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Business News/ Market / Stock-market-news/  Stock rally at risk as UBS sees earnings as ‘glass half empty’
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Stock rally at risk as UBS sees earnings as ‘glass half empty’

Earnings are recovering and some high-frequency data points have turned positive, but the evidence isn't broad enough

An equity advisor watches share prices at a financial consultants’ firm in Mumbai. Photo: Gautam Singh/APPremium
An equity advisor watches share prices at a financial consultants’ firm in Mumbai. Photo: Gautam Singh/AP

Mumbai: The rally that helped India’s benchmark stock index post its best week in three months may have outpaced the recovery in earnings growth, according to UBS Group AG.

Net incomes at companies in the National Stock Exchange (NSE) Nifty 50 Index will grow 10% in the year to March 2017, slower than the 23% forecast by analysts, Gautam Chhaochharia, head of research at UBS Securities India Pvt. in Mumbai, said in an interview. The gauge ended 2015 within 3% of his target of 8,200.

The Nifty erased losses for the year last week as earnings at some of the country’s biggest companies including Larsen & Toubro Ltd., an engineering conglomerate, beat estimates and a forecast for the strongest monsoon rains in two decades boosted investor confidence. The market is getting “carried away" and will sputter once the buoyancy in global equities ebbs, Chhaochharia said.

“Earnings are recovering and some high-frequency data points have turned positive, but the evidence isn’t big and broad enough," he said. While Chhaochharia said he is bullish on equities over a three-year time frame, the market could decline “if the global risk-on trade doesn’t remain as strong as it’s been in the past two months."

The comments echo concerns raised earlier this year by other analysts even as corporate profitability is on the mend after falling in four of the last five quarters. Operating profits for the Nifty 50 companies have risen 10% year-on-year in the March quarter, the most since the three months ended September 2014, data compiled by Bloomberg show.

Beating estimates

Larsen & Toubro was the top gainer on the benchmark S&P BSE Sensex last week after the company reported better-than-expected results and forecast sales to increase this year. On Friday, state-run refiners Bharat Petroleum Corp. rallied to a record and Hindustan Petroleum Corp. surged 9.7% after their earnings topped forecasts.

Mahindra & Mahindra Financial Services Ltd., the auto-loan unit of India’s largest tractor maker, posted its first net income growth in a year as collection of dues from customers in 260,000 villages improved. The stock has rebounded 70% from its three-year low in February.

Last week, Morgan Stanley upgraded the nation’s stocks to overweight from equal weight, citing the economic environment, lower borrowing costs and prospects of an above-normal rain after two successive droughts.

Soured debts

Yet, mounting bad loans at lenders are hindering efforts to boost investment as Prime Minister Narendra Modi completes two years in office. Twelve state-run lenders posted combined losses of $3.1 billion for the March quarter after pressure from a central bank audit made them accelerate recognition of soured credit. While investors had anticipated higher non-performing-debt disclosures, the scale of losses surprised analysts.

“While at an aggregate this season has been good, non-performing assets at banks did surprise estimates negatively," Chhaochharia said. “The glass is half full, half empty. How you look at it depends on your starting point." He expects the Nifty to end 2016 at 7,500, or 8.3% below Monday’s close. It could rise as high as 8,400 by year-end if the rally in global equities persists, he said.

Materials demand

Some indicators signal that a revival may be underway. Eight industries including steel and cement grew a combined 6.4% in March versus 5.7% in February, as lower interest rates and state spending on roads stoked demand for materials.

On Tuesday, data may show India’s economy probably expanded 7.5% in the March quarter, faster than the previous three month’s 7.3%, according to a Bloomberg survey. That would mark four straight quarters of growth topping 7%. The forecast of above-average rainfall may help broaden the revival, Chhaochharia said.

“I’m impressed with what the government has been doing," he said. “The growth we’re seeing in the past two years has happened despite fiscal consolidation, a reasonably tight monetary policy and a weakened banking system. That gives us the confidence." Bloomberg

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Published: 30 May 2016, 09:58 PM IST
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