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FROM SHAREKHAN'S DESK
Adrift but not for long
The market has been stuck in a narrow range for the past two months. Despite a slew of major events domestically (namely, the Union Budget with controversial tax amendments and GAAR provisions, an unexpected 50-basis-point rate cut in the annual monetary policy review, downgrade of India's outlook by Standard & Poor's (S&P) and rising trade deficit among others) and the flow of varied data from global economies, the market has been unable to break out of the range on either side. Though stock-specific volatility has increased lately, the benchmark indices haven't gone anywhere in the past couple of months.
MARKET OUTLOOK The heat is on -
Macro concerns mount, government must clean up its act: The Reserve Bank of India (RBI) has kick-started the interest rate reversal cycle by a surprise reduction of 50 basis points in the policy rates, but macro challenges and policy blunders remain the key concerns for stock market investors. The rising twin deficits, the current account deficit and the fiscal deficit, are putting pressure on the rupee against the major other currencies as well as causing structural liquidity issues in the domestic banking system despite fund infusion by the RBI through CRR cuts and open market operations. In such an environment where inflation is also inching up again after softening for four consecutive months, the RBI has limited room to move ahead with further monetary easing initiatives and the ball is squarely in the government's court now. -
S&P sounds the warning bell: The leading global rating agency, Standard and Poor's (S&P), has sounded the warning bell by downgrading India's rating outlook to negative from stable on macro concerns and the government's policy inaction. It has reaffirmed the "BBB-" rating but warned of one-in-three probability of a potential rating downgrade over the next 24 months if the situation does not improve. However, S&P's peer and another global rating agency, Moody's, has reaffirmed its "Baa3" rating for India which provides some solace to the bewildered policy makers of the country. -
Global trends: weak macros but robust corporate results: Economic activity in the USA continues to point to a sluggish recovery but the scenario in Europe has deteriorated in the recent past. The UK has announced contraction in its economy for the second consecutive quarter and the other major European countries like France and Germany are also witnessing a drop in manufacturing activity. The peripheral East European countries continue to struggle and move from one crisis to another with each round of fund raising done at higher cost/yields. However, amid the weak economic environment, the corporate results globally have surprised positively and beaten consensus expectations especially in the USA. So far 75% of the S&P 500 companies have declared results for Q1 of 2012. Of these about 70% have reported earnings above expectations, 10% in line with expectations and 20% below estimates. The robust corporate results and easy liquidity are supporting the equity markets globally especially the US market as of now. -
India Inc: Q4 results a mixed bag; downgrades pick up again: In India corporate earnings have come under pressure due to high input cost, rising financing cost and uncertainty in the external environment.
In the past three quarters the earnings of the Sensex companies have grown in single digits, ie at 7% in Q1FY2012, 8.1% in Q2FY2012 and 4.1% in Q3FY2012. The Q4FY2012 results declared so far (of BSE 100 companies) follow the trend and earnings have grown by 7.2% (ex oil companies). But the earnings downgrades have picked up again after a lull of a couple of months. However, the Sensex' consensus earnings estimate for FY2013 has been downgraded substantially (by 15%) over the last 15 months and largely factors in most of the negatives. Thus, the downgrade cycle is close to peaking out and there could be scope for some positive surprises if the liquidity improves domestically and the government moves ahead with policy reforms. -
Market stuck in a range; but not for long: After the spurt in early 2012, the benchmark indices have been stuck in a narrow range for the past couple of months. There has been a flurry of negative news flow: the uncertainty related to foreign taxation laws (GARR), retrospective amendment to the Income Tax Act (Vodafone case), Spain debt crisis, confusing policy signals and the veiled threat by S&P of a possible rating downgrade in future. But the benchmark indices have neither breached the key support nor broken down. The market has not even gained on the back of the positive surprises such as the 50-basis-point rate cut by the RBI and the initial indication of a normal monsoon. -
Valuations are supportive; see opportunity in adversity: The range-bound movement is in line with our expectation expressed in our last Market Outlook report, released on March 3, 2012. However, the macro challenges and policy blunders have turned the bias negative and a breakdown from the range looks imminent (as compared with the earlier expectations of an upmove post-consolidation) due to the mounting macro concerns and other tactical factors. However, if the benchmark indices manage to successfully navigate through the heated macro conditions this summer, the upside momentum could pick up in the second half of the year. For investors, any substantial correction in the near term would be a summer discount sale as the risk-reward ratio has turned quite attractive.
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Axis Bank: Strong operating performance -
Bajaj Corp: Volume growth momentum sustained -
Bharat Electronics: Price target revised to Rs1,805 -
Godrej Consumer Products: Price target revised to Rs590 -
HCL Technologies: Price target revised to Rs550 -
HDFC Bank: In line performance -
ICICI Bank: Robust growth in profits; maintain Buy -
IDBI Bank: Q4 earnings beat expectations, slippages decline -
India Cements: Price target revised to Rs110 -
Infosys: Price target revised to Rs2,440 -
Mahindra Lifespace Developers: A higher other income boosts Q4 PAT -
Maruti Suzuki India: 'Dziring' a 'Swift' recovery -
Polaris Financial Technology: Price target revised to Rs190 -
Reliance Industries: Earnings largely supported by other income -
Tata Consultancy Services: Price target revised to Rs1,364 -
UltraTech Cement: Impressive performance, earnings ahead of estimates -
Wipro: Price target revised to Rs450 -
Yes Bank: Earnings up by 34% YoY, CASA ratio inches up
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