Earnings forecasts (SENSEX) for BSE India Sensitive Index companies for the year ending in March 2012 have fallen 7.9 percent to 1,160 rupees per share, the biggest drop since the 12 months ended March 2009, according to about 1,500 estimates compiled by Bloomberg. Analysts cut outlooks for Maruti Suzuki India Ltd. (MSIL), the country’s biggest carmaker, and Tata Steel Ltd. (TATA), the largest producer of the alloy, by at least 29 percent, the data show.
While Prime Minister Manmohan Singh said in a Dec. 14 interview with Bloomberg News that he expects economic growth in India to accelerate to an annual pace of 9 percent, analysts are slashing their forecasts for companies as seven interest-rate increases this year drive up financing costs and a 15 percent plunge in the rupee boosts import prices. Bank of America Corp., CLSA Asia-Pacific Markets and UTI Asset Management Co. say the downgrades will extend into the 2013 fiscal year and deepen declines in the Sensex, which has slumped 22 percent this year, the most among benchmark measures in the 10 largest markets.
“Till now, the concern was that inflation and interest rates are going to hurt earnings growth,” said Swati Kulkarni, who helps oversee $12 billion at Mumbai-based UTI Asset, India’s fifth-largest money-management company. “Now the rupee is causing the biggest damage to earnings. We may see more earnings downgrades in the next two to three months.” Kulkarni’s UTI MNC (UTIUGSC) fund has beaten 97 percent of its peers this year, data compiled by Bloomberg show.
BRIC Declines
The Sensex may sink to 14,500 in the next six months, according to a Dec. 5 Bank of America report. The measure rallied 1.3 percent to 16,035.06 at 1:26 p.m. local time today as the central bank refrained from raising interest rates, the first time it has done so in eight meetings. Still, the gauge’s drop this year has outpaced the Standard & Poor’s 500 Index’s 3.3 percent loss and, in dollar terms, is more than the declines for measures in any of the so-called BRIC countries of Brazil, Russia and China.
“I am sure investors are wise enough to distinguish between short-term aberrations and long-term prospects,” Prime Minister Singh said in the interview in New Delhi two days ago. “There are short-term issues sometimes over which we don’t have any control.”
‘Biggest Threat’
With inflation above 9 percent for the past 12 months, the Reserve Bank of India increased its benchmark interest rate 375 basis points to 8.5 percent in 13 moves since March 2010. Policy makers today left the rate unchanged, matching the estimate of all 14 estimates in a Bloomberg News survey.
Higher borrowing costs have slowed the expansion in India’s $1.7 trillion economy, Asia’s third-largest, to 6.9 percent in the three months to September, the least in more than two years. Industrial production fell 5.1 percent in October from a year earlier, the first decline since 2009, according to statistics office data on Dec. 12.
“A slowdown in economic growth, a weak rupee and global factors are the biggest threat to earnings growth,” UTI’s Kulkarni said. “The question is how much is priced” into stock markets, she said.
Lower Target
While net income at the Sensex’s 30 companies climbed a combined 7 percent in the three months through September, the least in five quarters, 40 percent of the gauge’s companies including New Delhi-based Bharti Airtel Ltd. (BHARTI), the nation’s largest mobile-phone operator, and Mumbai-based Tata Consultancy Services Ltd. (TCS), the biggest software services exporter, reported profit that missed analysts’ estimates, data compiled by Bloomberg show.
Bank of America predicts Sensex companies may earn 1,200 rupees per share for the year ending March 2013, 21 percent lower than the 1,510 rupees estimated in April, according to the report from Bank of America analysts led by Jyotivardhan Jaipuria, the lender’s Mumbai-based head of India research.
The bank’s latest target is 9.2 percent lower than the 1,322 rupee forecast of analysts compiled by Bloomberg.
“For the next six months, we will see most of the downgrades happening,” Jaipuria said in a Dec. 1 interview.
More Expensive
The slide in the Sensex means the gauge trades at 2.7 times corporate net worth, near the lowest level since July 2009. While that’s higher than the MSCI BRIC Index, which trades at 1.4 times, cheaper valuations are luring Franklin Templeton Investments’ Mark Mobius, who is buying consumer banks that benefit from increasing wealth in India as well as utilities, because of electricity shortages.
“Valuations are good in India,” Mobius, who oversees $40 billion as Hong Kong-based executive chairman of Franklin Templeton Investments’ Emerging Markets Group, said in a telephone interview on Dec. 9. “We can get great opportunities right now.”
Indian stocks remain 39 percent more expensive than companies in the MSCI Emerging Markets Index, compared with an average premium of 12 percent since 1996, according to price- earnings ratios based on trailing profits compiled by MSCI Inc. and Bloomberg.
International investors withdrew $787.1 million from local shares last month, the most since August, data from the market regulator show. Foreign funds have pulled out $321.5 million from domestic stocks this year compared with a record inflow of $29.4 billion in 2010, as Europe’s worsening debt crisis prompted investors to flee from assets perceived as risky. The European Union is the Asian nation’s biggest trading partner, according to India’s Commerce Ministry.
Risk Appetite
“There is a long-term appetite for Indian equities but in the near term, with the global crisis dominating, investor appetite for risk is not high,” Nick Cringle, co-chief investment officer at Royal Bank of Scotland Group Plc’s wealth management division, said in a Nov. 23 interview in Mumbai. The Sensex trades at 13.7 times estimated profit and equities will become attractive when valuations fall to 11-to-12 times, according to Cringle.
Kotak Institutional Equities, the Mumbai-based brokerage controlled by billionaire Uday Kotak, has pared its earnings growth forecast for Sensex companies for the year ending in March to 14.4 percent from 19 percent, Sanjeev Prasad, co-head of institutional equities at Kotak, said in an interview with Bloomberg UTV on Nov. 23.
‘Uncertainty and Confusion’
CLSA lowered its target for Sensex companies’ earnings per share for 2013 by 3 percent to 1,269 rupees, analysts led by Mahesh Nandurkar wrote in a Dec. 8 report. CLSA cut its 12-month Sensex target to 17,000 from 18,200 citing lower earnings and “political logjam,” according to the report.
Prime Minister Singh decided on Dec. 7 to shelve plans to allow overseas investment in some domestic retailers, bowing to opposition lawmakers and adding to government initiatives that haven’t been completed, such as the planned sale of stakes in state-run companies to help narrow the budget deficit. Singh expects to push through the reform of the retail industry next year, he said on Dec. 14.
Policy decisions in India are fraught with “uncertainty and confusion,” John Flannery, chief executive officer for General Electric Co.’s local unit, said in an interview in New Delhi on Dec. 7.
“Any near-term positive newsflow appears unlikely on the ‘reforms’ front,” CLSA’s Nandurkar and his team wrote in their report. An economic “slowdown is visible,” they said. For the latest updates on the stock market, visit Stock Market Today
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