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Indian stock market and companies daily report (October 10, 2012, Wednesday)

Contributed by Angel Broking

The Indian markets are expected to open in the red today, tracking a weak opening of the SGX Nifty, which is down by 0.4% in early trade. Most of the Asian markets are trading in the negative zone.

The US markets moved sharply lower on Tuesday, weighed down by concerns about the outlook for the global economy. The International Monetary Fund (IMF) in its world economic outlook has lowered its global growth forecast for 2012 to 3.3% from 3.5% earlier, while its 2013 forecast was also reduced by 0.3 percentage points to 3.6%. IMF's lowering of global growth forecast, along with warning that the risks for a serious global slowdown are alarmingly high added to the investor concerns. The markets also kept an eye on Europe, where finance ministers of the region held a second day of meetings after formally launching the European Stability Mechanism on Monday.

Meanwhile key benchmark indices ended higher on Tuesday after closing lower for two consecutive trading sessions. US Treasury Secretary Timothy Geithner on Tuesday said India's recent steps to further open its market to foreign investors will help provide a foundation for India's strong economic growth. Going ahead, the market would keenly observe the 2QFY2013 earnings season starting off this week.

Markets Today

The trend deciding level for the day is 18,800 / 5,704 levels. If NIFTY trades above this level during the first half-an-hour of trade then we may witness a further rally up to 18,879 - 18,964 / 5,730 - 5,754 levels. However, if NIFTY trades below 18,800 / 5,704 levels for the first half-an-hour of trade then it may correct up to 18,71 5 - 18,637 / 5,679 - 5,653 levels.

IMF revises its global growth forecast downwards

In its latest 'World Economic Outlook', the International Monetary Fund (IMF) revised global growth downwards to 3.3% for CY2012 and 3.6% for CY2013 due to signs of weakness in recovery of growth. The IMF highlighted that downside risks to growth emanating from advanced economies due to fiscal imbalances and weak banking system are adversely impacting growth in emerging and developing markets. At the same time it also emphasized that effective policy response by advanced economies by avoiding tail-risk scenarios is likely to improve growth prospects and abate risks to growth.

The IMF revised its growth forecasts for advanced economies to 1.3% in CY201 2 and 1.5% in CY2013. For emerging markets and developing economies it revised the growth forecast to 5.3% in CY2012 and 5.6% in CY2013. It slashed India's growth forecast, for CY2012, sharply to 4.9% vis-a-vis its forecast of 6.2% in the month of July citing adverse impact of factors such as slow approvals for new projects, sluggish structural reforms, high policy rates and slowing external demand.

Shome Committee recommendations to boost investor-confidence

The Parthasarathi Shome Committee constituted to undertake stakeholder consultations and finalize the guidelines for General Anti Avoidance Rules (GAAR) has recommended that an amendment to the income-tax law seeking to tax indirect transfers of Indian assets should apply prospectively and only on those who make capital gains. Even in 'rarest of rare' cases where retrospective taxes are applied it recommends exhaustive and transparent consultation with stakeholders and waiver on interest levies or penalties. It also recommends the exclusion of FIIs, listed companies' P-notes and stock market transactions from the ambit of the retrospective amendment.

This development is expected to come as a major relief for investors and thereby abate tax uncertainty and boost investor confidence in the economy. The draft report has been put up for public discussion and comments until October 19, 2012. The government having unleashed a slew of reforms to boost investor and business sentiment is likely to broadly accept the recommendations and thus we expect it to be sentiment positive for markets.

Government reduces duty drawback rates on exports

In a notification, the Ministry of Finance has reduced duty drawback rates on exports. As per the notification, duty drawback rates on motorcycles, three-wheelers and medium and heavy commercial vehicles (MHCV) have been reduced to 2% from 5.5% previously. In light commercial vehicles, duty drawback rates have been reduced to 2% from 4% earlier, while the rates have been largely unchanged for the passenger cars segment at 3%. For the auto ancillary companies, rates have been reduced from 3-5% to around 2.5-4%. These new rates will be effective from 1 0 October, 2012.

Within our coverage universe, Bajaj Auto, Ashok Leyland, TVS Motor and Bharat Forge are amongst the largest exporters and derive 1 2-47% of their revenues from exports. As such, we believe these companies will be the most affected by the cut in the duty drawback rates. However, most of the companies have announced that they will increase the prices in the export markets which will likely offset the negative impact of duty cut. Nonetheless, given the current macro economic conditions we believe that it will be challenging for the companies to pass on the price increases completely. In the event of no pricing action, the export revenues of the companies will be impacted negatively which will pressurize operating margins as well as the bottom-line (FY2014 earnings expected to decline by 2-7% for these companies).

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