Mumbai: The Indian equity market is likely to see one of its worst phases, with most sectors expected to report a decline in earnings or single-digit earnings growth in Q4 FY’09, a leading broking firm said in its report.
“Banking would be the best-performing sector with earnings growth of 16% year-on-year (y-o-y). While metals and real estate would see earnings decline by 86-90% y-o-y, other sectors with steep earnings decline would be autos and pharma,” broking firm Motilal Oswal’s India Strategy report said.
Quarter-on-quarter (QoQ) trends are divergent from y-o-y trends for a few sectors. Banking and FMCG will report a QoQ decline in earnings, while auto and cement will witness a growth, it said.
“While the monetary policy has eased significantly in H2 FY’09, credit demand has slowed down to 18%. As the recovery in earnings momentum will take time, attractive valuations remain the key driver for the stock market at the current level,” Motilal Oswal director - research Rajat Rajgarhia told reporters at a meet here.
Domestic inflows will continue to drive institutional interest in equities, any change in the FII flows will create meaningful impact on Indian equities, the report said.
Recent business trends have surprised positively. Several sectors that reported significant drop in business momentum in Q3 FY’09, have witnessed a strong recovery in Q4 FY’09, the report states.
“Over the last three months, we have witnessed consistent upgrades in our volume estimates for autos, cement, wireless and steel, among others,” Rajgarhia said.
This is reflected in higher QoQ earnings estimates for most of these sectors. While a part of this upstick is a reflection in pre-election spending and completion of projects, the various stimulus packages and RBI measures have also aided the positive surprises in volumes, the report said.
In FY’09, the key negatives that drove markets down were weakness in global financial markets, slowdown in domestic economy, tight monetary policy in H1 FY’09 and heavy selling by FIIs.
All these factors contributed to a series of large downgrades in corporate earnings. Another highlight of FY’09 has been a 27% depreciation in the Indian rupee v/s the US dollar, which also had a negative impact on earnings.
An environment of deflation for the next six months will be conducive for both RBI and the next government to pursue easy monetary and fiscal policy to stimulate growth, the report said.
“While RBI has introduced several liquidity injection measures, we expect a further cut of at least 100 basis points in lending and deposit rates over the next few months,” Rajgarhia said.
In the near term, the rub-off impact of global developments, election-related uncertainty and risk-aversion are likely to remain key overhang on market performance.
Going forward, in Q1 FY’10, the most important event for the markets would be the general elections scheduled for April-May 2009, Rajgarhia said.
Election 2009 would be an important but unpredictable milestone for Indian equities, the report said.