Mumbai: BSE Ltd’s benchmark Sensex has declined 17.7% this year, but high fiscal deficit, an inflation rate that is accelerating faster than the central bank’s comfort level, and slowing economic growth may continue to weigh on stocks in 2012, according to at least two brokerages.
The average 13-14 times one-year forward price-earnings multiple is not a fair value for companies that constitute the Sensex and it should be cut to 11-12 times, Neelkanth Mishra, director of equity research at Credit Suisse Group AG said after unveiling the India 2012 Outlook report on Wednesday. Credit Suisse’ target for Sensex for March 2013 is 13,500.
In the February budget, finance minister Pranab Mukherjee had estimated a 4.6% fiscal deficit for fiscal 2012, but this is unlikely to be met because of rising expenditure and falling revenue. According to Mishra, on the revenue side, only 34% of the target for the full year has been achieved, the lowest in the past 14 years, because of slowing growth, and there is a 7% rise in the government expenditure target. The Nomura Asia Pacific Outlook 2012, released last week, expects the fiscal deficit to climb to 5.1% in 2012.
A high fiscal deficit is not good for the economy as it is likely to raise bond yields. The yield on the 10-year benchmark government bond that crossed 9% a few weeks back is now trading at 8.76%. To bridge its higher-than-estimated fiscal deficit, the government has already raised its borrowing plan in the second half of the fiscal year.
Rising interest and input costs have hit corporate profitability and brokerages have been downgrading earnings. “There has been an earnings decline despite 20% sales growth in the second quarter because of inflation,” said Mishra.
Credit Suisse expects 16% growth in earnings for FY13 and there are significant downside risks to this target because of slowing growth. Nomura’s earnings estimate for fiscal 2012 is at 13.8%.
Inflation continues to play spoilsport for the Indian economy as it is more of a fiscal phenomenon and not a monetary phenomenon, according to Credit Suisse.
During the times of low fiscal deficit, 1996-2007, inflation remained low, but the moment the fiscal deficit flared up, inflation also followed suit. Wholesale price inflation in October stood at 9.73% and by the Reserve Bank of India’s (RBI) estimate, it will come down to 7% in March. Credit Suisse expects inflation to fall to 7.3-7.4% by March. Mishra said the level may not be adequate for RBI to change its monetary policy stance.
Nomura, however, expects RBI to change its stance and bring down its policy rate to 8% next year.
To rein in persistently high inflation in Asia’s third-largest economy, RBI has raised its key policy rate 13 times since March 2010, from 3.25% to 8.5%.
The Indian rupee which has declined 13.56% against the dollar since January is Asia’s worst-performing currency and may weaken further because of the country’s widening current account deficit.
India’s trade deficit, the difference between exports and imports, widened to $19.6 billion in October, the most in the past 17 years. This is expected to go up because of a rising import bill and a decline in exports. Foreign institutional investors, the mainstay of the Indian stock markets, have sold $145 million in the past 11 months, net of buying, after pumping in a record $29.33 billion last year.
Mishra of Credit Suisse expects the rupee to fall to Rs 55-56 per dollar by July 2012.
The Nomura report, however, said the local unit may recover to 50.5 per dollar by March.
The rupee closed to 51.71 to a dollar on Wednesday, down 0.6%.
As the rupee weakens, information technology and export-oriented firms who earn dollar revenues stand to benefit. Tata Consultancy Services Ltd and Sun Pharmaceutical Industries Ltd are the top buys for Credit Suisse. “Investor expectations are anchored at Rs 44-46 range and 20% further decline in rupee provides significant structural boost to their costs,” said Mishra.
Nomura has “positioned” its portfolio to take advantage of the peaking out of inflation and the rate hiking cycle. Its top stock picks include Bharat Heavy Electricals Ltd, Mahindra and Mahindra Ltd, Mundra Port, State Bank of India, Lupin Ltd and Jubilant FoodWorks Ltd.
The promoters of Jubilant and HT Media Ltd, which publishes Mint, are closely related. There are no promoter cross-holdings.