Results ETC. ETC.

With the results season now beginning to start in all earnest it is important to see how results have panned out till now and the key takeaways from the same. The most prominent results out till date have been from the Technology and the Banking segment. Technology sector results have been positive in general and the most important thing is the guidance that the companies have given on hiring as well as top line growth for next year. With growth likely to be in the region of 25% for the top tier companies for next year the things are looking good for this sector. However cost pressures are also high, currency movements are a concern and valuations at a 50% premium to market multiples. The other set of results that have come out have been from banking where the banks have reported in line with expectations and the outlook again seems to be positive. The key risks for the future will be increase in NPA’s as interest rates move up and also a likely squeeze in margins with the cost of funds moving up.

The bigger positive from IT sector results that I see is the very strong hiring picture in the sector which is extremely positive for the economy. The addition of nearly half a million people in this sector over the next 12-18 months is likely to boost consumption across the board. It should also be positive for housing demand over the medium term. The other positive that I see from this picture is that the strong growth in IT exports will boost the Forex income of the country and will have a positive impact on the current account deficit going forward. IT sector exports for this year were in the region of USD 60 billion and a 25% growth in USD terms implies a growth of USD 15 billion over the next 12 months which when combined with the general buoyancy in exports seen over the last 12 months should see the Current Account Deficit remain well under control despite the spike in crude oil prices.

The mid cap companies have just started to report and results in general have been pretty strong given the cost pressures and higher interest rates. Given the extreme pessimism surrounding this sector positive results have seen stock prices respond positively. I believe that this is likely to be a key feature of the current results season where in sectors where expectations are running very low any positive surprise will lead to a sharp up move in stock prices. Also where mid cap companies surprise positively we can see a sharp up tick again.

Crude price impact

The biggest talked about issue (specifically in the Indian context) has been the up move in crude prices and its impact on the economy and consumer demand. It is important to see who is impacted by inflation the most and how the inflation of crude prices will impact various economies.

At a price of USD 100 per barrel the total consumption of crude oil in India at a consumption rate of 3 million barrels per day is USD 110 billion per annum. In the current year i.e. April -March 2012 India’s nominal GDP is expected to be around Rs 90 lakh crores i.e. USD 2 trillion. As such oil consumption would be around 5.5% of GDP. Given the fact that nominal GDP growth in India is likely to average 15% and population growth is around 1.5% per annum the per capita income growth would be 13.5% pa. Similarly China consumes around 8.3 million barrels per day of oil and as such total consumption will be USD 300 billion pa on a GDP of USD 5.87 billion.

The consumption of oil in the USA is 22 million barrels per day and this implies a total value of USD 800 billion per annum.

Now the key is to see that given the economic growth and growth in per capita income which economy will be impacted more due to the spike in crude oil prices. Now if India growth at a nominal rate of 15% it implies an addition of GDP of USD 300 billion for the next year. Assuming a demand growth of 7-8% and a further price up tick of 15-18% next year the incremental increase in value of oil consumption will be USD 110*25% (APPROX)= USD 137.5. As such out of the incremental addition of GDP of 300 billion the crude oil consumption increase is USD 27.5 billion i.e. around 10% of incremental GDP. Now assuming no growth in oil consumption in the US and a nominal GDP growth of 4% the consumption of oil will be USD 800*1.18= USD 944 billion. Now addition to GDP of the US on a base of USD 14 trillion odd will be USD 560 billion. As such nearly 25% plus of the incremental GDP growth is going towards funding oil consumption. As such the entire logic of fast growing emerging markets being impacted more due to the oil price spike is founded on poor logic. Given the high unemployment picture in the developed world combined with poor income growth this will reduce consumption growth and given that consumption forms a big part of these economies it will provide headwinds to an already fragile economic growth picture in these economies. The Europeans are relatively better positioned given that the Euro has appreciated by nearly 20% since June last year and as such in Euro terms oil is not up as much as is USD terms where crude has surged nearly 50% in the same time frame.

However all said the excessive speculation in commodities is not presenting a very positive picture for inflation in general. The key is to see when the US Fed will realize that they need to wind down the excessive money printing. They are the last ones left now, off course with the follower BOE, however with China now tightening aggressively and the ECB joining in the one way commodity rally runs the risk of a severe sell off some time over the next 2-3 months. RBI needs to carry on with its measured hikes without giving in to the hawks in the system, as in a scenario where a large number of primary input commodities have risen by 40-50% since last may a WPI of 8.5% is not really bad if not seen in isolation. We have already started to see demand destruction now in oil consumption, also in the case of edible oils we have seen exports of palm oil out of Malaysia falling and stocks rising over the last few weeks, there is a glut of steel in the global system. There is today extreme speculation in precious metals, specifically silver where the largest Silver ETF has been adding nearly 60-70 tonnes per day. Now we have to see this in the context of actual silver consumption per year which is around 25000 tonnnes globally i.e. around 70 tonnes per day. As such financial speculation is adding as much demand if not more per day as actual financial consumption, which in my view is the height of speculation.


The overall market view continuous to be bullish and markets should continue to climb the wall of worry. As per my technical analysis (purely, nothing fundamental) we should see the next major correction in the markets only after a new high and much higher levels over the next few months. With a large number of Asian and other emerging markets already crossing their November/all time highs we should see the Indian markets follow with a lag. There continues to be pessimism in the markets and a lot of money on the sidelines, which I think will come in only after the earlier high gets taken out. As such my base case view at this stage will be that the markets are set for a further rally before any significant correction sets in (defined as more than 5-6%). As I wrote earlier the outlook is better for sectors and stocks where expectations are low and chances of outperforming earnings are higher.

You’re neither right nor wrong because other people agree with you. You’re right because your facts are right and your reasoning is right-and that’s the only thing that makes you right.” -Warren Buffett

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