Market : FAQs

MARKET : FAQs

Q: The markets have remained buoyant since the start of this calendar year. How do I see them panning out in the coming months?

A: Post the strong and decisive mandate in the general election, investors have been anticipating tough reforms by the new government to revive the economy, which has fueled the current rally. The government in the recent budget has shown clear intent to move forward on fiscal consolidation path and introduce reforms which helps endorse investor interest. Even though improvement in economic scenario will happen at a gradual pace, equity markets would continue to remain buoyant. We expect Sensex to get further re-rated and trade at 16.5x FY16E earnings per share (EPS) of 1835 at 30300 by December 2015 with the Nifty reaching 9050.

Q: How do I see the Q1 earnings season; what is my outlook on earnings for the FY15?

A: At the start of the earnings season, we had expected our coverage universe of about 190 companies (ex-oil and gas) to post a revenue growth of 16.5%, almost quadruple of 4.2% delivered in same quarter last year. At the same time we expected about 70 basis points (bps) expansion in earnings before interest, taxes, depreciation, and amortization (EBITDA) margins resulting in profit after tax (PAT) growth of 23.2%.

The results declared so far have been a mixed bag, with defensive and quasi-defensive sectors reporting either better or in-line numbers. Pharma, FMCG, Automobile, Cement and Telecom companies have largely reported better than expected numbers, while IT and Metals reported numbers in-line with expectations. However, capital intensive sectors like Capital Goods continue to report sub-par financials, indicating that ground level recovery in economic performance would continue only at a gradual pace.

Q: What are the major risks with respect to Indian markets that one should be watchful about?

A: Indian equity markets have been trending higher on back of expectations of structural reforms to revive the state of the economy by the new government. Therefore one of the major risks remains emergence of state of inertia in policy environment. In case, the new government fails to meet investor expectations, we could witness an interim correction in markets.

Secondly, the possibility of deficit monsoon could impact agricultural production and spike inflation. In addition, higher crude prices could derail the fiscal consolidation measures, besides further fueling imported inflation. However, rainfall has revived of late while crude prices have also started to come off the recent peaks.

Q: What do the recent macro economic data suggest about our economy?

A: Macro economic data in the past few weeks has started to look up with index of industrial production (IIP) figures for May at a 19-month high of 4.7%, almost a percentage point higher than expectations of 3.76%. Similarly, consumer price index (CPI) and wholesale price index (WPI) for June eased to 7.95% and 5.8% respectively, after the new government curbed farm exports and took steps to prevent hoarding and black marketing. Furthermore, the recently released core IIP recorded a phenomenal growth of 7.3% year-on-year (YoY) during June 2014.

However, even though some of the data points have started to improve, all round improvement in economic scenario will happen with a lag. Moreover, the risk of drought could spoil the summer crops which would impact economic growth and could delay interest rate cuts, besides fueling food inflation further.

Q: Foreign institutional investor (FII) flows have remained robust in the calendar year 2014 with ~ 70,000 crore inflows so far. Do I see inflows to continue going ahead?

A: The country received FII inflows of over 1,11,000 crore in 2013, while the current year’s inflows stand at about Rs 70,000 crore. With the new government displaying the right intent towards implementations of reforms and gradually improving state of the economy, the country is favorably placed to attract further inflows. Moreover, in the last ten years, India has received FII inflows of over $132 billion almost double of the next highest FII receiving emerging country, highlighting foreign investors’ confidence in Indian growth potential.

Q: Which segment of market is looking most promising at this point of time and why?

A: With improving sentiments, most sectors that were being avoided have started to attract investors in search of higher alpha. We expect defensive sectors like FMCG, Pharma and IT, to under-perform the broader markets. These sectors would give way to high beta, capital intensive sectors. We continue to be bullish on quasi-defensive sectors like automobiles, cement and banks with healthy balance sheets. Moreover, we upgrade capital goods, power, infrastructure, metals and oil & gas to overweight on a clearer policy outlook.

Q: On a final note, what should be the investment approach of retail investors in the current scenario?

A: Market has rallied almost 25% since the start of this calendar year and is trading closer to life high levels. Hence, it is advisable for retail investors to avoid bulk buying and rather continue with a systematic investment plan (SIP) approach to eliminate the risk of arising out of intermediate correction.