Mumbai: Indian companies are in the midst of announcing another quarter of great earnings growth, but many analysts and investment managers aren’t celebrating. They say India’s once-booming stock market is running out of steam.
Until recently, the Indian market has been one of the best performers in the world, with the Bombay Stock Exchange’s benchmark index doubling over the past two years on the back of robust corporate earnings. Indeed, earnings were once again strong in the January-March quarter, with aggregate net profits up more than 40% over the same quarter last year across hundreds of companies that have announced results so far.
But warning signals are beginning to flash. Rising interest rates, a stronger rupee and waning international interest in emerging markets have analysts and investors increasingly wary about the market’s prospects over the next year. Fund managers say they will closely watch earnings for the next two quarters to determine whether the Indian economy is staying on its high-speed track or beginning to decelerate. India’s economy has expanded more than 8% annually over the past three years—one of the fastest growth rates in the world.
“The market will move sideways for the next four to five months,” predicts A.K. Sridhar, Mumbai-based chief investment officer for UTI Asset Management. “People will be more cautious in terms of exposure.”
The country’s central bank, the Reserve Bank of India, has been lifting interest rates to fight inflation, which is hovering at annual rates of close to 6%. The central bank wants inflation to ease to less than 5%. The bank’s key short-term lending rate, raised twice in 2007, is now 7.75%, the highest level in more than four years. Interest on home and auto loans is more than 10%, compared with around 7% three years ago.
Auto sales and home-loan growth are already slowing because of the higher interest rates, analysts say.
Moreover, investors can earn more than 9% on their money simply by keeping it in the bank, so they have less incentive to risk it in the stock market.
Meanwhile, the rupee rose to a nine-year high in April at Rs 40.60 to the dollar. The stronger rupee hurts many of India’s best-known and fastest-growing companies—software and outsourcing firms such as Infosys Technologies, Tata Consultancy Services and Wipro—that earn most of their money in dollars.
“We should see some kind of earnings growth slowdown,” says Shriram Iyer, who heads research at Edelweiss Securities. “The impact of a strong rupee and rising interest rates should show up in the (next) quarter this year. I think return on earnings, while being decent, should be lower than it has been in recent years. That should temper the market.”
There also are worries that international interest in emerging markets like China and India could wane.
A business slowdown in the US or another market meltdown in China could mean that foreign investors who poured billions into the Indian market during the past few years will invest less over the next 12 months, analysts suggest.
Iyer expects the Bombay Stock Exchange’s 30-Share Sensitive Index, or Sensex, to hover around the 14,000 mark until the end of the year. The Sensex fell 1% on 4 May to 13,934.27 and is basically unchanged from where it started the year.
The index, which historically trades closer to 15 times average actual earnings for listed companies, is looking a little expensive, analysts reckon, as it is now trading at more than 20 times earnings.
To be sure, investors willing to hold on to shares for more than a year should be able to make money, analysts predict. But in the meantime, they may have to wait for six months to figure out how rising interest rates and a stronger rupee will affect earnings. During that period, the market is unlikely to reward them with impressive gains.