INDIAN EQUITIES - LOOKING BACK AT 2011

Here are some articles from last year that I think are worth a read.

Indian Equities have been faced with a toxic combination of Policy inaction, high interest rates, a very weak Indian Rupee and waves of instability from western markets, primarily the EU.

The articles below provide some interesting views on the Outlook for 2011. Mukul Pal's contrarian outlook, highlights the point that beaten down sectors that have been written off by Mr. Market could surprise us in 2012!

INDIAN EQUITIES : FII & Domestic Institutional Fundflows

2010 has been a good year for Indian Equities. The FMCG (Consumer staples ) sector, Auto sector & Banking sector have performed well this year. Valuations are no longer cheap, and the margin of safety for investors has narrowed substantially.

Link - Domestic institutions turn cautious, go on selling spree ...
As usual, FII fundflows continue to dictate market direction, but as the above article points out, Domestic Institutional investors - Mutual Funds are booking profits.

INDIAN MONSOONS 2010

The monsoon rainfall last year was well below average.
As India waits for the arrival of the south west monsoon, everyone's hoping for a normal monsoon this year.

Insufficient rainfall resulted in rising food prices, as the prices of vegetables and food grains soared.

Last year, consumer demand in rural areas held up pretty well despite a poor monsoon. Continuing inflation, especially ''food price'' inflation will have a dampening effect on consumer consumption in the auto, FMCG & durable goods sectors.

Thus, a back to back season of insufficient rainfall will have serious repercussions for the Indian economy.

In the meantime, the India Meteorological Department (IMD) has forecast a normal monsoon across the country this year.

'''Lending a quantitative perspective to the available indications, IMD said the total rainfall during the June-September monsoon season would be 98 per cent of the long period average. This assessment is subject to a model error of ± 5 per cent.'''

Lastly, just a warning for those who may blindly follow the forecasts of the IMD!!

''''Last year too IMD had predicted a near-normal rainfall of 96 per cent. Two months later, in June, it issued an update scaling down its assessment to 93 per cent of normal. Both these predictions went awry. IMD then revised its forecast for a third time in August, this time predicting 87 per cent of normal rains.

These predictions, however, turned out wrong and the country received only 77 per cent of normal rainfall. This led to a drought in large parts of the country.'''''

Links:

TAKE A LOOK-India forecasts normal monsoon rainfall‎

Monsoon to dispel clouds over sugar, grain‎

MD predicts normal monsoon‎

HATCHBACK CARS IN INDIA

The hatchback car market in India looks all set for a fresh round of cut - throat competition.
Below is a clipping from last week's TIMES zigwheels. www.zigwheels.com

Ford India has launched the Ford Figo at a super competitive price of Rs. 3.49 lakhs (approx USD 7755, at 1USD = INR 45) for the base model.

The Indian government is also rolling back excise duty benefits on the sale of small cars and the Reserve Bank of India is also hinting at a tighter monetary policy going forward.

The Indian hatchback market is dominated by Maruti Suzuki & Hyundai Motors.

Maruti Suzuki is the dominant player and is the manufacturer of the legendary Maruti 800, the Suzuki Wagon R ( since relaunched as the Suzuki Ritz) and the Suzuki A star ( formerly the Suzuki Alto).

Hyundai India also makes the popular Hyundai Santro and the Hyundai i 10.

Tata Motors makes the Tata Indica & the Tata Nano!

Volkswagen, Ford, Fiat and GM are new entrants in the hatchback space.
In the past Fiat and GM have tried to enter this space, and were not very successful.

The hatchback segment is getting rather crowded in my opinion.

While this is great news for the customer, it means that the car makers will face margin pressures going forward.

Car makers will also have to compete with a growing second hand car market and second hand cars that are refurbished by the car companies themselves.

Consequently, investors in auto companies like Maruti Suzuki need to take note of the changing dynamics of the low margin high volume hatchback car market.

Investors in auto ancillary companies will also have to deal with shrinking profit margins. Raw material prices (steel, glass, rubber etc) are rising and car companies will look to cut costs to boost their own profitability.

A price war is great for the customer, but drastically reduces the profitability of the car makers.

INDIAN FMCGs & AUTOS : STOCK VALUATIONS

The newspaper clipping below is from the
Business Standard newspaper, Mumbai,
6th August 2009.
I saw this a few days ago, but got down to writing about it only this evening.








Source :Overpriced FMCG stocks leave fund managers a worried lot
The recent rally in FMCG (Fast Moving Consumer Goods – toothpaste, detergents, tobacco products, bathing soap etc) and Auto stocks has continued on, despite concerns of a deficient monsoon.

Over the last couple of sessions, the Auto and FMCG sectors have sold off rapidly on concerns of a sub – par monsoon season. Valuations in both these sectors had run up a lot and were factoring in a far more ‘rosy situation’ than the one we are faced with.

The government has not declared a major failure of the monsoons just yet. So far we’ve only had ‘concerned’ statements from various government authorities that the monsoons are sub par this year.

We may only know the exact outcome in a few weeks time.

Here’s what I think -

• Rural consumption demand in India is still largely monsoon dependent, and irratic and untimely rainfall, will definitely impact this predominantly agrarian section of the economy.

• FMCG stocks are companies that sell products for every day use, and consumption usually remains steady even during downturns. Thus the sector is considered 'defensive'. However, investors must remember, that you never make money by buying into an investment at expensive valuations.

• FMCG goods and car / motorbike sales this festive season (Diwali), will be negatively impacted if the monsoons do not improve soon enough. Valuations in these sectors do not leave an investor with an adequate margin of safety if he has bought into these sectors recently.

• I would advise investors not to ‘chase performance’; and buy into rising stocks just because they feel left out. Investors’ who says ‘that fundamentals don’t matter’ are just ‘momentum’ chasers, and are probably going to lose a lot of money in the long run!