Mumbai: Ever since Indian equities went ballistic after the results of the national elections were announced on 16 May, domestic and foreign brokerages have been busy upgrading earnings estimates and share price targets of the companies they track.
But some sceptics ask whether they are getting carried away by the ebullient mood in the markets and ignoring the headwinds that still buffet the Indian economy.
Since 18 May, the first day of trading after election results were declared, the Sensex, India’s most-tracked equity index, has jumped 22.19%. It closed on Tuesday at 14,874.91.
To match this vertiginous rise, stock analysts have been busy reworking their numbers to give a fresh view on where they think earnings and stock prices ought to be.
For instance, a 28 May report by Macquarie Securities (India) Pvt. Ltd says it’s raising the target price for Reliance Industries Ltd by 8.3% to Rs2,405 per share, primarily on the back of higher estimates of gas reserves in the KG-D3 and KG-D9 blocks that the company has rights to.
Similarly, in a 29 May report, Nomura Financial Advisory and Securities (India) Pvt. Ltd said it believes margins at Mahindra and Mahindra Ltd can improve further, as the full benefits of lower commodity prices kick in.
There is clearly a new optimistic undercurrent in most brokerage reports.
First Global Stockbroking Pvt. Ltd said it has upgraded earnings estimates of 22 companies, including Tata Motors Ltd, Axis Bank Ltd, HDFC Bank Ltd and Bharat Heavy Electricals Ltd.
Of the companies in Kotak Securities Ltd’s coverage universe and whose fourth quarter results have been declared, the brokerage has upgraded earnings of 33, downgraded that of 15, and maintained that of 24. And Motilal Oswal Securities Ltd has upgraded 54 stocks, downgraded 31 and maintained status quo on four after the March results.
These flurry of upgrades follows expectations that the worst is over for the Indian economy.
“Results have been subdued, but business confidence is up, credit flow is coming back and there is a general uptick in sentiment,” said Harendra Kumar, head of research at Centrum Broking Private Ltd, explaining the larger number of upgrades.
But sceptics ask whether broking houses are trying to toe their clients’ line and are also letting stock movements rather than corporate performance determine their actions.
“Unfortunately, a broker’s view on the fundamentals gets influenced by the inflow of money,” said Abhay Aima, head of private banking at HDFC Bank. For example, added Aima, if a broker sees 100 clients wanting to buy, he has to change his view to suit the clients’.
Clear reasons for the upgrades are explained in the various research reports cited in this story.
“Upgrades are happening because of market momentum. Having seen 2,500 points-plus on the Sensex, there’s no way but to justify a buy,” said Arun Kejriwal of Kejriwal Research and Investment Services.
In the global fallout of the financial meltdown and recession in the US, the Sensex declined 52% in 2008 and touched a 40-month low of 8,160.40 points on 9 March. It has bounced back since then.
“Estimates have to be in line with the fundamentals and not in line with the markets. The re-rating of a country or a company cannot happen in a quarter or six months,” said HDFC Bank’s Aima.
Net profits of 40 of the 50 companies that comprise the Nifty, the National Stock Exchange’s benchmark equity index, and whose results were declared till Saturday, declined 5.7% from the same quarter of the previous year. Similarly, sales for these companies declined 17.61%.
Shankar Sharma, director and chief global trading strategist at First Global Stockbroking Pvt. Ltd, believes that election results is the single biggest factor in changing estimates of growth and making him bullish on India on a long-term basis.
Sharma also feels there are challenges that need to be surmounted.
India’s exports fell for the seventh month in a row in April, its fiscal deficit is likely to hit 11% of gross domestic product (GDP) in 2009-10, and GDP growth for the fourth quarter of the last fiscal year fell to 5.8% compared with 8.6% in the same quarter of the previous year.