Dry Patch Ahead for Nifty as Rain Gods Fail to Smile

In five of the seven years of deficit rains, Nifty fell during the last two weeks of July, says a study     The Nifty, already suffering its worst July in a decade, could slip further by mid-August, if an analysis of data linking index movements and monsoon-deficient periods in the past 22 years is any indication.  Between 1990 and 2011, monsoon has been officially classified as deficient on 13 occasions. The toughest seven years during this period saw the monsoon falling short by between 6.7% and 21.8%, meteorological department data shows.  In five of the seven years that the rain gods failed to deliver, the 50-share Nifty index fell during the last two weeks of July, with the selling abating only after the second week of August, a study of seasonal charts shows.  This time around, a weak monsoon season comes at a time of high domestic political uncertainty, paralysis of sorts in decision-making, a slowing economy and global economic problems.  "Given the lack of monsoon and other negatives, the Nifty is likely to retest the lower end of the 4,700-5,600 zone in the August-September time frame," says trader and fund manager Ashwani Gujral. "Deficient rains sentimentally impact a weak market much more adversely than otherwise. There is a negative bias for the market for next one month.'"  So far this year, monsoon has severely underperformed the average — the first time since 2009, a year that was officially labeled a drought year. As of July 24, the monsoon is 22% below the 50-year average, according to the Met Department.  Even though agriculture's share in the overall economy has fallen over the years, it is still an important factor in the health of the rural economy and can impact growth in earnings of companies with a high degree of sensitivity to the rural economy. Companies such as Hero MotorCorp, Mahindra & Mahindra and HUL have their fortunes tied to a plentiful monsoon, which drives up rural incomes and, with it the consumption of their products.  "If rains falter, rural incomes could weaken, with risk to rural consumption," Morgan Stanley said in a note advising clients to avoid stocks of companies with higher rural exposure.  The effect of a truncated monsoon is severe on the Nifty too. The shortfall in rains stood at 7.8% in 2000, triggering a five-week fall on the index. It again slumped for four continuous weeks in 2002 when the rain deficit was 19.2 percent. The weekly drops in the Nifty-50 have ranged from falls between 0.3% and 8.1% for the four weeks from mid-July to mid-August in the 13 rain deficient years since 1990. The only aberration was in 2009, when the global financial system was in the grips of a bull run, recovering from the depths it had touched during the market meltdown of the previous year. Similarly, in the years when rains were abundant, the Nifty began a sustained upturn from the third week of July, showing a strong co-relation between Nifty and monsoon season. On Wednesday, the Nifty closed 0.4% lower at 5,110 points. The index has had its worst July so far since 2002, and has dropped 10% from its February 22 peak.

Economy gasps as growth sputters to 9-yr low of 5.3% 6.5% GDP Rate In 2011-12 Way Below Govt’s Estimates

New Delhi: India's economic growth has come down to a nine-year low of 5.3% in the January-March quarter of this year, showing up in bolder relief than ever before the signs of the severe stress in the economy, and prompting calls for urgent action to reverse the trend. 

    Data released by the Central Statistics Office (CSO) on Thursday showed growth in 2011-12 stood at 6.5%, much lower than the 8.4% posted in the previous year. It was below the government's previous estimate of 

6.9% and way off the mark of estimates handed out periodically by top government policymakers. 

    The Indian economy, once the star among emerging market economies, has steadily slowed since the January-March quarter of 2010-11, and on Thursday after digesting the January-March growth figure of 5.3%, some economists cut their growth estimates for 2012-13. 

    The manufacturing sector growth fell 0.3% in the March quarter compared to an expansion of 7.3% in the corresponding period the previous year. Agriculture posted a growth of 1.7%, sharply lower than the 7.5% growth in the March quarter of 2010-11 For the full year, the manufacturing sector grew 2.5% in 2011-12 compared with 7.6% in 2010-11. 

