Worms Digest 16 September 2014

Good Morning !!!

Sensex: 26816 (-0.9%), Nifty: 8048 (-.78%)

Dow: 17031 (+0.26%), S&P: 1984 (-0.07%)

Nikkei: 15897 (-0.32%)

WPI Inflation falls to 5 year low of 3.74%

Inflation is trending well below RBI expectations with WPI hitting a low of 3.74% for the month of August. RBI still continues to be cautious with a view that falling prices could be a temporary phenomenon, but it could well be Wrong!!!. 

There are 3 primary elements of inflation index - 

i) "food articles" named  primary articles (weight 20%) which includes stuff like fruits & vegetables, food grains, milk, eggs and chicken

ii) "fuel & power" (weight 15%) which includes items of transportation like diesel & petrol, electricity used for residential and commercial purpose and LPG, kerosene which are used for cooking foods.   

iii) "manufactured goods" (weight 65%)

Food articles are experiencing relatively lower level of inflation mainly due to base effect. The late recovery of monsoon deficit has helped improve sentiments and lower food prices. The high levels of reservoir should yield strong Rabi crops.

Crude Oil and natural gas prices are trending lower compared to last year and the current wisdom suggests that chances of sharp uptick from the current levels are unlikely.  

Manufactured goods prices are today essentially driven by cost pressures than demand pull. Given the low consumer sentiments and excess capacities ability and willingness of management to raise the prices of manufactured goods is limited. In fact, the gradual decline in global liquidity and outflows from commodities market suggest the commodities prices could remain suppressed at least for next 6-12 months. So there will be no cost pressures for companies to hike prices of manufactured goods. In fact, prices could come down to provide a boost to demand.

The only devil in the pack is turmoil in currency markets. Hopefully after the crash of 2013 when for the first time US Fed indicated withdrawal of QE, the market has gradually well priced in that risk and any acceleration on that front would be non-destructive for currencies. The fact that Raghuram Rajan is preparing war chest for any eventuality on that front is a cushioning factor.

In summary, if all goes well, India is well poised to see low to reasonable levels of inflation which is a great news for businesses. 

However, whether the same translates into interest rates cuts by RBI will be a function of how RBI governor perceives i) threat on currency front ii) change in view of 'temporary fall' in prices iii) surprise element which the bank wants to maintain for the market.

Action Agenda - Bet against the Central Bank. Go long G-sec and PSU Banking stocks.

Other Key News Bytes

• RIL re-enters the fuel stations business as diesel deregulation becomes more of a reality 
• Hindalco's 5 bauxite mines have been ordered shut by Jharkhand Government following Shah Commission's report on illegal mining 
• Tata Motors shares could see weakness as August JLR sales decline by 9.7% (though some of the decline could well be attributed to the phasing out of Freelander) 
• MCX has received conditional renewal of license from SEBI till September 2015. However it needs to meet condition of minimum networth of Rs.100crs in 3 months time in order to introduce new contracts. This is a confusing state of affairs since networth of MCX as per its reported accounts already stands at Rs.1160crs. However SEBI claims it to be just Rs.56crs. In any case, the resolution of the matter should not be a big issue. 
• Cognizant, in its biggest ever acquisition and to strengthen its healthcare business has acquired TriZetto for US$2.7bn in all cash deal. Cognizant expects US$1.5bn of revenue synergies from the combined entity and acquisition to be EPS-accretive in the first year itself.
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"In reality no one knows what market will do; trying to predict it is a waste of time and investing based on that prediction is a speculative undertaking."....Seth Klarman

Have a great Day!!!