Mumbai/London/Singapore
: Indian stock analysts who predicted gains in the nation’s benchmark index while the gauge fell last year are now turning bearish as equities surge the most since 2009.More than 1,200 estimates compiled by Bloomberg on 4 October showed analysts projecting a 1% drop for the BSE’s Sensex index in the next 12 months, after they overestimated returns by an average 21 percentage points in 2011. The benchmark measure has climbed 22% this year, the best performance among the largest emerging markets, as international money managers bought a net $18 billion of Indian shares, data compiled by the country’s markets regulator and Bloomberg show.
While Mumbai-based securities firm Dolat Capital Market Pvt. Ltd advises cutting holdings of State Bank of India because of loan losses and Prabhudas Lilladher Pvt. Ltd has downgraded Reliance Industries Ltd (RIL) on slower earnings growth, Templeton Emerging Markets Group’s Mark Mobius is increasing his Indian holdings. Mobius, who oversees $48 billion, cites Prime Minister Manmohan Singh’s efforts to open up the economy for his bullish stance.
“They are going through a reform process, so there’s a lot of opportunities,” Mobius said in a 12 October interview in Singapore. “We are adding now.”
The Sensex is valued at 16 times reported earnings, the most expensive of the so-called BRIC markets after Brazil and about 5% below its average since 2000, according to data compiled by Bloomberg. The gauge trades for 2.7 times book value, or assets minus liabilities, a 15% discount to its historical average, the data show.
Growth plan
Singh began a campaign in September to revive India’s economic growth from the weakest level since 2009 and avoid a credit-rating downgrade. He lowered taxes on companies’ overseas borrowing and announced plans to open the country’s retail and aviation industries to foreign investment.
The 80-year-old leader unveiled more policy changes this month, including proposals to boost overseas investment in the insurance and pension industries, which require support from his party’s coalition partners to win parliamentary approval. Finance minister P. Chidambaram said in a Bloomberg Television interview on 12 October that he plans further changes in capital markets, banking and infrastructure in the next few weeks.
Political support
“India has shown us time and again that with a few fairly simple policy moves, you can ratchet up growth very fast,” Arjuna Mahendran, the Singapore-based head of Asia investment strategy at HSBC Private Bank, which manages about $500 billion, said in an 11 October interview on Bloomberg TV India.
Mahendran expects the Sensex to climb above 20,000 in the next six months, he said in a separate interview on 1 October. That’s nearly 7% higher than the index’s close of
18,710.02
in Mumbai on Tuesday.“Singh may struggle to win the political support needed to enact his recommendations,” Daphne Roth, the Singapore-based head of Asian equity research at ABN Amro Private Banking, said in an emailed response to questions on 9 October. “Returns from Indian stocks may be limited by inflation, the government’s budget shortfall and the current account deficit,” she said.
Inflation quickened to 7.81% in September, the fastest level among the BRICs and above the Reserve Bank of India’s comfort level of about 5%, according to government data released on 15 October. The budget shortfall may reach 6% of gross domestic product (GDP) in the year through March 2013, compared with the government’s target of 5.1%, according to Standard and Poor’s. The current account deficit in the three months ended June was 3.9% of GDP.
BRIC outlook
The wave of policy announcements has failed to convince equity analysts the surge in Indian stocks will continue. Their 12-month return forecasts for the Sensex turned negative this month for the first time in two years and the projection as of Monday was for a 1.9% gain, down from 19% five months ago. That compares with estimated increases of at least 18% for benchmark indexes in China, Brazil and Russia, data compiled by Bloomberg shows.
Indian analysts have been too bullish every week since Bloomberg began compiling the projections in July 2010, overestimating returns by an average 21 percentage points, the data shows.
Analysts cut fiscal 2013 profit forecasts for Sensex companies by 1.4% since June, when earnings before interest, taxes, depreciation and amortization fell to 19.5% of sales, the data show. The so-called Ebitda margin, a gauge of profitability, for the quarter ended June matched the lowest level since 2003.
Refining margins
Deepak Pareek, an analyst at Mumbai-based brokerage Prabhudas Lilladher who cut his recommendation on RIL to reduce from accumulate on 23 August, said in an 11 October phone interview that refining margins are unlikely to rise significantly from current levels. “Reliance is also struggling to win government approval to develop new gas discoveries,” he said.
Pareek maintained his rating in a 16 October note and said he expects Mumbai-based RIL to trade at Rs.805 in the next 12 months, compared with its closing level of Rs.823 the previous day. On 17 October 2011, he predicted the stock would reach Rs.952. It peaked at Rs.905 in intraday trading on 4 November before slumping to as low as Rs.673.05 on 16 May.
Analysts covering State Bank of India, the country’s largest lender, reduced their share price estimates by 2.7% this year even as the stock surged 38%.
Still sceptical
Singh cut taxes, reduced tariffs and removed restrictions on foreign investment in the auto and pharmaceutical industries during his five years as finance minister from 1991-1996.
India’s economy expanded at an average annual pace of about 6% in the period, compared with 3.6% for emerging markets, according to the International Monetary Fund. The Sensex climbed about 170% during Singh’s term.
Ravil Shirodkar in Mumbai and Kartik Goyal and Unni Krishnan in New Delhi contributed to this story.
