Investors rushed to buy stocks on 13 April after Infosys Technologies’ earnings for the fourth quarter of 2006-07 exceeded estimates, enough early evidence for some analysts to claim that the coming earnings season—over the next four weeks, a few thousand companies will declare their financial results for Q4 of 2006-07 and the entire year—would see the aggregate profit of Indian companies growing by more than 25%.
“We expect this to be among the best-ever quarters for corporate India,” said Amitabh Chakraborty, president, equity, at Religare Securities Ltd, a brokerage. “The Infosys results have given some confidence to the market today. We can expect some of the uncertainty in the market to subside over the next few months,” he added.
Since January, the Bombay Stock Exchange’s Sensex, a benchmark index of 30 stocks, has yo-yoed. It touched a high of 14,652 points on 2 February and a low of 12,415 on 5 March. On Friday, it rose 270 points, or 2.1%, to close at 13,384.
Infosys’ results weren’t the only good news for stock market players.
Data released by the government showed that wholesale price inflation had dropped to 5.74% for the week ended 31 March from 6.39% in the previous week. It still remains higher than the central bank, the Reserve Bank of India’s target of 5-5.5%. Analysts at brokerages said inflation would come down further in April as the impact of RBI’s interest rate hikes became more pronounced.
In March, during the run-up to the earnings season, analysts were concerned that the growth of companies would be affected by the central bank’s efforts to reduce money supply, and the consequent reduction in credit and demand.
The early results do not show that trend.
They cannot be expected to, said an executive at Anand Rathi Securities, a Mumbai-based brokerage. “While companies are announcing their results for the January-March quarter, the effect of therate hikes will be felt from April onwards. I will be looking very closely at auto-sales growth and home-loan growth in April,” said D.D. Sharma, senior vice-president, at the firm.
Sharma isn’t the only one to sound a warning. Several analysts at brokerages said they expected the earnings of companies in 2007-08 to witness a decline largely because of the central bank’s rate hikes.
RBI raised a key short-term lending rate five times in 2006-07, and also reduced money supply by raising the reserves banks need to keep with it. “Smart investors always look at the future and that is what we are worried about,” said Sharma.
A recent report from Citigroup said that while profits of the 30 companies whose stocks constitute the Sensex could grow by 26% for the quarter ended March 2007 (as compared with the same quarter a year ago), they could dip by 15% next year (2007-08 as compared with 2006-07).
“Today’s (market) developments do indicate a reversal (of trend), but let us see how things pan out,” said Rahul Rege, head of non-institutional securities at BRICS Securities. “Investors are still sceptical and they have no positions in the market,” he added.
Rege said that investors seemed to have lost the ability to think objectively because people had lost a lot of money over the past few months.
Some of the uncertainty could end after results of elections in the state of Uttar Pradesh are announced this month, said analysts at some brokerages, and if the inflation rate dips further.
They warned that investors could react adversely if the central bank went in for another increase in interest rates on 24 April when it meets to announce its annual monetary policy.