How India went from Jolly January to Sober September

Investors stepping into 2013 were greeted with optimistic forecasts from market gurus. But the mood has since gone rapidly downhill with the same people drastically pruning their forecasts for the Sensex, profit growth and rupee.

From reports that wanted us to be “prepped for a rally” early in the year, we are now mournfully asked “How much worse can it get?”

What triggered this change of mood? The analysts advance reasons ranging from the absence of interest rate cuts to capital outflows and the steep fall in the rupee.

Chopping and trimming

Ridham Desai of Morgan Stanley trimmed his 12-month Sensex target to 18,300 this week, from 23,000 at the beginning of the year. In its report ‘Trimming Earnings and Index Target, again’, he says “earnings trajectory will weaken in the near term and the ensuing recovery is likely to slow”.

Against the original estimate that corporate profits would grow 12 per cent, he now thinks they may decline six per cent this fiscal.

This week, Manishi Raychaudhuri, strategist for BNP Paribas Securities, cut the Sensex target for this year from 21,300 to 17,000. “What we had not anticipated was the extent and pace of rupee depreciation, which has not only raised the cost of capital but also portends sharper earnings cuts than we had foreseen,” he laments.

He says that while sectors that benefit from a falling rupee make up a fourth of the Sensex, those that lose due to it make up 30-35 per cent. As a result, original estimates that Sensex company profits would grow by 13-14 per cent now seem ‘incongruous’.

He points out that sales growth has been low for 15 quarters, margins have been flat and Sensex profit growth has been only 1.4 per cent.

Bank of America-Merrill Lynch now thinks that a Sensex target of 16,000 is reasonable for the year. Recently, it cut its Sensex earnings estimates for the current fiscal to Rs 1,260, down from Rs 1,305.

Why the downgrades

Most forecasters cited concerns such as the sluggish economy, sharp capital outflows, rupee depreciation and high cost of capital, for their drastic downgrades.

Bank of America’s ‘India: How bad can things get?’ feared the rupee may not stabilise even at 63-69 but could slide further to 75, if there were any rate hikes. Nomura Securities revised its 2013-14 GDP growth estimates down to 5 per cent, from 5.6 per cent in its ‘India Turbulent Times Ahead’ report in September.

That’s why most brokers have not just reduced their profit growth estimates, but also pruned the price-earnings multiple they expect for the Indian market.

They now believe India will enjoy much less global fancy than before.

Buoyant in January

These sentiments are a striking contrast from January when many market players were in a buoyant mood.

In January, ICICI Securities’ report ‘Year of consolidation’ assigned a Nifty target of 6,550 for the year. It said, “Some revival in growth, interest rate cut on the back of likely lower inflation and more reform announcements drive the optimism.”

BNP Paribas, estimating that profits for Sensex companies would grow by around 12 per cent, said, “Strong earnings growth delivered by autos, consumer staples and healthcare will largely come on the back of margin improvements.”

The optimism then came from the view that India’s slowdown had bottomed out, interest rates would decline through the year and that food, manufacturing and wage inflation would ease. The US and China were also expected to recover.

While the latter has played out perfectly, it is the India story that didn’t play out according to script.

meera.siva@thehindu.co.in

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