Mumbai: Normal monsoon rains, the passage of the goods and services tax (GST) and the Pay Commission bonanza for government staff have been offered as reasons for the rally in Indian stocks.

But a look at stock ratings after the June quarter presents an entirely different picture.

Since the end of the June quarter, the number of buy ratings came down for three out of every four stocks in the benchmark 30-stock Sensex, data from Bloomberg showed.

Similarly, sell ratings increased for 17 out of 30 stocks. For 10 stocks, sell ratings remained unchanged and for the rest there was an upgrade.

Bloomberg classifies rating as buys, holds and sells.

“The ratings downgrade was due to sharp movement in the market in the last four-to-five months. There has been a strong up-move in the market in recent times, and prices possibly include the near-term upside in the stocks," said Gaurav Dua, head of research at Sharekhan Ltd.

Since its low point on 29 February, the Sensex has gained 28.02% and is trading at 18.0648 times one-year forward earnings. This run has happened at a time when earnings per share (EPS) estimates have been pared, underlining the fact that the rally is not supported by fundamentals.

Since April, EPS estimates for fiscal 2017 have dropped for 16 out of 19 BSE sectoral indices. Analysts tracked by Bloomberg have cut Sensex earnings estimate by 1.66%.

BSE Realty saw the sharpest earnings estimates cut of 16.85%, followed by BSE Healthcare with 9.15%. The metals index saw the sharpest earnings upgrade of 34.64%, reflecting the pick-up in commodity prices.

According to Sanjeev Prasad, senior executive director and co-head of Kotak Institutional Equities, the quality of earnings in the June quarter has not been very good.

A strong outperformance by oil companies offset the weaker performance in other sectors, Prasad said.

“The Indian market’s valuations are expensive. There is no doubt about it. Yes, a lot of reforms has been done by the government that has improved India’s macroeconomic position and ease of doing business—the benefits of these will come through over the next 1-3 years," said Prasad.

He added that the Seventh Pay Commission recommendations of a pay hike and likely government spending should help improve consumption, but there was no immediate visibility on broad-based demand.

“The transmission of improving macro into better earnings will happen over time. I believe it will take more than six months to see a significant recovery in economic activity. The recovery so far has been very mixed and largely led by urban discretionary consumption," said Prasad.

He expects more earnings downgrades in the investment sectors such as cement, industrials and infrastructure where the Street is building a swift recovery. To be sure, the pace of earnings downgrades is decelerating and 21 Sensex stocks still have more buys than sells.

“The signs of bottoming out of the earnings downgrades are the key positives," said Dua.

India has so far received only 4% less rainfall than the long period average since the onset of the monsoon in June. This deficit is not a cause for concern as kharif sowing is almost complete in 96% of the seasonal area.

A decent monsoon season comes after two consecutive years of drought in Asia’s third largest economy, where a huge proportion of the rural population is largely dependent on agricultural income.

“I am expecting the effect of a good monsoon in the second half of the current year. The market is fairly priced at this stage," said R. Sreesankar, co-head of institutional equities at Prabhudas Lilladher Pvt. Ltd, adding that his Nifty EPS estimates for fiscal 2017 had inched up marginally to 446.20 from 440 earlier.

That said, there are concerns if the good rains and lower rural distress will necessarily trigger a significant rise in consumption.

“Coming after two droughts, when the first monsoon comes in, the first thing the farmers would do is repay borrowings. So, it need not necessarily lead to a strong rise in consumption-related growth should the farmers be leveraged," said Sreesankar.

“We need to revisit these estimates when harvesting takes place. The risks to these estimates are how harvesting season goes through," Sreesankar added.