

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equity markets Non Food credit growth

Leading

Declining. It would prove bad for the equity markets since it is indicative of the fact that either corporate are hesitant of taking more loans for their expansion plans or banks are hesitant in giving financial support to corporations having low credibility

CCIL Bond Index

Leading

Falling. As the yields are rising, bond prices are falling. This would be bad for the equity markets going down the line

GDP

Coincident

Growth of 6.1% for the 1st quarter of the FY10. Better than the same quarter of the previous year.

IIP

Lagging

Good.

Core Infrastructure Industries

Lagging

The rosy picture shown by the core infrastructure industries in the latest data released(June 2009) could have already being factored in.

Auto Sector

Leading

The auto segment is clearly showing signs of improvement.

Real estate sector

Leading

There are definitely signs of revival seen in case of real 15

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estate sector. Indices-Shanghai

Leading

Analyst Name: Avani Mehta Email Id: [email protected]

Bad. Weakness visible

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