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Informist, Monday, Nov. 4, 2024

 

By Anshul Choudhary

 

MUMBAI – Poor earnings by Indian companies for the second straight quarter have hurt prospects of Indian equities in the near-to-medium term at least, according to market watchers. They expect indices to continue to fall in November as September quarter earnings have been underwhelming so far and this has forced analysts to cut their earnings estimates for the full year. Above this, despite a recent correction in stock prices, analysts said current valuations do not give enough comfort against the prospects of higher taxes from the US, uncertainty over the trajectory of interest rates, and volatility in crude oil prices.

 

A downgrade of earnings prospects means analysts have curtailed their expectations for this financial year. Analysts and fund managers said consensus shows Nifty 50 companies' net profit may rise 5-7% this financial year, significantly lower than expectations of 12-14% growth at the beginning of the year. Considering that earnings growth slowdown may continue, which is also partially the reason behind relentless selling of Indian equities by foreign investors, analysts said markets are unlikely to recover anytime soon.

 

While indices are expected to fall more, the pace of decline is likely to be slower than that in October. The Nifty 50 fell over 6% in October, marking its worst fall since March 2020 when the government announced a nation-wide lockdown due to the COVID-19 pandemic. According to the median of the estimates of 14 brokerage houses, the Nifty 50 is expected to find support at 23400 points in November, indicating a fall of over 2.5% from here. Monday, the Nifty 50 closed at 23995.35 points, down 1.3% from Friday.

 

For now, the festival season and rural demand are immediate triggers and any positive news on demand may help markets recover to some extent, but even then, analysts do not expect significant gains. According to the median of the estimates, the Nifty 50 is likely to face resistance at 24500 points, 2?ove the current levels, but still down nearly 7% from the lifetime high it had scaled on Sept. 27.

 

"(The) market has corrected in the last one month, but given valuations and no earnings upgrades, one should expect market to remain range-bound till you get visibility on incremental earnings," Shridatta Bhandwaldar, the head of equities at Canara Robeco Asset Management Co, said. Bhandwaldar said the recent correction in large-caps partially captures the downgrades in earnings, but he said valuations in mid-caps and small-caps are still high. The Nifty 50 is down nearly 9% from its lifetime high, while the Nifty Midcap 150 is down nearly 8% and the Nifty Smallcap 250 is down 6% from their respective lifetime highs.  

 

Although earnings growth in the first half of this financial year was expected to be slow to begin with, analysts were not expecting companies to be conservative in their commentary for the coming quarters. "Commentary was surprising for me as majority of them were either neutral or slightly cautious. They (companies) are not very clear on the future trajectory...one thing is sure that they are shaken and it (September earnings) is not a one-off thing," Dharmesh Kant, head of equity research at Cholamandalam Securities, said.

 

Investors had pinned their hope on the second half to help companies report healthy earnings growth, so much so that the market initially ignored poor earnings growth in the June quarter and investors continued to buy equities. However, analysts said the September quarter is different as this time several companies have acknowledged the slowdown in consumer demand, which is likely to affect earnings growth during Oct-Mar as well. "We may be too hopeful of H2 (Oct-Mar) compensating for weakness in H1 (Apr-Sept)...not looking at a bumper H2," Deepak Jasani, head of retail research at HDFC Securities said.

 

Several fund managers also spoke on similar lines. "A lot is riding on the second half and festival season...even there the commentary is mixed. Festival season so far is not up to the mark, but we'll have to wait and watch how this pans out. Some of the automobile companies' commentary and reported numbers suggest the festive season was not great at (the) start," said Shibani Kurian, head of equity research and senior fund manager at Kotak Mutual Fund, while adding that demand should improve around Diwali. 

 

Poor September quarter earnings amplified the selling of Indian equities by foreign investors in October. The sell-off by foreign investors initially began after investors saw an opportunity to invest in relatively cheaper equity markets in China after China, about a month back, announced stimulus measures to boost its economy. This pushed foreign investors to cut their weightage for emerging markets such as India to fund their investments in China.

 

That outflow has not stopped despite indices in China coming off highs, Kant said, while mentioning that high valuations of Indian stocks amid underwhelming earnings growth and uncertainty over the US election have also played their part in foreign investors' decision to dump Indian equities. In October, foreign institutional investors sold Indian equities worth over $10 billion, the highest monthly sell-off ever.

 

The US presidential election, with Democrat Kamala Harris and Republican Donald Trump tied in a photo-finish race, has added to the uncertainty. Market participants are on the edge about what could be the policies of the new president and would the new president raise tariffs that would hurt Indian companies. While this election is a close contest, analysts are mainly concerned that none of the two candidates favour India.

 

"While a Trump presidency will be more noisy and volatile, we assess that a Harris presidency will not differ too widely in certain key areas," Emkay Global Financial Services said in a note Thursday. "...a Red Sweep (Trump win) would probably trigger a short-term rally (in Indian equities) but its sustenance depends on earnings momentum and valuations, both of which are weak." At the same time, Emkay Global said if Harris wins the election, market is likely to take it negatively due to her support for higher corporate taxes. US citizens are set to vote for the new president on Tuesday. 

 

A sustained poor earnings growth would also mean investors would not be able to ignore other factors such as geopolitical tensions in West Asia. In the past few months, crude oil prices have been extremely volatile as the war in West Asia has spread with Israel attacking Iran in October. The Brent crude oil futures rose above $80 per barrel at one point in October, before falling back quickly to around $73 per barrel.

 

While the US election, stimulus by China, and geopolitical tensions pose a risk to foreign flows, market watchers said there is a risk to flows from domestic investors as well, who have so far managed to offset the negative impact of outflows by foreign investors. The two fund managers quoted above said there are no signs of slowdown in domestic flows as of now. However, if earnings growth does not improve and market returns are subdued for a few more quarters, Bhandwaldar said there is a risk that domestic retail investors will begin pulling out money. "They look at past performance and it (outflows by retail investors) always comes with a lag," he said. 

 

Following are the support and resistance levels for the Nifty 50 index for November, based on responses from 14 brokerage houses:

 

Brokerage Name	Support 1	Support 2	Resistance 1	Resistance 2
Emkay Global Financial Services	23400	22800	24500	24700
Globe Capital Market	23350	23200	25000	25250
HDFC Securities	23800	23600	24485	24882
IDBI Capital Markets & Securities	23000	-	25100	-
Indiacharts	23260	23100	25000	25121
Kotak Securities	23000	-	24500	-
Motilal Oswal Financial Services	23500	23300	24500	24750
Nirmal Bang Institutional Equities	23500	23400	25000	-
NVS Brokerage	23700	23400	24400	24700
Religare Broking	23400	23000	24700	25100
SAMCO Securities	23300	-	23700	-
Sharekhan	23600	-	24400	-
StoxBox	23500	-	24750	-
Way2Wealth Brokers	23350	23100	24500	24750

 

End

With inputs from Team Informist

US$1 = INR 84.12

 

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

Edited by Deepshikha Bhardwaj

 

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