The rally that helped India’s benchmark stock index post its best week in three months may have outpaced the recovery in earnings growth, UBS Group AG said.
Net income at companies in the NSE Nifty 50 Index is expected to grow 10 percent in the fiscal year ending March next year, slower than consensus forecast of 21 percent, Gautam Chhaochharia, head of research at UBS Securities India Pvt in Mumbai, said in an interview.
The index ended last year within 3 percent of his target of 8,200.
The Nifty erased losses for the year last week, as earnings at some of the nation’s biggest firms, including engineering conglomerate Larsen & Toubro Ltd, beat estimates and a forecast for the strongest monsoon rains in two decades boosted investor confidence.
The market is getting “carried away” and will sputter once the buoyancy in global equities ebbs, Chhaochharia said.
“Earnings are recovering and some high-frequency data points have turned positive, but the evidence isn’t big and broad enough,” he said.
While Chhaochharia said he is bullish on equities over a three-year time frame, the market could decline “if the global risk-on trade doesn’t remain as strong as it’s been in the past two months.”
The comments echo concerns raised earlier this year by other analysts even as corporate profitability is on the mend after falling in four of the past five quarters.
Operating profits for the Nifty 50 companies have risen 10 percent year-on-year in the March quarter, the most since the three months ended September 2014, data compiled by Bloomberg show.
Larsen & Toubro was the top gainer on the benchmark S&P BSE SENSEX last week after the company reported better-than-expected results and forecast sales to increase this year.
On Friday, state-run refiners Bharat Petroleum Corp rallied to a record and Hindustan Petroleum Corp surged 9.7 percent after their earnings topped forecasts.
Mahindra & Mahindra Financial Services Ltd, the auto-loan unit of India’s largest tractor maker, posted its first net income growth in a year as collection of dues from customers in 260,000 villages improved. The stock has rebounded 70 percent from its three-year low in February.
Last week, Morgan Stanley upgraded the nation’s stocks to overweight from equal weight, citing the economic environment, lower borrowing costs and prospects of an above-normal rain after two successive droughts.
However, mounting bad loans at lenders are hindering efforts to boost investment as Indian Prime Minister Narendra Modi completes two years in office.
Twelve state-run lenders posted combined losses of US$3.1 billion for the March quarter after pressure from a central bank audit made them accelerate recognition of soured credit.
While investors had anticipated higher nonperforming-debt disclosures, the scale of losses surprised analysts.
“While at an aggregate this season has been good, non-performing assets at banks did surprise estimates negatively,” Chhaochharia said. “The glass is half full, half empty. How you look at it depends on your starting point.”
He expects the Nifty to end the year at 7,500, or 8 percent below Friday’s close.
The gauge could rise as high as 8,400 by the end of the year if the rally in global equities persists, he said.
Some indicators signal that a revival may be under way. Eight industries, including steel and cement, grew a combined 6.4 percent in March versus 5.7 percent in February, as lower interest rates and state spending on roads stoked demand for materials.
India’s economy likely expanded 7.5 percent in the March quarter, faster than the previous three month’s 7.3 percent, according to a Bloomberg survey. Official data are being released today.
That would mark four straight quarters of growth topping 7 percent. The forecast of above-average rainfall may help broaden the revival, Chhaochharia said.
“I’m impressed with what the government has been doing,” he said. “The growth we’re seeing in the past two years has happened despite fiscal consolidation, a reasonably tight monetary policy and a weakened banking system. That gives us the confidence.”
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