SLUGGISH ELEPHANT March quarter GDP growth at 5.3%, against 9.2% in Q4 of 2010-11 

Manufacturing scrapes the bottom with 0.3% decline, agriculture grows just 1.7%, services slow down to 7.9% from 10.6% 

Overall 2011-12 growth at 6.5%, lower than estimates of 6.9% Economists are scaling down growth projection 

for 2012-13 

Industry in gloom. Says govt should pull out all stops to stem the slide 

Growth in core sectors slows to 2.2% in April 

    Growth in the eight core industries slowed in April, pointing to a rut. Coal, crude oil, natural gas, refinery products, fertilizers, steel, cement and electricity grew 2.2% in April, lower than the 4.2% posted in the same month last year. P 19 

Govt in denial? FM hints that the worst is over 

    The finance ministry seemed to be in denial on Thursday, with officials saying India was still growing faster than many Eurozone countries. Pranab Mukherjee too suggested the worst was over, saying the factors for sluggishness had "bottomed out". P 19 Experts urge govt to step up reforms

New Delhi:The slide in the economic growth has led to calls for quick action on the part of the government. The sluggishness in the services sector, which accounts for nearly 60% of GDP, emerged as a worry for policymakers already burdened by the slowing economy and stubborn inflation. Data showed the services sector growth slowed to 7.9% in the March quarter compared with a10.6% expansion in the sameyear-ago period. The domestic demand-driven economy has been hit hard by high inflation, interest rates, rising global commodity prices, lack of economic reforms and delay in implementation of projects. This, in turn, has hit business confidence, forcing domestic players to explore investment options overseas. 

    Policymakers have consistently blamed the global economic environment and the lack of cooperation from the opposition in approving key economic legislations as reasons for the slowdown. The March quarter data came on a day when the opposition had called for a shutdown to protest the sharp increase in petrol prices. Analysts say the disappointing growth numbers could spoil the mood further and heighten the anxiety. 

    Finance Minister Pranab Mukherjee termed the March quarter data as disappointing but said the figures should be seen in the light of overall global developments. He attributed the slowdown to tight monetary policy and the weak global sentiment affected growth in domestic private investment. 

    But economists pointed to two key risks which included uncertainty about the monsoons and the European debt crisis and said the need of the hour was to step up reforms and ease supply bottlenecks.

COME AGAIN? 

There are several reasons that growth is almost universally predicted to be sustained at a high rate of 8-9% per annum and more, over the next few decades... —PRANAB MUKHERJEE ON AUG 6, 2011

FIIs Raise Bearish Bets on Bank Nifty on Asset Quality Worries

Recent bounce-back fails to impress as weak rupee, loan recasts seen queering the macro pitch

Foreign investors have been building bearish bets on bank Nifty futures over the past month on concerns over their asset quality and a weakening rupee which could act as a spoiler to RBI cutting interest rates by adding to high inflation. 

Outstanding positions, or open interest (OI) on Bank Nifty futures, have increased by 52.56% since April 24, driven by FIIs' selling the index, whose price level has fallen by roughly 6% over the period, says an Angel Broking report citing market regulator Sebi data on FII exposure. 

These bets are now being rolled over, signalling FIIs' cautious-to-negative outlook on banking stocks despite the recent market bounce-back. 

The report makes the observation on the premise that FII exposure to index futures is restricted largely to Nifty and Bank Nifty futures, with other index futures such as IT, MiniNifty, PSE, and Infra being illiquid. While open interest in Bank Nifty futures has risen since April 24, that of Nifty has also risen but by a much lesser 9%, indicating that most of the shorts formed by FIIs in index futures were in Bank Nifty futures. 

"With so many sell positions built up, one could argue about Bank Nifty getting a leg up because of short- covering but that appears unlikely given the possibility of a further depreciation of the euro, which could affect the rupee-dollar equation," argued Siddarth Bhamre, Angel Broking's head of derivatives and the report's author. "There does not seem to be any trigger for short-covering to happen in a big way." Given the lack of any trigger for a trend reversal despite the recent market bounce-back, FIIs have been rolling over their bearish positions to the June series. 

According to Bhamre, bank Nifty has witnessed a 48.43% rollover ahead of Thursday's derivatives expiry, implying that FIIs are rolling over their shorts in the index. Loan restructuring is expected to touch a high of . 2 lakh crore by the current financial year-end (FY13), according to Crisil. The large quantum of restructuring reflects the prevailing stress on corporate India's credit quality because of lower profitability, weak demand and tight liquidity, the rating agency said. 

A weaker currency also affects banks' outlook as risk of imported inflation added to the already high inflation rate makes the central bank loathe to cut interest rates, which affects their profitability. 

