India’s Always Bullish Analysts Are Turning Bears

Indian stock analysts who predicted gains in the nation’s benchmark index while the gauge fell last year are now turning bearish as equities surge the most since 2009.

More than 1,200 estimates compiled by Bloomberg on Oct. 4 showed analysts projecting a 1 percent drop for the BSE India Sensitive Index (SENSEX) in the next 12 months, after they overestimated returns by an average 21 percentage points in 2011. The benchmark measure has climbed 21 percent this year, the best performance among the largest emerging markets, as international money managers bought a net $18.1 billion of Indian shares, data compiled by the country’s market regulator and Bloomberg show.

While Mumbai-based securities firm Dolat Capital Market Pvt. advises cutting holdings of State Bank of India because of loan losses and Prabhudas Lilladher Pvt. has downgraded Reliance Industries Ltd. (RIL) on slower earnings growth, Templeton Emerging Markets Group’s Mark Mobius is increasing his Indian holdings. Mobius, who oversees $48 billion, cites Prime Minister Manmohan Singh’s efforts to open up the economy for his bullish stance.

“They are going through a reform process so there’s a lot of opportunities,” Mobius said in an Oct. 12 interview in Singapore. “We are adding now.”

The Sensex index is valued at 16 times reported earnings, the most expensive of the so-called BRIC markets after Brazil and about 5 percent below its average since 2000, according to data compiled by Bloomberg. The gauge trades for 2.7 times book value, or assets minus liabilities, a 15 percent discount to its historical average, the data show.

Growth Plan

Singh began a campaign in September to revive India’s economic growth from the weakest level since 2009 and avoid a credit-rating downgrade. He lowered taxes on companies’ overseas borrowing and announced plans to open the country’s retail and aviation industries to foreign investment.

The 80-year-old leader unveiled more policy changes this month, including proposals to boost overseas investment in the insurance and pension industries, which require support from his party’s coalition partners to win parliamentary approval. Finance Minister Palaniappan Chidambaram said in a Bloomberg Television interview on Oct. 12 that he plans further changes in capital markets, banking and infrastructure in the next few weeks.

Political Support

“India has shown us time and again that with a few fairly simple policy moves, you can ratchet up growth very fast,” Arjuna Mahendran, the Singapore-based head of Asia investment strategy at HSBC Private Bank, which manages about $500 billion, said in an Oct. 11 interview on Bloomberg TV India.

Mahendran expects the Sensex to climb above 20,000 in the next six months, he said in a separate interview on Oct. 1. That’s at least 6.9 percent higher than the index’s close of 18,710.02 in Mumbai today.

Singh may struggle to win the political support needed to enact his recommendations, Daphne Roth, the Singapore-based head of Asian equity research at ABN Amro Private Banking, said in an e-mailed response to questions on Oct. 9. Returns from Indian stocks may be limited by inflation, the government’s budget shortfall and the current-account deficit, she said.

Inflation quickened to 7.81 percent in September, the fastest level among the BRICs and above the Reserve Bank of India’s comfort level of about 5 percent, according to government data released on Oct. 15. The budget shortfall may reach 6 percent of gross domestic product in the year through March 2013, compared with the government’s target of 5.1 percent, according to Standard & Poor’s. The current-account deficit in the three months ended June was 3.9 percent of GDP.

BRIC Outlook

The wave of policy announcements has failed to convince equity analysts the surge in Indian stocks will continue. Their 12-month return forecasts for the Sensex index turned negative this month for the first time in two years and the projection as of yesterday was for a 1.9 percent gain, down from 19 percent five months ago. That compares with estimated increases of at least 18 percent for benchmark indexes in China, Brazil and Russia, data compiled by Bloomberg show.

Indian analysts have been too bullish every week since Bloomberg began compiling the projections in July 2010, overestimating returns by an average 21 percentage points, the data show.

