Uncertainty scaring the bulls
Fiscal cliff in the US, double recession in Europe and leadership change in China have been keeping the global markets on tenterhook for the past few weeks. The outlook for growth in the global economy is so weak that even the military tension in Gaza has not really led to a spike in oil prices. On the other hand, the India story seems solid.
Most economic indicators are pointing to bottoming out of the downcycle and the government showing strong intention to revive growth. Foreign investors have been keeping faith in the India story and the QE3 (quantitative easing)-led liquidity has found its way as inflows, supporting Indian markets.
Though there was disappointment after the Reserve Bank of India (RBI) left interest rates untouched, the earnings season has proved a saviour. After a gap of two years, this result season marks important changes in trend. BSE100 companies have seen margin expansion by 120 basis points and analysts upgrade equalled downgrades.
However, the initial euphoria is now starting to subside and the market has been looking for actual progress on the ground to get more bullish. The government’s efforts on divestment have not yielded anything as yet. At the same time, 2G auctions reflected the grim situation of the sector. This has raised questions about the 5.3 per cent (of gross domestic product) fiscal deficit target set by the finance minister. More important, the recent appointment of Rahul Gandhi as head of the Congress poll panel for the next Lok Sabha elections and the speed with which the Samajwadi Party has declared its candidates for 2014 have created doubts about possibility of early polls. All eyes are on the winter session of Parliament that starts on Thursday.
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Markets are going to consolidate here till some of these worries subside. Also, foreign institutional investor activity will reduce as we get into the holiday season by the middle of December. However, buying on dips remains the call and investors should utilise the current nervousness to buy into India-centric plays. Revenue growth for BSE100 companies has now shrunk to 16 per cent in the current (September) quarter, sharply down from 45 per cent growth seen during peak of FY07. Pressure is mounting on RBI to act when it meets next, as growth concerns mount. Industrial growth has now shown contraction in four of the last six months. At the same time, inflation positively surprised by dropping to 7.5 per cent. In fact, core inflation is now very close to the RBI comfort zone of five per cent. To quote the State Bank of India chairman, who, while highlighting the impact of a cut in interest rates on retail loan demand, observed: “Daily home loan sanction has tripled following the rate cut by bank in August." Consensus is building in very modest 9-10 per cent revenue growth estimates for FY13-14 and interest rate cuts can lead to strong upgrades.
Ebitda (earnings before interest, taxes, depreciation and amortisation) margins for companies should also continue to expand as global and domestic inflation subside, with marginal help from a stronger rupee. At the same time, interest expenses have been increasing at 30 per cent for the BSE100 companies over the last year, which should abate with interest rate cuts. Companies can do better than the 10-12 per cent earnings growth currently being estimated by consensus for FY13-14. Our top five picks for this year are Maruti Suzuki India, Coal India, ICICI Bank, Larsen and Toubro and Bharti. Happy investing!
The author is MD and head of research, Macquarie Securities India