"Shorts build-up has been witnessed in Bank Nifty futures and individual stock counters such as SBI, Axis, ICICI Bank and HDFC Bank," said Yogesh Radke, head of quantitative research, including derivatives research, Edelweiss Securities. "Despite the recent bounce-back in markets the perception of most investors and traders towards banking stocks remains cautious to negative because of the concerns on asset quality, global concerns and currency weakness." 

ram.sahgal@timesgroup.com 

Nifty 50 companies are expected to report better numbers for the December 2011 quarter

Crazy Little Thing Called Growth Nifty 50 companies are expected to report better numbers for the December 2011 quarter, helped by new capacities, better employee utilisation and one-time gains for some. But at a time when macroeconomic parameters are pointing to a deceleration in the economy, the big question is whether the good show will continue i  nvestors appalled by India Inc's lukewarm performance over the last two quarters may be in for a surprise once the financial numbers for the December quarter start flowing in. Helped largely by factors such as one-time windfalls, lower base of the previous year, business consolidations, and a weaker rupee in the case of exporters, India Inc is expected to report a better quarter this time around.  The ET Intelligence Group expects the net profit of the Nifty 50 companies to grow by 11.4% year-onyear for the December 2011 quarter on a robust 25% growth in revenue. While the estimates look positive against the backdrop of a 6.5% fall in net profit and 23.5% increase in sales last quarter, it is still too early to conclude that there has been a reversal in the trend.  This is because domestic as well as global macroeconomic parameters do not look any better than what they were during the previous quarter. As our coverage on India Inc's September 2011 quarter performance on November 21, 2011, pointed out, there continues to be sluggishness in demand indicators including slowing industrial production, and stagnation in industrial capital expenditure. Read on to know what can be expected from India's top frequently traded companies and which factors will impact 12 key sectors.  UP AND NOT AWAY  After dipping to 23.5% in the September 2011 quarter from above 27% in the preceding two quarters, sales growth of the Nifty 50 sample is expected to inch up to 25.5% for the December quarter.  The performance, however, will be less secular this time around with only a handful of companies reporting robust sales growth. According to our forecast, 15 companies will be able to post a bigger jump in their revenues compared to the sample's average sales growth. During the September quarter, 24 companies had topped the sample growth rate  Companies including BPCL, Reliance Power, Tata Motors, and Cairn India are expected to clock a higher sales growth during the third quarter of FY12. These companies will be benefited by factors like new capacities coming on stream, the weak rupee or one-time benefits. For instance, BPCL's performance will depend a great deal, as usual, on how much the government decides to compensate it for selling products below cost. In the first half, the government chose to pay very little leaving the company high and dry. We have estimated that BPCL will get 2,500 crore of upstream support and 5,000 crore in compensation from the government for the December quarter in projecting a net profit of 1,008 crore. This will be five times more than the profit of 187.4 crore a year ago.  IT players including TCS, Infosys, and Wipro would show a better year-on-year growth on account of a steeper depreciation in the rupee. Reliance Power and Tata Power are likely to reap the benefits of new capacities. Kotak Mahindra Bank has started reporting dividends from subsidiaries on a quarterly basis since the September 2011 quarter. This had resulted in 44% jump in its revenue then. We expect the private sector lender to report a 34% increase in the December quarter boosted by dividends.  THE ROAD AHEAD  Macroeconomic factors such as fiscal deficit, currency movements, exports and growth in gross domestic product look unfavourable at the moment. Given the government's plan to raise borrowings by 40,000 crore in the second half of FY12, net borrowings are expected to touch 4.4 lakh crore according to economists at Barclays Capital. This may result in the fiscal deficit exceeding the target of 4.6% of GDP, they think. Though food inflation has fallen by 3.36%in the fourth week of December, experts consider it to be more as a result of a higher base in the corresponding period last year than actual relief in food prices. In addition, the wholesale price index reported a year-on-year increase of 9.1% in November — though marginally lower than the previous month — reflecting that prices have not cooled off significantly.  