Analysts cut fiscal 2013 profit forecasts for Sensex companies by 1.4 percent since June, when earnings before interest, taxes, depreciation and amortization fell to 19.5 percent of sales, the data show. The so-called Ebitda margin, a gauge of profitability, for the quarter ended June matched the lowest level since 2003.

Refining Margins

Deepak Pareek, an analyst at Mumbai-based brokerage Prabhudas Lilladher who cut his recommendation on Reliance Industries to reduce from accumulate on Aug. 23, said in an Oct. 11 phone interview that refining margins are unlikely to rise “significantly” from current levels. Reliance is also struggling to win government approval to develop new gas discoveries, he said.

Pareek maintained his rating in an Oct. 16 note and said he expects Mumbai-based Reliance to trade at 805 rupees in the next 12 months, compared with its closing level of 823 the previous day. On Oct. 17, 2011, he predicted the stock would reach 952. It peaked at 905 in intraday trading on Nov. 4 before slumping to as low as 673.05 on May 16.

Analysts covering State Bank, India’s largest lender, reduced their share-price estimates by 2.7 percent this year even as the stock surged 38 percent.

State Bank

Rakesh Kumar, an analyst at Dolat Capital Market, lowered his recommendation on the lender to reduce from accumulate on Aug. 13 and gave a price target of 1,810 rupees, according to data compiled by Bloomberg. That’s 19 percent below State Bank’s closing price of 2,240.95 rupees in Mumbai trading yesterday.

Kumar predicted on Oct. 19, 2011, the stock would rally about 24 percent to 2,317. The shares fell to as low as 1,571.10 rupees on Dec. 20 after State Bank reported an increase in defaults. Now, Kumar is advising investors to cut holdings as there are few signs of improvement in loan quality, he said in an Oct. 15 phone interview.

Overseas investors increased their stake in State Bank to 9.1 percent of the shares from 7.9 percent in December, according to exchange data compiled by Bloomberg. Foreign inflows into Indian stocks this year are the biggest among 10 Asian markets tracked by Bloomberg.

“It’s not the time to be bearish on India,” David Gaud, a senior money manager at Edmond de Rothschild Asset Management in Hong Kong, which oversees about $18 billion in equities and convertible bonds, said in an Oct. 15 phone interview.

Falling Valuations

State Bank is valued at a 4 percent discount versus the MSCI Emerging Markets Financials Index, compared with a premium of as much as 26 percent two years ago, according to price-to- book ratios compiled by Bloomberg. Reliance Industries’ price- earnings ratio has fallen to a 18 percent discount to Rio de Janeiro-based Petroleo Brasileiro SA (PETR4), Brazil’s state-run oil producer, from a 22 percent premium at the start of the year.

The Sensex returned an average 29 percent in 12 months during periods from 1980 to 2011 when the combined budget and current-account deficits were more than 8 percent of GDP, according to Deutsche Bank AG. India’s budget shortfall was 5.8 percent of GDP and the current-account gap was 4.2 percent in the 12 months ended March 2012.

“When the twin deficits are high like now, something happens,” Ajay Kapur, Deutsche Bank’s head of Asian equity strategy in Hong Kong, wrote in an Oct. 8 report. “Policy reforms get enacted while valuations already reflect the grim situation.”

Still Skeptical

Singh cut taxes, reduced tariffs and removed restrictions on foreign investment in the auto and pharmaceutical industries during his five years as finance minister from 1991 to 1996.

India’s economy expanded at an average annual pace of about 6 percent in the period, compared with 3.6 percent for emerging markets, according to the International Monetary Fund. The Sensex climbed about 170 percent during Singh’s term.

“Most Indian analysts are still skeptical about how the government can push forward the reforms,” said Edmond de Rothschild’s Gaud, who’s been adding to infrastructure-related companies. “India is probably the market where we’ve been turning more active and more positive over the past three to four months.”

To contact the reporters on this story: Shikhar Balwani in Mumbai at sbalwani@bloomberg.net; Michael Patterson in London at mpatterson10@bloomberg.net; Weiyi Lim in Singapore at wlim26@bloomberg.net

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

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