India Morning Report: The Capital Goods chimera fools no one

Markets settled in to a subdued Friday even as the now almost regular double feature jump in Capital Goods sub indices in the IIP caused IIP to flare up to a 2.6% closelt following June’s 1.8% growth. Though the jump in Core industries reported last week too signifes a likely higher mark for GDP than the June bottom, the jump in IIP itself needs to be ignored with care as the Capital Goods number in the positive is now habitually likely followed by an equally sharpp negative in the August series when it is reported next month or at least before the October festivities mask production growth, if any For those interested, such volatile jumps are a regular in the Durables orders data series in the US and the component of Aircraft orders for example is thus repored separately rather diligently than a black box number up 5% once and -5% the next month almost without reason

Industry investments are not back and thus markets have given in to high PCRs (Put Call Ratios) retreating to 5800 levels in the Friday Morning trade. .Another consumption major McDonalds and on assumes the continuing saga of Walmart signify strained battle lines between Global majors and those who know India at the helm, all in the name of corruption and many other equally obvious slogans India panders to in the global arena ( Without being best at any) Connaught Plaza, seemingly owns not many restaurants and McDonalds obviously as always wants to be unfair while buying out reality partners an moving to another hase of growth,. The valuation battle will be difficult to disengage for any private company but a $100 mln ballpark looks more  feasible than the company sponsored $10 or $300 mln valuations and it is going to be a long battle. Walmart too is apparently not driven by valuation in its current revisit of the decision to Invest in India, at stake the Best Price business with $500 mln turnover and a prospective equity buy in Easy Day which will allow Walmart to become a household name in India

The Rupee is not getting any sponsors this week beyond the 64 mark, but with indices nearer 5750 or 5800 n Monday, it might be another bullish week of te Indian Rupee making up to the benchmark EM currency moves which are more than 10% smaller than India’s 25% move since May 21 in the absence of any buying or sustained investment into the Indian Economy

India’s Mid Cap IT like KIT and MindTree could probably use his time to gainfully grow in size but Enterprise space growth is definitely overdone for them and bigwig Indian outsourcing. IBM is exiting India CRM (Voice) centres too but in a misguided bid to grow portfolio profitability without a synergistic picture as is the Elephant’s wont.

Power NBFCs started the week well an may well help the banks lead Indian equities into the 6300+ zone as the dismal days are following a very standard script and business could be booming before you know it without improving the Savings rate at an all time low of 30% currently

BTW, the PMO mentioned most PSEs (94%) have hit the Capex targets for the June quarter and Government expenditure, well targeted could keep us generating that sub 4% peg of growth on which Private sector investment may build. It’s a long weekend though and Oil could also be at a much lower level on Monday


A reality check that augurs well for those willing to stop and take a breather | Earnings Insight

Earnings Mid Terms crash on All India and US

Mid Cap IT and Infy looking for avenging the transfromation space with Indian business providers were again usurped by larger BPO deals and a good showing from unhedged HCL Technologies and one hopes also TCS leaving one critical movement in currency which is good for the larger economy as the ones hanging for dear life.

Similarly consumer plays like Coke paid 11% in Currency headwinds against a  strengthening dollar in the first two months of the quarter as global corporations report the halting recovery in the US. Intel is down and the world as we know it unchanged thrashing ahead for those not playing in such currency movements , not necessarily wanting to be shackled with Nationalist interest. However even as IBM looks at an inevitable yet steeper falling hardware sales and the ones that missed the housing recovery at Citi look at a continuing salvage operation, the world has moved on whether it desired to or not. The gap between the peers that have performed in this quarter and the rest is likely to keep growing and one must recognise those that have failed in this perfectly competitive quarter as having strategically misaligned themselves and needing a relook at their global and domestic business strategy. Globally this will soon include BofA by today evening when they report before US markets open but the winners may not necessarily include McDonalds’ , Starbucks and the resurgent Wells Fargo. What has probably happened is that those running with a perfectly operational strategy and anticipated free fall in this quarter have been singled out by us and we stand by our observation as we see the various forces of human endeavour trying to come out of the ever elongating crisis and note that no one has caught the envisioning of this new normal whether those still prognosticating a recession or those just hoping to ride on more growth allowances to make a comeback.