The situation on the export front is not encouraging either. Though India's merchant exports rose by 33.2% in the first eight months of FY12, the pace has reduced significantly in recent months. In October, exports grew by 10.8%, and in November, at an even slower rate of 4%. This may continue in the near term due to uncertainties in western economies. Some industry trackers believe that a possible easing of interest rates by the Reserve Bank in the coming months may help in resuming dwindling credit offtake in the economy thereby supporting growth. The banks' credit disbursal relative to deposits has been consistently falling in the last few months. In the second week of December, the ratio fell to 0.72, the lowest in 21 months and 38 basis points lower from the corresponding number a year ago.  India Inc is likely to report slower growth in the remainder of FY12 and a trend reversal can only be expected in the second half of FY13 if policy-related issues that have created bottlenecks are addressed by then. We have provided a detailed analysis of 12 key sectors to help you gauge which sectors are likely to be affected more during the December quarter and which companies may sail through the tough times.  The performance of the auto sector is expected to remain under pressure at a time when the rupee has weakened and pushed up input costs. In the four-wheeler segment, Maruti Suzuki, the leading player in the sector, reported a 27.6% fall in total vehicle sales during the quarter under review, given the problems arising from its earlier labour problems and auto finance at elevated levels. As a result, its net profit is expected to fall nearly 58% y-o-y in the December quarter.  M&M is also expected to post a 16.3% y-o-y fall in its standalone net profit despite strong demand for its tractors and SUV portfolio. And that's largely due to a rise in purchase of traded goods during the quarter under review. However, Tata Motors is expected to report a 46.6% growth in its consolidated net profit for the third quarter of FY12, helped by strong demand for its recently-launched SUV Evoque. Twowheeler player Bajaj Auto is expected to report a 20.4% y-o-y growth in its net profit in the quarter under review, helped by strong overseas demand for its models like the Pulsar.  The slowdown in economic and industrial growth in the country is likely to increase pressure on the asset quality of banks with exposure to affected sectors like SME, real estate, textiles, power and infrastructure. Credit growth is expected to be modest as capital expenditure by companies is close to stalling. As a result, NPAs (non performing assets) are likely to increase. Gross slippages, especially for public sector banks, are likely to rise from 3.7% last quarter to 4% in the October-December quarter. Despite the sharp decline in banking stocks, the perception of default risk will remain high until the macroeconomic situation improves.  The capital goods sector may witness yet another quarter of dreary growth as not much has changed for it in the past three months from the macroeconomic perspective. While companies in the sector may witness an increase in the pace of order execution in order to meet their target revenue guidance for the year, pricing pressures and high input costs are likely to impact margins in this quarter as well. The only respite for the industry, especially for companies catering to the power sector, is the increase in the ordering activity from Power Grid Corporation India Limited (PGCIL) this quarter. The order activity is expected to be healthy, at least until March 2012, as PGCIL needs to meet its targets for the XIth Five Year Plan that ends this fiscal.  Realisations for an all-India player like ACC are likely to improve nearly 10% y-o-y in the quarter under review, helped by better realisations in the southern and western regions. In the northern region while cement prices have shown some signs of easing over the past few weeks they are still higher on a y-o-y basis.  Higher realisations should help companies to deal with a rising cost structure. Although imported coal prices have eased by 8% sequentially during the December quarter to about $110, this has been more than offset by the rupee depreciation. A higher tax burden is expected to weigh on the Holcim-controlled companies (ACC and Ambuja) in the December quarter given a rather low base a year ago. Ambuja Cements is also anticipated to post a growth of barely 8.5% growth in net profit in December quarter, while net sales should grow 22.1%.  FMCG companies are likely to continue their good performance in the quarter ended December. Most players including HUL have increased prices of their products. This may affect volume growth, but easing of raw material prices will help them to improve margins. The companies are also likely to control costs by rationalising ad spend and changing the product mix. While there are fears of a slowdown in demand in the urban and rural markets, HUL, ITC and Nestle are likely to be the best performers in the sector.  IT exporters are likely to report lower volume growth, measured in terms of billed man-hours, during the December quarter due to New Year festivities.  Top players are expected to log 3-5% sequential volume growth with a similar growth in dollar-denominated revenue. But, when converted to rupees, revenue is expected to grow in double digits from the previous quarters for each of the top four players, which are publicly listed in India.  