The World This Week May 21 – May 25, 2012

Equity View: Last week Nifty closed up by around 0.4% from the last week’s closing. Tata Power came up with its quarterly results on Tuesday last week. The results were disappointing with Tata Power reporting losses at the consolidated level for the second time in three quarters. Losses were aggravated by two exceptional items. Firstly, the company wrote down the value of its Mundra power project by Rs 815 crore to account for higher costs due to rupee depreciation. Secondly, it decided to account for stripping cost (the cost of preparing a mine) when incurred. This cost was earlier amortised. The power space, in the last couple of years has been under pressure as many power generating companies have developed huge Ultra Mega Power Projects in which they are facing a lot of difficulty because of high coal prices. These companies are not able to pass on the increase in coal prices because the tariffs are frozen. We believe that considering that the power situation continues to be very grim and we are passing through peak summer, our view is that we should see some kind of resolution in terms on coal mining issue and coal prices that were fixed earlier. Hence, we might also see some revision in tariffs which would be a significant positive move for most of the power generating companies. We expect this revision to happen some where in the middle of next month. The key event for the week was the steep hike in petrol prices which was around Rs. 7.5 to Rs. 8 per litre across the country; this was on back of rupee depreciation against dollar since the beginning of the year. Brent Crude is down to almost $105 per barrel and NYMEX is down to almost $90 per barrel, this fall in prices is a significant positive for India from a medium to long-term perspective as India imports nearly 80% of its crude requirement, and with Rupee level being high our import bill continues to be high and we are not able to really benefit by the fall in crude prices. However, once the rupee stabilizes and comes down to it’s an average level of Rs. 52-53 per dollar we would see some cushion as far as the crude import bill is concerned. If crude oil continues to fall further on the back of concerns about Euro zone we would see some more pressure on crude oil prices, which should be a big positive for Indian equity markets. One key trend that has been witnessed over a period of time, as part of the risk on trade, asset classes like equities, commodity and crude oil rally together and after a point when crude oil prices become too high, the correlation between crude oil and Indian equities in particular breaks down. In month of March crude oil prices had moved up significantly and Sensex as well as Nifty started to move along with it, as crude touched $120-$125 a barrel, the correlation broke and we saw a negative pressure build up on the Rupee because of the high Crude oil prices. Also, all asset classes have fallen together and we saw that Indian equities and crude oil have fallen together in the last couple of months and it will soon hit a point where the correlation again breaks down and further fall in crude oil prices will result in a positive momentum in the Indian equities. This again is the function of how the Dollar-Rupee plays out, but we believe that we are closer to those levels and another $5-10 decline in crude oil prices is going to lead to significant cool off in as far as Indian fiscal and current account deficits are concerned. News: DOMESTIC MACRO:

Goldman Sachs said it was cutting its gross domestic product forecast to 6.6% from 7.2% for the fiscal year ending in

March 2013, citing a weaker investment outlook on the back of domestic policy uncertainties. Merrill Lynch also

downgraded its views, to 6.5% from 6.8% previously for fiscal 2012-13, though it cited the fallout from the euro zone

crisis as its main rationale.

State-owned oil marketing companies announced an 11% hike on Wednesday after a six-month freeze on rises,

seeking to recover losses from higher global oil prices and a plunging rupee that have deepened the country's trade

deficit.

GLOBAL MACRO

Euro:

Moody's restated French AAA, negative outlook on France's top-notch credit rating on Thursday, saying after Francois

Hollande's May 6 presidential election win that it needed more time to assess how France will manage its public

finances in a time of anaemic growth.

At least half of euro zone governments as well as banks and large companies are making contingency plans in case

Greece decides to leave the single currency area, even though the preferred option is still for Athens to keep the euro.

US:

Initial claims for state unemployment benefits slipped 2,000 to a seasonally adjusted 370,000, the Labor Department

said on Thursday. The four-week moving average, considered a better measure of labor market trends, dropped 5,500

to 370,000.

China:

The World Bank cut its economic growth forecast for China this year to 8.2% on Wednesday and urged the country to

rely on easier fiscal policy that boosts consumption rather than state investment to lift activity.

The HSBC Flash Purchasing Managers Index, the earliest indicator of China's industrial sector, retreated to 48.7 in May

from a final reading of 49.3 in April. It marked the seventh straight month that the index has been below 50,

indicating contracting economic activity.

China aims for annual growth of 10% in exports and imports this year and is running far short of both. The first four

months of 2012 saw exports grow 6.9% on the previous year while imports grew 5.1%.

Satadru Mitra Varun Goel Jharna Agarwal Abbas Naheed Kishan Jakotia Kanika Khorana

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