Food eases pressure; sharp upward revisions to Jan - Cholamandalam Securities

For the month of March, WPI inflation was reported at 5.96% (market expectations of 6.4%) vis-à-vis February numbers of 6.8%. The index reading was reported at 170.6 (provisional) for March 2013 as against 161 for March 2012 and 170.2 (provisional) for February 2013. Fuel inflation at 10.5% was the key driver of the uptick. January WPI inflation figures were revised upwards to 7.3% from 6.6%; on the back of upward revisions across major components - primary articles, fuel and manufactured products. The consumer price index (combined) was reported at 10.4% y-o-y in March 2013 as against 10.9% in February 2013.

- Food inflation registered a sharp downtick. Food grains (-0.23% m-o-m) and eggs, meat and fish (-2.0% m-o-m) were amongst the key drivers for the downtick. However, both these items continued to quote in double digits on a y-o-y basis. Milk (4.4% y-o-y) and dairy products (-1.1% y-o-y) eased pressure. Processed food products continued to trail primary articles; lower ticks were seen in edible oils (9.3% y-o-y).

- On the fuel front, electricity (13.2% y-o-y) continued to be a dampener and is expected to remain so for at least the next couple of months. The coal pack continued to remain soft on the back of low base with the CSO recording the last hike in non-coking coal prices in January 2012. A further hike in diesel prices (INR 0.50/liter) in March led the uptick in the fuel group.

- Core inflation (manufactured products inflation ex-food) was reported at 3.4% y-o-y, lowest since February 2010. Downticks were noted in heavy weighted items - basic metals (0.9% y-o-y), chemicals (4.5% y-o-y) and textiles (3.8% y-o-y). Pricing power amongst corporates continued to be weak; as intermediate items continued to lag basic goods steel and chemicals. Other components were largely seen down or flat.

Outlook:

A cut in major subsidies and a higher disinvestment target are expected to address the fiscal position. Sticky double-digit CPI inflation and a sharp upward revision to January WPI inflation are key concerns. Absence of ripple effects on core WPI and easing crude oil prices at the global level are amongst the key positives. A sharp drop in gold prices is expected to curb investment and consumption demand for gold, which in turn is expected to ease pressure on the trade gap front. A cut in repo rates is on the cards, at the upcoming policy meet (May 3), on the back of a weak industrial output and subdued core inflation.

Source : Equity Bulls

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