This is because of a near 12% sequential drop in average rupee rate for a dollar during the December 2011 quarter. The mark-to-market losses on forex hedging, however, may increase. The commentary by managements on future demand traction will be crucial in anticipating the trend in US technology spending in 2012.  Steel makers will not benefit much from the 15% decline in international coal prices as the rupee declined by 10% during the same time making imports costlier. They will not be able to pass on the cost increase to their customers amidst a demand slowdown.  The mining ban in Karnataka will continue to negatively impact volumes of steel makers dependant on that region for iron ore. Sesa Goa is also expected to see slow volume growth as a result. In the base metal space, higher cost of power will severely impact margins of aluminium producers like Hindalco and Sterlite. With LME prices on the decline, realisations will be under pressure. Companies which have borrowings in foreign currencies are likely to take a further hit on their loans.  The sector is expected to show mixed results. Upstream oil producers such as ONGC and Cairn India will report high realisations thanks to strong oil prices and a weak rupee. ONGC's one-time gains on recovery of royalty on Rajasthan oilfield will be a further booster. The midstream refiners are facing margin pressure, with the benchmark gross refining margins coming down in the quarter.  The downstream marketers — Indian Oil, BPCL and HPCL — are suffering the worst with the industry's under-recoveries shooting up to 388 crore per day. The domestic natural gas industry and its leader Gail India are facing stagnation, as the domestic availability of natural gas isn't growing.  On the whole, the pharma sector's performance is likely to continue on a healthy trajectory although individual companies may perform differently. While a 10% depreciation in the rupee is beneficial for most pharma companies in terms of export realisations, the rupee effect would be neutralised for companies with high imports.  Ranbaxy and Cipla are likely to report better growth on the back of Lipitor sales for the former and higher sales from Indore SEZ for Cipla. Dr Reddy's performance may be disappointing as the company has not performed well in India and Russia. Sun Pharma's performance may also be impacted, as Taro may not be able to sustain the exceptional performance logged in the preceding quarter.  Most powerutilities will feel the pinch of rupee depreciation as they import coal. This would increase the overall cost of power generation, forcing these companies to operate at lower plant load factor or capacity utilisation. Companies mainly dependent on imported coal include Adani power, JSW Energy and KSK Energy.  The plant load factor of these companies would also be lower due to the extended monsoons. This will have an impact on the power companies' revenues and higher input cost would reduce profitability too. Coal India's production would be lower year-on-year due to waster-logging in its mines.  NTPC and Power Grid Corp would perform better than industry peers as these companies are not much dependent on external fuel supply like others and have a relatively safer business model.  With economic conditions not much different from the preceding quarter, it will be a poor show for the real estate sector in the December quarter. Slowdown in demand will continue to lead to low revenue recognition for most companies. Most of them have not launched any new projects during the quarter — a sign of difficult times — as they struggle to raise funds.  Many companies have little choice but to trim their debt as interest costs are denting their bottom line. For instance, DLF, the largest real estate company, has an interest cost of 20% of its revenues. However, companies with projects in tier II and III cities have been able to perform better due to the ongoing demand.  Higher interest outgo to service loans taken to establish 3G services will continue to weigh heavily on telecom operators during the December quarter due tothe pan-India launch of the platform by most operators. This will hamper net profitability since these services are yet to gain momentum and hence would not contribute to the bottom line significantly. Bharti Airtel is expected to report a strong sequential growth of 9% in its African operations during the quarter, helped by higher subscriber penetration and the currency movement. This will more than offset the sluggishness in its Indian operations. But the company is likely to report a fall in net profit due to higher interest expenses.  After reporting a fall in sales for the past few quarters, Reliance Communications is expected to show a 10% sequential growth for the third quarter backed by stable per minute revenue and sustained subscriber addition.  (Contributed by Amriteshwar Mathur, Bakul Chugan Tongia, Crystal Barretto, Jwalit Vyas, Kiran Kabtta Somvanshi, Ramkrishna Kashelkar, Ranjit Shinde, and Suraj Sowkar)

