Market Outlook
June 15, 2012
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Market Outlook
June 15, 2012
Dealer’s Diary
The Indian markets are expected to open in the positive territory taking cues fromglobal markets. SGX Nifty is trading higher by 0.5% in early trade. Most of the Asian markets are trading higher.US markets after moving mostly higher during the course of the day sawconsiderable volatility in the final hour of trading and managed to end the day onthe upside. The volatility in the latter part of the trade was seen amidst report fromReuters, which indicated that central banks of major economies are prepared totake necessary steps to stabilize the financial markets after the Greek elections onSunday. Two separate reports from Labor Department reported increase in initialjobless claims and a fall in core consumer prices which had mixed impact onmarkets.Meanwhile, Indian shares fell sharply on Thursday after government data showedthat the headline inflation accelerated to 7.6% in May on yoy basis, driven by higher food and fuel prices, making it harder for the Reserve Bank of India to cutinterest rates aggressively.
Markets Today
The trend deciding level for the day is 16,753 / 5,077 levels. If NIFTY trades abovethis level during the first half-an-hour of trade then we may witness a further rally up to 16,847 – 17,015 / 5,107 – 5,160 levels. However, if NIFTY trades below16,753 / 5,077 levels for the first half-an-hour of trade then it may correct up to16,584 – 16,490 / 5,025 – 4,995 levels.
Indices S2 S1 PIVOT R1 R2
SENSEX 16,490 16,584 16,753 16,847 17,015NIFTY 4,995 5,025 5,077 5,107 5,160
News Analysis
May inflation levels at 7.6% yoy
Hindalco – project analysis
NTPC commissions 500 MW unit at Vindhyachal STPS
Refer detailed news analysis on the following page
Net Inflows (June 13, 2012)
`
cr Purch Sales Net MTD YTD
FII 1,870 1,598 272 358 42,297MFs 635 547 88 684 (5,783)
FII Derivatives (June 13, 2012)
`
cr Purch Sales Net Open Interest
Index Futures
2,029 952 1,077 9,955
Stock Futures
1,074 1,125 (50) 22,834
Gainers / Losers
Gainers LosersCompany Price (
`
)
chg (%)
Company Price (
`
)
chg (%)
MMTC 747
8.1
Indiabulls Real Est 54
(6.4)
Piramal Health 472
4.4
Unitech 22
(5.7)
Hindustan Copp 264
4.0
PNB 769
(5.5)
Sun TV Network 262
2.8
Adani Ports 114
(5.3)
Colgate Palmolive 1,160
2.0
Mcleod Russel 273
(4.9)
Domestic Indices Chg (%) (Pts) (Close)
BSE Sensex
(1.2)
(202.6) 16,678
Nifty
(1.3)
(66.7) 5,055
MID CAP
(1.3)
(76.4) 5,925
SMALL CAP
(0.7)
(42.8) 6,322
BSE HC
(0.6)
(38.1) 6,511
BSE PSU
(1.1)
(77.3) 6,942
BANKEX
(2.8)
(328.5) 11,339
AUTO
(2.0)
(182.1) 8,983
METAL
(1.0)
(105.6) 10,264
OIL & GAS
(0.2)
(18.1) 7,770
BSE IT
0.3
18.8 5,702
Global Indices
Chg (%)
(Pts) (Close)
Dow Jones
1.2
155.5 12,652
NASDAQ
0.6
17.7 2,836
FTSE
(0.3)
(16.8) 5,467
Nikkei
(0.2)
(19.0) 8,569
Hang Seng
(1.2)
(218.1) 18,808
Straits Times
(0.5)
(13.1) 2,774
Shanghai Com
(1.0)
(23.0) 2,296
Indian ADRs
Chg (%)
(Pts) (Close)
INFY
1.3
0.6 $44.4 WIT
0.8
0.1 $8.8IBN
(1.0)
(0.3) $29.8HDB
(3.4)
(1.0) $29.8
Advances / Declines BSE NSE
Advances
989
410Declines
1,730
1,013Unchanged
120
78
Volumes (
`
cr)
BSE 1,773NSE 8,457
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Market Outlook
June 15, 2012
May inflation levels at 7.6% yoy
Wholesale price-based inflation for the month of May, 2012 came in at 7.6% yoy,higher than 7.2% yoy levels registered in April, 2012. The inflation levels of March,2012 were revised upwards from 6.9% yoy to 7.7% yoy. The May, 2012 inflationlevels of 7.6% yoy were in line with the Bloomberg estimates. Core (non-foodmanufacturing) inflation – which the RBI tracks closely – remained stable at 4.7%yoy Primary articles inflation remained at elevated levels of 10.9% yoy, c.120bp higherthan the 9.7% yoy witnessed in April, 2012. The food articles inflation which hadmoderated considerably between October 2011 and January 2012 before risingback sharply remained at elevated levels (10.5% yoy) in the month of May.However, on the positive side, the food index declined marginally by 0.05% mom(annualised 0.6%) mom compared to a sharp growth of 4.7% mom (annualised56.6%) in April 2012. The fall in food article index is only the second instance of amom decline in the last 12 months. Also with current forecasts suggesting goodmonsoons, we expect food inflation to remain under control from here on.The Non-food articles index rose by 8.5% yoy in May 2012 compared to 1.6% yoy in April 2012. However, over April, 2012, the Non-food articles index rose by 1.7% mom (annualised growth of 20.3%) compared to 2.8% mom growth(annualised growth of 34.1%) in April, 2012. The growth in non-food articles indexwas on account of higher prices of soyabean, safflower, gaur seed, raw silk andrape & mustard seed and sunflower, amongst others. Inflation for mineralsregistered an uptick to 15.6% yoy compared to 19.3% yoy in April, 2012.Fuel & power inflation (11.5% yoy) witnessed annualised mom growth of 12.2%over April 2012 due to higher prices