The changes at macroeconomic level mean that older ties between economies in critical businesses including banking and auto have probably been running on the saame tenets as the nineties yet and that they have changed only no as have been expected since 2008/9. Investors thus would have more hiccups ahead and would likely need to pull back from equities and reassess the situation and a second round of deleveraging will now likely hit global economies only later as European banks re-enter the arena.

However, this article does not have the answers we need to ‘move on” productively, except that even without regulators’ forcing it banks and global companies would do well to be more careful and are likely to be weaker to future economic crises or as observers noted, black swans could be a more often occurring event in the coming days. The growth of consumption as variously noted by Intel, Fedex, Starbucks, McDonalds’, Coke ( incl New York’s ban on supersized drinks) GM, Facebook, Dominos and Pizza Hut is not the same as it was a decade ago into which you added a health fad and a mobile. The Euro will survive but European corporates are still not ready to come out with performances worthy of a standing ovation including growing Healthcare plays like Roche, Novo Nordisk and US based Sanofi and JNJ

The going is going to be tough and the tough better get going!

A time for infosys, past

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A time for Infosys, past The cut of growth estimates to 16% and a last clarion call from Infosys( before going down) for high quality revenues led by consulting as CTS shines up on the horizon wihtth low cost high volumes and TCS maintains the domestic lead Esp suspect would be macro strategy pronouncmements in the wait and watch mode , having plateaued or lost relevance in managing high relevance for clients and or creating and non linear growth in products and platforms. Europe’s outsourcing experience is patchy at best and they are busy at home this year, growth in Asia not spilling over to spread of outsourcing for another decade? Infy wants growth from Europe (touche) and 5 large deals were signed in thwe quarter for $500 mln value, one in Europe. Margins are good for Infy and hedging for less than half the revenues at $877 mln. Sales were $1.8 bln , forecast for Q4 flat at the same

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$1.80 bln and expecting yoy growth to end at $7.05 bln revenues in March 2013 Also funnily, the management team just about managed to not sppeak about growth in banking and financial services but then the sector remains key, we believe also nearshoring is more key than you would believe in such a key Outsourcing insdustry thus Accenture outscoring Infy by 5:1 in coming bids and wins despite the “potential” for this industry,. Between CTS and Accenture’s growth (outside India) Indian IT is up for recalibration or individually for Infy and HCL Tech

Q3 Sales INR 9298 Crs ( INR 92.98 bln) up 12% QOQ from 8090 CRs (INR 80.98 bln)

Q3 Op Margins 4.4 % currency advantage 3% from rupee

Q3 OP Margin 31.4%, pricing up 5% yoy

Added 49 clients, 5 large deals, 2 above $500 bln, increasing share of outsourcing of clients with higher quality business key target ( biggst weakness in strategy)

Europe and life Sciences and healthcare grew over double digits in size from last quarter

Future Outlook

Pricing stable

FY2012growth down from 17-19% to 16.4%

Moneycontrol Interview – Boardroom

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Rupee Impact: Expecting Indian IT growth to recover

Though the equations are well off as Domestic Indian It business does not contribute to Dollar income or exchange rate risk that is giving a lot of IT companies more profit, it is true that despite protestations of growth including the latest Gartner report professing a $79 bln business in India at 9% growth in 2012, there are considerably dull days ahead for Indian IT.

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While the US offshoring market and even Europe has been near saturation and has gone into a policy twirl, the domestic business has slowed down to lessd than the expected $8 bln as policy making is held up on crucial issues like UID ( Accenture and Wipro among other bid for a $400mln piece of UID business, that may be over budget and is waiting on the bid , probably only to scratch it).

The situation with the UID business is by no means unique ads most public contracts , even more so (if possible) for public spending contracts outside India remain stymied in current economic environment, labor friendly policies being the only saving grace of any government trying to last its course

However non IT exports other than Garments are likely to be more profitable in Gems but more than that are likely to grow in volumes across otherwise restricted lists like rice, iron ore and more. Also the $71 bln business already in the door in India will stay and earn 4-5% more in profits over the year ( A quick calc by HMT CFO KV in he media today is on the mark at 40bps per 1% depreciation)  assuming the rupee at 22% depreciation over the year yields a minimum 10% extra in profit ( esp at companies that have not applied hedging to more than 1-2 month revenues..)

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