Option Traders Bet on a Range-bound Nifty Play

Investors follow the 'strangle' strategy — sell put at a lower strike price, sell call at a high

   Large traders and proprietary desks of broking firms may have pulled out of the options market, but select investors are taking positions to bet that the Nifty will move within a range for some time. These investors are trying an ageold options strategy known as "strangle". Here, they sell a put option with a lower strike price and simultaneously sell a call option with a higher strike price. They make sure that both options expire at the same time. A strike price is the price at which an investor enters the market. 

As option sellers (or writers) the investors pocket the option premium in the two trades; but it's a high-risk game where they can lose their shirts if the Nifty goes either up or sharply. But if the Nifty moves sideways between the two strike prices, they collect the option premium and lose nothing. It's a "limited profit strategy" that many traders are trying out in an uncertain market. For the past few days, open interest (OI) has been the maximum for 5700 calls and 5500 puts. 
On Monday, call writing (selling) was seen in 5700 calls which saw a 7% increase in open interest. On the put side, a short build-up was seen in 5500 levels with an 5.5% increase in open interest, respectively. This indicates traders are making short strangle and short straddles and expect the market to trade in a range of 5500-5800. 
"We are suggesting our clients to establish short strangles as the Nifty is expected to trade in a range with credit policy announcement round the corner," said Shailesh Kadam, AVP-Institutional Derivatives, PINC. "We expect the Nifty to trade in the range of 5500-5800 in the near term as higher inflation and uncertainty in European markets will limit the upside in the Nifty," he said. 
Traders said many broking firms are selling call options with a strike of 5700 and put options with a strike of 5500 on the lower side. This is known as "short strangle". It means traders don't expect the market to break out of this range till the expiry of July series. 
PROP TRADES TAKE A KNOCK 
Having lost money in options, proprietary trading desks of most broking houses are refraining from such bets. Indeed, the participation of proprietary traders in options has been falling consistently due to a dull market and little movements in the implied volatility index (or vols). (Traders buy vols when they are betting that the market will be choppy). 
Derivative analysts said that a range-bound movement in the Nifty, following a sharp rally mainly driven by institutional investors, have prompted prop traders to stay out. "Prop volumes in options have fallen nearly 30-40% in the past one month as there has been no movement in implied volatilities (IVs)," said Adil Setna, Head-Derivatives, Dolat Capital Markets. "Also, the current IVs are not justifying the movements in the Nifty, making it unviable for traders to sell options," he added. 
Implied volatility, a measure of traders' expectations of nearterm market risks, is a key aspect of option premium pricing. 
But analysts, including Manoj Murlidharan, AVP-Derivatives, IIFL PReMIA, said that many proprietary traders were caught off guard when the Nifty surged from 5200 levels to 5800 due to buying by institutional investors.

Oilmin Backs BP’s Stake Buy in RIL

Proposal, which has been cleared by MHA, may come up before CCEA next Thursday

The oil ministry has unequivocally supported BP's $7.2-billion deal to buy stakes in Reliance Industries' 23 oil and gas blocks, paving the way for approval of the landmark deal that marks the first significant investment by a global oil major in India. A top government official said the cabinet was expected to consider the deal next Thursday. The oil ministry, which recently secured cabinet approval for the Cairn-Vedanta deal and also took the bold decision of raising fuel prices, could have approved this deal itself, but chose to seek the cabinet's clearance, given the large size of the deal, the official said.

"The oil minister has recommended the approval of the $7.2-billion investment. He signed it last night and sent it this morning. In all probability, it is coming up next Thursday before the Cabinet Committee for Economic Affairs," said the official, who did not want to be identified as he is authorised to speak about it only after cabinet approves it. The proposal has been sent to the ministries of law, fin ance and home. The home ministry has cleared the proposal after some initial reservations, the official said. BP, which announced the deal last February, reacted cautiously. "The applications have been submitted to the government of India for their approval. We are awaiting their response in due course," BP spokesman Mark Salt told ET. Oil ministry officials said the referral of the Reliance-BP deal to the cabinet was significantly different from its move to seek the cabinet's nod for the Cairn-Vedanta deal. Gas Marketing JV also on Anvil The Cairn-Vedanta deal was also considered by a group of ministers (GoM). "There is no need for a GoM. In the case of Cairn-Vedanta, the cabinet was given two options. In this case only one option has been given. The ministry has taken an unequivocally positive position," the official said. He said the Cairn-Vedanta deal had revenue implications for the government and state-run Oil and Natural Gas Corp, making its approval more complicated, unlike the Reliance-BP deal. Reliance Chairman Mukesh Ambani told ET in an interview in May that BP's deep-sea expertise was expected to help the company reverse the decline in gas output from the D6 block. Reliance and BP also plan to set up a 50:50 gas marketing joint venture, which will build infrastructure and supply liquefied natural gas (LNG) to the rapidly growing domestic market. The total investment from BP, including field development and marketing infrastructure could eventually add up to $20 billion. Reliance has been facing the ire of gas consumers as well as authorities over the declining gas output. The Comptroller and Auditor General has also questioned the capital expenditure on the field. Analysts said the involvement of BP in the block would give a strong endorsement of the expenditure. BP is upbeat about the Indian market. According to BP's Energy Outlook 2030, energy consumption in India has grown by 190% over the past 20 years and is likely to grow by 115% over the next 20 years, a rate of over 4% per annum. Gas is expected to be the fastestgrowing fossil fuel, with demand growing at a rate of nearly 5% a year between 2010 and 2030.

