Growth slowdown won’t hurt Sensex
Growth slowdown won't hurt Sensex
Mumbai: The first quarter results of companies for 2007-08 that start coming out this week will show a slowdown in growth of revenue and profits, said analysts, but with the numbers being along expected lines, the stock market will continue to rise.
Double-digit growth in corporate earnings, an inflation rate that is among the lowest in the past year, and soft interest rates will see the Sensex, the Bombay Stock Exchange’s benchmark index, continuing with its run in the mid-term, say brokerages. The brokerages add that the index will touch the 16,000-mark in the next three months. The Sensex crossed 15,000 during intra-day trading on Friday before closing at 14,964, a new high.
HDFC Bank Ltd, which is readying for its follow-on public offering of shares, will kick off the earnings season on 10 July, followed by Infosys Technologies Ltd the next day. Both stocks are constituents of the Sensex as well as the broader market index of the National Stock Exchange, S&P CNX Nifty. Bajaj Auto Ltd and Allahabad Bank, too, will announce their results this week.
A Citigroup Global Markets report, dated 6 July, the day the Sensex crossed the 15,000-mark, predicts that the index will touch 16,000 by December and range between 17,500 and 18,400 by December 2008. The report estimates the profit growth for Sensex companies, minus the oil firms, to be around 25% in the quarter ended 30 June, down from 36.5% in the quarter ended 31 March.
Overall, the Sensex stocks’ net profit growth, according to the report, will be 21.4%, down from 30.4%.
Motilal Oswal Securities Ltd, a domestic brokerage, expects the earnings of Sensex stocks to grow by around 18% in the quarter. In the previous eight quarters, the average earnings growth of the Sensex stocks was around 26%. The reason for the lower growth was the possible decline in profits of Oil and Natural Gas Corp. on account of a higher oil subsidy, the impact of the rupee’s appreciation on the software sector, and the fallout of higher interest rates on automotive companies, according to Rajat Rajgarhia, head of research at Motilal Oswal.
According to the Citigroup report, companies in sectors such as telecom, cement, media and hotels could see significant growth in their profit margin, while those in sugar, metals and textiles could witness a decline in profit margins. The rupee appreciated by 6.4% against the dollar in the April-June quarter and this, along with wage hikes, will affect the profit margins of software firms. However, this will be offset by a strong growth in volumes.
“Sectors such as telecom, cement, financial services, engineering and real estate are expected to rally, riding on strong earnings. The market is expected to continue with the positive movement. The Sensex could go anywhere between 16,000 and 17,000 levels in the next three to four months," says a senior executive at Motilal Oswal, who did not wish to be identified.
Indian markets under-performed global markets in the first half of this calendar year ending June. However, the Sensex appreciated about 12% in the April-June quarter after slipping about 5% in the January-March one.
“The Sensex could appreciate another 10% and add 1,500 points in the next eight months," says an analyst at Enam Securities Ltd who does not wish to be identified. A portfolio manager at a major domestic brokerage says that he is betting on positive gains from the Sensex in the mid-term.
However, not all brokerages are uniformly bullish on Indian markets. A global equity investment strategy report by Zurich-based Bank Julius Baer & Co. Ltd issued earlier this month advised the bank’s clients to keep away from Indian equities at this stage.
However, the last six months have seen strong inflows into the Indian market with foreign institutional investors (FIIs) investing $6.1 billion in Indian stocks since January this year.
“The India story continues to attract significant overseas fund flows in both primary and secondary markets. This is reflective of the strong economic fundamentals of India and also the expectations of continuing growth in corporate profitability," says Narayan S.A., managing director, Kotak Securities.
“There could be a slowdown, but that won’t dent the confidence as that is on the expected line. And with inflation in control and no concern on the liquidity front, it will even improve further," says the equity head of a foreign brokerage.
The India Strategy report of Motilal Oswal Securities, released last week, also said that the improved outlook on inflation and interest rates could collectively outweigh concerns arising from the rupee’s appreciation.
(PTI contributed to this story.)
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