Sensex Index Declines as Europe Debt Concerns Counter Manufacturing Growth

Indian stocks declined the most in two weeks as investors awaited details on how European leaders will expand a bailout fund, overlooking growth in the country’s manufacturing and an improvement in corporate earnings.

Reliance Industries Ltd. (RIL), India’s most valuable company, declined to a one-week low. Sterlite Industries (India) Ltd., the largest copper producer, fell for a second day. Larsen & Toubro Ltd., the biggest engineering company, slid 1.6 percent.

The BSE India Sensitive Index, or Sensex, declined 1.3 percent, the most since Oct. 18, to 17,480.83 at the 3:30 p.m. close in Mumbai. The gauge climbed 7.6 percent in October, its first gain since June and the best performance since March. The S&P CNX Nifty Index on National Stock Exchange of India Ltd. lost 1.3 percent to 5,257.95.

“Investors are jittery whether the European bailout plan will work out or not,” said Kaushik Dani, a Mumbai-based fund manager at Peerless Mutual Fund, which manages $1.2 billion in assets. “After the rally in October, some investors are likely to book profits, given the nervousness over global issues.”

A gauge of India’s manufacturing output climbed to 52 in October from 50.4 in September, HSBC Holdings Plc and Markit Economics said today, a sign the economy is withstanding record interest-rate increases and a faltering global economy.

The Reserve Bank of India last week signaled it’s nearing the end of monetary tightening after it increased rates for the 13th time since mid-March 2010, seeking to support expansion as Europe’s debt crisis clouds the outlook for exports. In China, a manufacturing index dropped to the lowest level since February 2009, bolstering the case for fiscal or monetary loosening.

‘Reality Check’

Still, concern mounted that the euro area’s plan to shore up bank balance sheets and expand a bailout fund partly by seeking money from countries such as China won’t halt the spread of the debt crisis from Greece.

“With some European nations indicating reluctance to invest in the leveraged European Financial Stability Facility and China requesting more details, there seems a faster reality check than most expected,” Shankar Char, vice president at ICICI Securities Ltd., a unit of India’s biggest private lender, said by e-mail.

The Sensex has slumped 15 percent this year on concern the central bank’s record increases in borrowing costs may worsen the effects of the Europe’s debt crisis and slowing economic growth in the U.S. on corporate profits. Companies in the gauge trade at 14.9 times estimated profits, down from 21.5 times in March 2010. The MSCI Emerging Markets Index is at 10.3 times.

Earnings Comfort

Still, five out of 16, or 31 percent, of Sensex companies that posted earnings for the September quarter have trailed analyst estimates, compared with 47 percent in the three months ended June, according to Bloomberg data.

“The performance of some front line names has been decent and it will give comfort to investors,” Peerless’s Dani said.

Hindustan Unilever Ltd. (HUVR), the Indian unit of Unilever Plc., rose 3.3 percent to a record 388.1 rupees. The stock has jumped 19 percent in the six days through today and is the top gainer on the Sensex this year. It reported yesterday profit that beat analysts’ estimates for a third straight quarter.

Reliance declined 1.9 percent to 860.6 rupees, its lowest level since Oct. 24. Sterlite dropped 3.2 percent to 123.3 rupees, extending yesterday’s 4.1 percent drop. Larsen & Toubro shed 1.6 percent to 1,390.05 rupees, the most since Oct. 24.

‘Stubbornly Resistant’

India’s central bank last week reiterated that monetary tightening would help slow the wholesale-price inflation to 7 percent by March 31. It also cut economic growth forecast to 7.6 percent from 8 percent for the fiscal year ending March 31.

Inflation was 9.72 percent in September, remaining above 9 percent since the start of December.

“Inflation has been stubbornly resistant to anything that the Reserve Bank of India has done, and it is very clear that the RBI has succeeded in preventing the multiplier effect of inflation,” Mohammed Apabhai, head of Asia trading strategy at Citigroup Inc., told Bloomberg UTV today. “The pressure is very much downward on inflation.”

Overseas investors bought a net 4.81 billion rupees ($98 million) of Indian equities yesterday, raising total investment in equities this year to 18.7 billion rupees, according to data on the website of the market regulator. They withdrew a net $2.4 billion in August, the most since October 2008.

To contact the reporter on this story: Rajhkumar K Shaaw in Mumbai at rshaaw@bloomberg.net

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net

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