Nifty Cos Set for Robust Q1 Show

ETIG analysis reveals companies in most-tracked index to record 19% profit jump, 26% rise in sales 

Tech majors, banks & Bajaj Auto to lead earnings growth while oilcos may be worst hit

 Bajaj Auto, Axis Bank and miner Sesa Goa will lead the S&P CNX Nifty companies' June quarter earnings rise by a fifth and a 26% surge in sales, validating Reserve Bank of India governor Duvvuri Subbarao's belief that the economy is still humming. 

Profits of companies in the most-tracked index may rise, but their profitability is poised to shrink due to higher raw material prices, wages, and increased funding costs, an analysis by ET Intelligence Group shows. 
Technology companies led by Tata Consultancy Services and HCL Technologies, which are enjoying abundant order flows from the US and Europe, would contribute to growth numbers. Domestic demand will drive earnings at Bajaj Auto and lender HDFC Bank. 
Among the worst hit may be state-run oil companies as they partly subsidise petroleum products consumption, including cooking gas. A fall in cement prices due to slackening construction and price competition in telecom services may result in these companies reporting a fall in profits. 
"Despite the initial perception of a production slowdown, the revised Index of Industrial Production series shows investment and industrial activity held up well throughout FY11," Anubhuti Sahay at Standard Chartered Bank said in a report. "A recent salary survey conducted by a private firm showed that Indian corporates are still willing to hire and have increased salaries in order to retain workers. While the impact of higher interest rates is apparent in some sectors—auto sales growth slowed to 18% in May from an average of 32% in the previous 20 months—it is not yet broad-based." 
The aggregate net profit of Nifty 50 companies may grow 19% year on year, the ETIG analysis shows. Net sales may advance 26% in the June quarter from a year earlier. This will be the seventh consecutive quarter of aggregate double-digit growth since September 2009 for India's 50 large and frequently traded companies. 
But soaring costs, in the form of higher interest rates and expensive inputs, could reduce the operating profit growth to 21.4% from a year ago. Pressure on Profitability 
This will be the slowest pace of operating profit growth since the September 2009 quarter when profit rose just over 4%, as demand fell post-Lehman bust. Operating margin is likely to shrink by 80 basis points from the year ago, and 170 basis points sequentially to 21.8%. A basis point is 0.01 percentage point. Pressure on profitability may sustain as there are no signs of easing of interest costs and the fall in commodity prices appears more temporary than permanent. With inflation forecast to rise after the recent raise in diesel prices, chances of interest rates falling are slim. 
"We raise our WPI inflation forecast for FY12 to 8.6% from 8.1% as a result of the government's move (to increase prices of petroleum products)," says the latest report by Goldman Sachs Group. 
Higher inflationary expectations are a double whammy for economic growth. The companies would not only spend more on inputs, but also postpone investments. 
The central bank has raised interest rates 10 times in the last 15 months. Policy rates have increased by 225 basis points in the last 12 months alone. 
The Nifty at current levels trades at around 17 times its earnings in the four quarters to June 2011. Though it may not be expensive compared with its range of 17-23 in the last 10 quarters, investors are cautious. Earnings growth may fall further. 
Some expect another 50 basis points rise in the RBI's guideline rate, which is 7.5% which could squeeze investments further. 
"With the RBI prioritising inflation over growth, we expect a 25-50 basis point hike during the course of 2011. But with the underline consumption dynamics, the need of the hour is a pickup in the investment cycle and productivity enhancements," explores Citi Investment Research and Analysis in its latest report on India's macroeconomic trends.
Public sector oil and gas companies will see a repeat of high under-recovery problems seen in the March 2011 quarter. This will translate to subdued quarterly profit figures for ONGC and Gail. BPCL is likely to post a small profit compared with its huge net loss last June, provided the government's aid arrives in time. The slack in order inflows in the engineering space, especially in the power transmission and distribution segment, is likely to impact margins of some capital goods players. Companies such as Bhel and L&T will report slower profit growth during the June quarter.