THE SENSITIVE INDEX (Sensex) and Nifty are at their 30-month highs and look expensive at the price-to-earnings (P/E) multiple of 22 time for 12 months earnings till June 30, 2010. At current prices, the indices are trading around 17 times FY11 forward earnings. Automobile, banking, technology and fast moving consumer goods (FMCG) companies drove the benchmark indices to this level at a time when oil and gas, telecom and realty were struggling to return to the black.
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Though the IMF has raised its global growth projection for this year by 0.4 percentage points to 4.6 per cent — it is 3.3 per cent for the US, 1 per cent for the Euro area, 10.5 per cent for China and 9.4 per cent for India — things don’t look that rosy. With the stimulus programmes now coming to an end, the US is slowing — a consumer survey showed the lowest level of intended car buying in more than 40 years; after removing inventory accumulation, Q1 growth of “final” sales was just 0.2 per cent compared to Q4 2009. In India, industrial production has fallen — while the y-o-y data don’t capture this, seasonally adjusted data show a fall for many months; the fall in capital goods is particularly severe; core sector growth has also slowed.
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India inc’s sales growth more than doubled in the last quarter of 2009-10 (27.5% in Q4 versus 12.7% in Q3). As a result, the Q4 GDP numbers show manufacturing grew a whopping 16.3%, a record for the last 8 quarters — for the full year, manufacturing grew 10.8% (3.2% in 2008-09). A sharp hike in global commodity prices meant that India Inc’s raw material costs rose 38% and, since they constitute 41% of sales revenues, this lowered profits growth to 35% (from 62% in Q3).
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Manufacturing growth in the US has surged to a 4-year high, the UK saw the highest rise since 1994 and JPMorgan Global PMI Output saw the strongest quarter since Q3 2007. With China and India doing well, the IMF has raised global output forecasts again, reduced the likely bank writedowns from $2.8 tn in October 2009 to $2.3 tn now, and overall levels of risks are steadily falling.
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Multi-Speed Recovery seems to be the latest buzzword when it comes to describing the global economy — slow growth in the OECD countries and high growth in China and India. The latest news from the US, in terms of Q4 growth and creation of new jobs, is exceptionally good and will not sustain. But even allowing for the “inventory effect” to peter out in the next quarter, forecasts for US growth are the highest in the OECD. While stock markets are up and spreads down, bank lending has yet to pick up, partly due to the possibility of further write-downs. The problem, as Martin Wolf, the chief economics commentator of the Financial Times points out, is that should there be a dip in growth, the OECD countries have precious little firepower left, given how high their deficits already are.
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The rebound in the fortunes of the commodities sector as well as the impact of government concessions/spending in areas like automobiles have ensured Q3 sales growth is once again positive. The picture remains bright even after removing Reliance from the sample since its 92 per cent top-line growth biases it — this reduces top-line growth in the September quarter from 17.4 per cent to a still healthy 12 per cent.
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NOTHING SYMBOLISES THE WORLD AS DUBAI DOES. Dubai World asking creditors for a six-month standstill showed there were enough gremlins lurking in dark corners. Ireland and Greece were touted as the next problem areas. And yet, in a trice, global markets absorbed the shock — indices were back to where they were before, as were CDS spreads.
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Thanks to a sharp turnaround IN THE fortunes of PSU oil marketing companies due to lower oil subsidies, savings in overall costs of production and interest earnings on the cash piles it is sitting on, India Inc’s profits rose over 63 per cent in the September quarter. This is while topline sales fell 6.3 per cent. Once you net out sectors like oil and refining or steel where prices have fallen hugely over the year, the sales growth is a more respectable 8.3% — net profit margins also rise, from 8.9% to 11%. Sales and profits, however, tend to be concentrated and the top 10 firms account for over 40 per cent of sales/profits of our sample of 1,068 firms — remove these top 10 firms, and net profit margins for the sample fall around 30 per cent. Tax provisions are up 23 per cent due to the Minimum Alternate Tax. Most of the top companies — in terms of sales/profits — have seen a relatively poor quarter.
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HOW MUCH THE RECOVERY HAS GAINED GROUND is best seen from the fact that the IMF has, once again, raised its forecast for global growth for 2009 as well as 2010. But, as was underlined at the G-20 meet, the recovery is fragile, heavily dependent upon government spending and support — global deficits are up 6 percentage points and governments in advanced economies have provided guarantees of over 30 per cent of their GDP to prevent their banks from collapsing.
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THE OECD HAS HIKED ITS THIRD QUARTER FORECASTS by 1.8 percentage points (ppt) since June, signalling a clear revival in advanced economies. But the recovery is heavily dependent upon government spending — in the US, this accounted for 45% of the positive growth impulse in Q2 while exports contributed 55%. The banking crisis hasn’t abated and the number of problem banks in the US has risen to a 15-year high.
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the imf has raised its forecast a tad but uncertainties remain. US data is encouraging and Q2 growth fell just 1% as compared to 6.4% in Q1 with both housing and investment contracting less. Rising public debt ensures spreads remain well above pre-crisis levels and lending to companies is far from taking off. The Euro Area will remain troubled while the US bounces back next year.
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The DRAMATIC SHIFT IN THE TAX STRUCTURE from one dominated by indirect taxes when he was full-fledged finance minister in the 1980s is the first thing that will strike Pranab Mukherjee as he rises to present his budget today. Nearly two decades of reforms have seen more stable tax regimes with less room for discretion. With corporate India contributing more than four per cent of GDP as taxes and the bulk of investment, keeping it in good health is critical.
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The ECONOMIC recovery is not in doubt, its strength is. A few weeks ago, the stress tests by the US Fed suggested a total of $75 bn was required by US banks to recapitalise, and much of this has already been raised, and quite easily at that. Bank interest rate margins are up. But, as the Federal Deposit Insurance Corporation’s (FDIC) report shows, the number of ‘problem banks’ in the US has risen sharply. In other words, the recovery is going to have several ups and downs.
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Take almost any index, and the result is unambiguous. Last year's sharp slide - in growth, credit, housing and more - has slowed, even reversed, though very slightly. How long a full-blown recovery will take is anyone’s guess. The global economy shrank 5 per cent in the last quarter (on an annualised basis) and that of advanced countries fell 7 per cent.
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The Indian Economy has slowed to a six year low in Oct-Dec (Q3), and the the last time the US economy shrunk as much as it did in this quarter was way back in 1982. Not unexpectedly, India’s sharp dip has taken place with the investment-to-GDP numbers falling from 35.3% of GDP in Q2 2008-09 to 31% in Q3 — it was the sharp hike in this, buoyed largely by corporate India’s investment binge, that had led to the sharp surge in GDP over the past few years.
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