The Hindu Business Line : Another wobbly week on the cards

Rattled by falling economic numbers, the equity market, however, did not fail to record a cheer for the Government move towards the nuclear deal last week.

Dalal Street movements may continue to be wobbly this week, in fact until the trust vote on July 22. Meanwhile, participants busy discounting the latest negative signal and forming a directional view for the next few quarters of the fiscal, appear to be sensing the way forward in the dark tunnel, which may not end at a short distance ahead.

After disappointing May industrial production numbers, some of the street observers feel that the indicators including non-food credit growth, cellular subscriptions, and the purchasing managers index (PMI) suggest a moderation in activity, rather than a sharp slowdown, and expect this trend to continue in FY-09.

The PMI bounced back to 58.6 in June from a 10-month low of 57.4 in May. Analysts feel agriculture will hold the key for both industry and overall GDP, and a normal monsoon is expected to boost rural income and demand.

Moderation

Goldman Sachs still expects the GDP growth to moderate to 7.8 per cent in FY-09 from 9 per cent in FY-08, but thinks downside risks have increased. In view of increasing level of WPI inflation, many apprehend further tightening of monetary policy by the RBI in October by tinkering with CRR and repo rate. Given a deteriorating basic balance of payments and the negative impact on sentiment from high inflation, the rupee may continue to weaken.

Despite these concerns, the brokerages have begun crystal gazing the FY-09 Senex EPS at over Rs 1000, which in April had been seen by some as low as Rs 850 or so.

The consensus is that three key risks – high crude oil price regime, persistence of double digit inflation, and political instability – are likely to continue to dog the market through the current fiscal.

Rising operating costs

For the quarter to June 30, expectation is that the aggregate earnings may rise moderately year-on-year between 10 and 12 per cent; but it may be much lower than the revenue growth because of sharp rise in cost of operations. For example, India Infoline feels that EBIDTA margins for non-financials may decline by 130 bps Y-o-Y, owing to a sharp rise in operating costs, especially those on fuel and feedstock. The deceleration in EBIDTA growth, compounded by higher interest and depreciation costs, and lower non-operating income, might further drive down PAT margins. The sectors that, according an emerging consensus, are likely to report Y-o-Y decline in earnings are autos, cement and utilities, real estate. Steel sector may prove to be a major exception with earnings growth likely to accelerate to 58 per cent, helped mainly by the 20-25 per cent Y-o-Y rise in price realisation. IT and pharmaceuticals sectors may fare better and continue to serve as defensive bets.

Broadly the current valuations are very low compared to their peaks early in the last quarter of the previous fiscal. The forthcoming results are likely to pave way for new valuations and some long-term buying in certain sectors.

(Responses may be sent to jayanta_mallick@thehindu.co.in)