Mumbai: For India’s best equity forecaster, the prospect of a normal monsoon is a reason to be bullish. Never mind that the government estimates there will be less rainfall than usual in this year’s.

Rakesh Arora, the head of research at Macquarie Capital Securities India Pvt., says the S&P BSE Sensex will rise 14% in the second-half of 2015, after a 1% gain in the first. The prediction assumes the India Meteorological Department (IMD) is wrong in its projection that annual rainfall, on which some 830 million people depend for their livelihood, will be 12% below a 50-year average in the current monsoon.

“We are betting that the monsoon is going to be normal, which means that rural consumption will pick up in the second half," said Mumbai-based Arora, whose Sensex forecasts have been the most accurate in Bloomberg surveys over the past two years. “Government spending has already started and execution of projects is going to start in a big way post the monsoon. Earnings growth will start to look better from the September quarter."

A normal monsoon is crucial for Prime Minister Narendra Modi to kick start demand for everything from smartphones to gold. It assumes even more importance this year after Reserve Bank of India (RBI) governor Raghuram Rajan said his ability to cut interest rates would depend on whether rains can check food costs, which account for almost half of India’s consumer inflation.

While Arora has cut his year-end Sensex target to 31,600 now from 33,000 at the start of the year, that’s above the average estimate in a Bloomberg survey of seven analysts. The survey predicts a 13% gain by December for the Sensex, the worst performer among the world’s four largest emerging markets so far in 2015.

Reliable prediction

Arora isn’t the only one to differ with the IMD’s call that the El Nino weather phenomenon will curb rainfall in coming weeks. Skymet Weather Services Pvt., a private company whose predictions have proved more reliable than the IMD’s over the past three years, says rainfall this year will be 2% above average.

While it’s too early to say who’s right—June only accounts for 18% of total monsoon rainfall, with the bulk of it coming in July and August—Skymet for now is on track to beat IMD for a fourth straight year. Precipitation since the beginning of June has been 16% above normal, the weather department said on Tuesday.

“The initial concerns on the monsoon have been put to rest," Pankaj Pandey, the head of research at ICICIdirect.com, a unit of India’s second-biggest lender, said in an interview. “The prospects of rate cuts have improved and the visibility of a rate cut will help in driving capital expenditure."

Earnings outlook

Public spending on infrastructure and a plan to boost capital at state-run banks may help “kick start the capex cycle," according to Sanjiv Bhasin, a New Delhi-based executive vice president at India Infoline Ltd.

The government plans to invest as much as 1 trillion this year on ports, power stations and roads, junior finance minister Jayant Sinha said on 8 June. India will inject as much as $3 billion to capitalize state-run banks during the current financial year ending 31 March, enabling them to lend more, finance secretary Rajiv Mehrishi said last week.

Still, “the earnings outlook will remain depressed for the next six months as companies struggle to get out of a cash crunch," Bhasin said.

Earnings at the Sensex’s 30 companies, which declined for two straight quarters, are poised to climb 3.6% in the three months ended 30 June, compared with a 24% increase a year earlier, according to data compiled by Bloomberg. The backdrop of the crisis in Greece is also seen as a challenge.

Abhay Laijawala, head of research at Deutsche Equities India Pvt., who was also the most accurate Sensex forecaster last year along with Macquarie’s Arora, says that the second half of 2015 will be a tug of war between global headwinds and domestic tailwinds for Indian stocks.

Laijawala says he now expects the Sensex to reach 31,000 by year-end, 12% above Tuesday’s close. While the latest target is 6% below his January forecast, he said he’s maintaining a “constructive outlook."

“We believe that the worst of the earnings downgrades may be behind," Mumbai-based Laijawala said by e-mail. “India will not be immune to global volatility, but it may still outperform its emerging market peers, based on an improving domestic macro economy, return of government spending and the end of earnings downgrades." Bloomberg

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