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Company forecasts hold key to market sentiment

Company forecasts hold key to market sentiment
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First Published: Mon, Apr 14 2008. 01 39 AM IST

Holding tight: A file picture of trading at a stock brokerage firm in Mumbai. Markets in India are in a state of wait and watch as technology bellwether Infosys kicks off the earnings season this week
Holding tight: A file picture of trading at a stock brokerage firm in Mumbai. Markets in India are in a state of wait and watch as technology bellwether Infosys kicks off the earnings season this week
Updated: Mon, Apr 14 2008. 01 39 AM IST
It seems the global markets won’t have a respite from negative sentiment. Friday’s sharp fall on US bourses highlights the fact that the markets are not yet out of the woods and there could be more pain in the offing as hopes diminish on positive surprises from earnings.
Holding tight: A file picture of trading at a stock brokerage firm in Mumbai. Markets in India are in a state of wait and watch as technology bellwether Infosys kicks off the earnings season this week.
India continues to grapple with soaring inflation, which now stands at 7.41%, while the US is dogged by disappointing corporate earnings.
The decline in US markets on Friday was triggered by General Electric Co., which tanked 12.8% to $32.05 a share, its worst ever fall since the 1987 crash, after it reported a 6% drop in profits and with revenue guidance for the year suggesting marginal or no growth, against an expectation of a 10% expansion — a good enough signal of what lies ahead in the US corporate world.
Moreover, the story so far in the US has not been good. The earnings season, which began with below-expectation results from aluminium producer Alcoa Inc., has so far witnessed all negative surprises including from United Parcel Service Inc. — the world’s largest package delivery company — Advanced Micro Devices, etc. They have all reported earnings below expectations and also painted a gloomy picture of revenue outlook.
Though this was just the beginning and this week is very crucial from the earnings point of view, the mood on markets globally is sombre: any negative news related to earnings might aggravate the fall, while the positive surprises would be viewed with suspicion. Clearly, unless a good number of companies provide positive earnings and revenue forecast, the earnings will not provide any positive trigger to the markets.
India, which is yet to start the earnings season in a big way, will have its first major test on Tuesday, when information technology bellwether Infosys Technologies Ltd reports its earnings.
Traditionally, since the Infosys numbers are treated as a barometer of the IT sector’s performance, they give the markets some direction. This time, too, marketmen are hoping Infosys will beat the estimates despite the US slowdown. The market is expecting a quarterly net profit of Rs1,260 crore ($316 million) for the company, showing an increase of 10.4% over the corresponding year-ago period and 2.6% over the last quarter. However, it is worth mentioning that the main clients of IT companies include General Electric, ABN Amro, Qantas Airways, Goldman Sachs and Credit Suisse, among others. These names indicate the dominance of companies in the troubled financial sector on the client list. Moreover, the outlook from General Electric could have a bearing on the prospects of IT companies here. So, market estimates cannot be counted on much, despite the fact that a weaker rupee during the last quarter might get reflected in the earnings. Even if the earnings numbers are better than expected, the IT sector may not move as desired unless the companies report significantly better revenue outlook, but that possibility seems remote.
The same logic applies to Tata Consultancy Services Ltd (TCS) and Wipro Ltd, which report their earnings on 21 April and 18 April 18, respectively. As for Wipro, its margins were under pressure due to wage hikes in the last quarter, which is expected to limit its growth to a meagre 2.2% over the year. Though TCS is expected to post quarterly net profit growth of around 17%, a recent statement by the company that two of its 15 biggest clients had delayed projects during the last quarter could affect the forecast. So, there is a need to approach these numbers cautiously and not go by past performance alone, even if it beats estimates; rather, the focus should be on revenue guidance for the current quarter and for the rest of the year. One should be extra careful and churn the numbers thoroughly before taking a call, as there would be a lot to read between the lines.
Tough call
Globally, this week is again going to be tough as, apart from earnings of big names such as Intel Corp., Johnson and Johnson, Coca-Cola Co., JPMorgan Chase and Co., International Business Machines Corp., Google Inc. and eBay Inc. this week, key US economic data including the two inflation indicators—the Producer Price Index, or PPI, (to be released on Tuesday) and the Consumer Price Index, or CPI, (to be released on Wednesday)—housing starts, industrial output and capacity utilization, and the Federal Reserve’s Beige Book, will also be watched closely for clues on the US economy. The inflation numbers, reflected by PPI and CPI, will shed some light on the Federal Reserve’s possible future course of action on interest rates in its meeting on 29-30 April.
Opinion so far is equally divided between a quarter-point and a half-point rate cut in federal funds rate, which currently stands at 2.25%. Since a moderate increase of 0.6% in overall PPI and 0.4% in overall CPI in March are already factored in, it should not trouble the markets much. But any positive surprises would do the markets some good.
Wait and watch
Back home, the markets are in a state of wait and watch, though in pure technical terms, the markets seem to be developing a positive bias. Since a lot would depend on earnings, the market would be mainly news-driven. Purely technically, the Bombay Stock Exchange’s sensitive index, or Sensex, is likely to test its first and main resistance level at 15,962 points.
If the index closes above this level with higher volumes, it would mean more gains that may take the Sensex to its next important resistance at 16,236. A close above this level would be quite bullish, taking the Sensex to 16,592. On its way down, the market is likely to test its first support at 15,663, following which the next support is placed at 15,481. However, if it pierces this level, the sentiment will turn negative, leading the Sensex to its critical support of 15,304, a deciding level, as a significant fall below this would mean a further sharp fall on the bourses.
This week, technically, Union Bank of India, Bharti Airtel Ltd and NTPC Ltd look good on the charts. Union Bank at its last close of Rs151.30 has a potential to touch Rs166, with a stop-loss of Rs139. Bharti Airtel at its Rs805.10 close has a target of Rs838 and a stop-loss of Rs772, while NTPC at its last close of Rs186.85 has a target of Rs198 with a stop-loss of Rs175.
From our previous week’s recommendations, Bank of Baroda hit a high of Rs298.70, meeting its target of Rs294 very comfortably. Bajaj Hindusthan Ltd hit a high of Rs215.80, also well above its target of Rs202, while Sterlite Industries Ltd touched a high of Rs809.80, sharply above its target of Rs762.
Vipul Verma is a New Delhi-based independent investment adviser. Your comments, questions and reactions to this column are welcome at ticker@livemint.com
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First Published: Mon, Apr 14 2008. 01 39 AM IST