JP Morgan India sees room for market growth if reform process kicks in

The Indian capital markets have risen in the past few months despite increase in crude oil prices and a cut back on the GDP estimates on hopes that the Government would press the reform process button, even if belatedly.

The market estimates that for the BSE Sensex, the earnings growth may be 9 per cent and 13 per cent for FY13E and FY14E respectively, according to a research report of JP Morgan India Private Ltd.

In a report dated August 24, JP Morgan India noted that in the past three months, the MSCI India ($) was up by 12 per cent in absolute terms and had outperformed MSCI EM by 500 bps. However, “fundamentals have deteriorated” and the consensus estimates for FY13E GDP growth has been trimmed from 6.5 per cent to 5.5 per cent. Though there was revival in monsoon in August, the shortfall in rains in the earlier part of the season could hit consumption, it said.

The report titled “India Equity Strategy” posing the question ‘Keeping the faith: But for how long' pointed out that Brent crude has moved up from a low of $90 in June to $115/barrel which had impacted deficit and inflation.

The Indian currency has further weakened against the greenback from Rs 54 to Rs 56 and yields on the 10-year Government bond had gone up from 8.08 per cent to 8.24 per cent.

Explaining the reasons for the market upturn despite the negative developments, the report said this was on hopes that the Government would deliver. It said ‘the markets are hoping for measures' to rein in demand pressures and fiscal deficit by resorting to hike in diesel prices and revive the investment cycle over the medium-term by permitting / increasing FDI limits in multi-brand retail, aviation, etc, quicker clearances for investment projects, especially in key infrastructural sectors like power / coal etc.

Though there were expectations that once the Presidential polls were out of the way the government would get into a reform mode, this has been belied due to factors like CAG report on coal and the reluctance of the alliance to embrace the reform agenda.

This has now turned the attention to what the Government would do after Parliament's monsoon session ends on September 7 and before the crucial Assembly polls in Gujarat in November.

JP Morgan India was “positive on Indian equities going into 2H' (second half of 2012) and it “remain(s) constructive over the medium term”. However, it advised investors to explore “hedging strategies to lock in upside and protect downside over the near term'.

The present political environment also raised questions over market reform and the global environment was also challenging. It felt that the valuations at 12x one year forward earnings “leave enough room for investors to chase the markets once the roadmap for reforms is established, even if the initial upside is missed”.

The BSE Sensex had appreciated 12 per cent in the last three months even as global crude oil prices have jumped by 28 per cent, which posed a threat to the macro outlook and to how the markets performed. While the analysts were cutting back on the estimates in the last couple of months, “the breadth of revisions has also been negative”. The report said “for the Sensex, the street now estimates sedate earnings growth of 9 per cent and 13 per cent for FY13E and FY14E respectively”.

COMMENT NOW