of petrol, bitumen and lubricants. Globalcrude prices have also been declining in-line with other commodities. In fact, WTIlevels have fallen sharply by over 30% in the last 2-3 months. The decline in crudeprices globally, however, has not contributed to the decline in domestic inflation atthe same pace due to the counter effect of depreciating INR. However, with INR stabilizing at current levels (~55), the positive effect of lower global crude pricesshould become more visible in the coming months.The impending fuel hikes to reduce the subsidy burden on oil marketingcompanies could, however, create some inflationary pressures. Petrol prices havealready been passed on and are only expected to increase fuel inflationmarginally, however any increase in diesel prices (contributes to over 60% ofoverall fuel subsidy and the current spread between petrol and diesel at all-timehigh of
`
33 vs. 10-year average of
`
14), though ruled out by the government asof now, could indirectly lead to higher food prices and have a meaningful negativeimpact on overall inflation.Manufactured products which have a weightage of c.65% in the overall WPIinflation remained stable at 5.0%. The annualized mom growth in manufacturingindex stood at 5.8% in May, 2012 compared to 8.4% in April, 2012. The coreinflation which the RBI tracks closely for its monetary policy remained stable at4.7% yoy (monthly average of 7.3% in FY2012). ) The recent sharp decline inglobal commodity prices, which generally gets reflected in inflation levelsdomestically with a lag, is expected to lead to a further decline in manufacturinginflation, in our view.
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Market Outlook
June 15, 2012
Hindalco – project analysis
Hindalco is on the verge of a massive expansion plan, wherein it is expanding itsaluminium and alumina capacity three-fold over the coming 4-5 years. In light ofrecent events such as clearance of Mahan coal block by Group of Ministers (GoM),delay in projects, declining aluminium prices and rising input costs (crude oilderivatives), we revisited Hindalco’s
financials for its upcoming projects undervarious scenarios. Our findings reveal that all three projects will generate ~17%RoE in a scenario where aluminium prices are at least at US$2,400/tonne (INR-USD53) and the projects have the backing of captive bauxite and coal mines – ascenario that looks remote in the coming 2-3 years.
What has gone wrong for Hindalco?
When Hindalco planned this massive expansion, the foreseen scenario was not asgloomy as it is currently. The projects have faced several hurdles, especially in thepast two years. Nevertheless, clearance to Mahan coal block from GoM isstructurally positive for Hindalco. However, assuming that even if Mahan coalblock receives clearance from the Cabinet soon, the captive coal mine is notexpected to commence production until the next 18 months in our view, while theMahan smelter is expected to be ready for commissioning in 1HFY2013. A decline in aluminium prices and higher input and coal costs have impactedprofitability of the company’s existing operations and lowered cash flowgeneration. This may also lead to further equity dilutions for the company’supcoming projects.
What lies ahead?
We do not expect a meaningful spike in aluminium prices in the near term.Further, with slow clearances for the company’s upcoming mines,
we do not ruleout further delays in its projects.
Post
GoM’s clearance for Mahan coal block, weexpect the Cabinet’s clearance as well; however, potential delays cannot beentirely ruled out.Further, there has been little progress on the procedural clearance process for thecompany’s Auranga coal mine and Talbira coal mine – which are expected to feedits upcoming Aditya and Jharkhand projects, respectively. While forest clearance ispending for Auranga mine, Talbira mine has received no major clearances as ofnow. While Jharkhand capex has not yet started, Aditya is at an advanced stageof completion, with commissioning due for 4QFY2013, while evidently coalavailability from Auranga has low visibility as of now. Going forward, to generateover 15% RoE, Hindalco needs to get clearances for atleast Auranga coal mine (forcaptive power generation at the upcoming Aditya smelter) alongside higheraluminium prices.
Outlook and valuation:
Hindalco is expanding its capacities three-fold over thecoming four-five years, and we are structurally positive on its integrated capacities.However, low aluminium prices, rising costs and delay in commencement ofmining from captive blocks are expected to mute its profitability growth in the nexttwo years. We expect Mahan coal block to be cleared by the Cabinet, which will bestructurally positive for Hindalco. However, even then it will take atleast 18 monthsfor Hindalco to commence production from this block. Moreover, we do not ruleout delays in the company’s upcoming projects.
Hence, we recommend Neutral onthe stock.
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