The World This Week July 22 – July 26, 2013

Equity View: There has been almost a 2.5% correction in the broader markets last week on the back of new measures

announced by RBI to control the rupee depreciation. On the back of the recent changes in the policy

regime, we have also changed our estimates of Nifty and Sensex earnings for FY14 and FY15. The revised

target Nifty earnings is now around Rs 365 for FY13 and we have assumed a 10% growth in earnings as

compared to 12% growth that we were assuming earlier. We are assuming a 12% growth in FY15 based

on which we have our Nifty earnings target of around Rs 450. Accordingly, we arrive at a Nifty target of

6720, which is equivalent to 22,400 on the Sensex. Hence, we are downgrading our expectation on

Sexsex of 25,000 to 22,400, which again is a good 15% upside from the current levels. We expect the

target to be hit by the end of this calendar year. We believe that markets still continue to be positively

inclined, valuations continue to be supportive and that we have hit only a temporary rough patch which

is largely due to rupee deprecation.

As we have seen the broader markets have been holding up quite well, Sensex has been around 20,000

levels for quite a few months now despite all the negative news on inflation, interest rates and rupee, the

equity markets have broadly held on to their own. In terms of corporate earnings, we have seen a decent

set of earnings results so far and we maintain an earnings growth target of 10% for this quarter and for

the rest of the year. The reason why we have reduced the earnings forecast is as we essentially expect

some slowdown in GDP growth expectation as compared to what we were expecting earlier. We

expected a 6% of GDP growth number in the beginning of the year, we believe that with the current

measures that RBI has undertaken, the GDP growth can come down to 5% – 5.25%. However this year if

the RBI does not withdraw these measures, then there is a chance that this number could change again.

We have the RBI policy meet tomorrow which we believe would be a non event. The RBI has already

done what it wanted to in order to stem the rupee depreciation in terms of hiking the repo and other

such measures. Short term Call money rates are also above 10% currently which is also the effective rate

at which banks are borrowing from broader markets. On back of these measures we do not think the RBI

is going to tinker with the Repo rate or the CRR tomorrow. Last week the RBI has already changed the

banks CRR requirement to 99% of the daily requirement as opposed to the 70% which existed before

that. So the CRR has also been hiked without explicitly mentioning it. Hence, we believe RBI would want

to see how these measures pan out – i.e. if they are able to strengthen the Rupee.

We also have the fiscal deficit number coming for the first quarter of FY14 on 31st July. We believe that

fiscal deficit so far has been broadly under control. The government is working with a number of around

4.8% to 4.9% of GDP for the full year which we believe might be overshot to the extent of 5.1% and 5.2%.

News:

DOMESTIC MACRO:

RBI reduced the liquidity adjustment facility (LAF) for each bank from 1 per cent of the total deposits to 0.5 per cent, limiting the access to borrowed funds from the central bank.

Also, RBI asked banks to maintain higher average CRR (cash reserve ratio) of 99 per cent of the requirement on daily basis as against earlier 70 per cent.

Government bonds rose the most in over three years on Thursday, as the central bank paid high yields in its sale of short-end bills, signaling its resolve to bolster the rupee by draining liquidity.

GLOBAL MACRO

EURO

Euro zone officials have approved the transfer of 4 billion euros ($5.3 billion) of funding to Greece by Monday which would cover its funding gap of 10 billion euros due in September.

Spain has shown a positive sign of the economy with Positive unemployment data and bank earnings. This fall in the unemployment rate was unexpected and has slipped for the first time in two years.

United States

U.S. consumer sentiment rose in July to the highest level in six years when the final reading on the overall index on consumer sentiment climbed to 85.1 from 84.1 in June which is the highest level since July 2007.

Sales of new U.S. single-family homes vaulted in June with an increase of 8.3 percent Y-o-Y, making it the highest number since May 2008. In May 2013, this number was up by 38.1 percent Y-o-Y, the largest increase since January 1992.

China

Profits earned by China industrial firms rose 6.3 percent in June from a year earlier to 502.4 billion yuan ($81.9 billion), easing from a year-on-year growth of 15.5 percent in May.

Indices:

Date Sensex Midcap Auto Bankex CD CG FMCG HC IT Metals O&G Power Realty Teck

22/7/2013 20,159 5,996 10,800 12,666 6,327 8,801 7,435 9,324 7,149 7,459 9,010 1,629 1,449 4,156

23/7/2013 20,302 5,999 10,838 12,830 6,571 8,830 7,548 9,341 7,181 7,518 9,059 1,637 1,469 4,158

24/7/2013 20,091 5,890 10,698 12,238 6,365 8,567 7,521 9,317 7,255 7,361 9,017 1,610 1,450 4,199

25/7/2013 19,805 5,837 10,714 12,124 6,308 8,452 7,271 9,164 7,245 7,233 8,895 1,590 1,445 4,208

26/7/2013 19,748 5,780 10,650 11,950 6,317 8,374 7,279 9,186 7,241 6,979 8,865 1,585 1,422 4,200

-2.04% -3.61% -1.39% -5.65% -0.15% -4.86% -2.09% -1.49% 1.29% -6.44% -1.62% -2.69% -1.85% 1.04%

Commodities and Currency:

Date USD GBP EURO YEN Crude

(Rs. per BBL) Gold

(Rs. Per 10gms) 22/07/2013 59.40 90.73 78.11 59.37 6462 27219

23/07/2013 59.68 91.66 78.68 59.96 6425 27646

24/07/2013 59.44 91.24 78.43 59.51 6471 27673

25/07/2013 58.94 90.47 77.86 59.01 6372 27343

26/07/2013 58.91 90.67 78.21 59.67 6345 27643

27/07/2013 6314 27895

0.83% Rupee

Appreciated

0.07% Rupee

Appreciated

-0.13% Rupee

Depreciated

-0.50% Rupee

Depreciated

-2.29% 2.48%

Debt:

Tenor Gilt Yield in % (Friday) Change in bps (Week) 1-Year 9.26 49 2-Year 8.91 61 5-Year 8.63 34 10-Year 8.16 22

Satadru Mitra Varun Goel Jharna Agarwal

Abbas Naheed Kinjal Doshi

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