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India Strategists See Record Sensex as Surge in Earnings

India’s equity strategists say the benchmark index, the most expensive among the biggest emerging markets, will rally to a record this year as pre-election spending sends corporate earnings to an all-time high.

The S&P BSE Sensex (SENSEX) will advance 6.5 percent to 21,150, surpassing its closing record of 21,004.96 in November 2010, according to the average estimate in a Bloomberg survey of eight strategists at firms from BNP Paribas SA to Deutsche Bank AG. The gauge is up 2.2 percent in 2013, versus a 9.7 percent drop in the MSCI Emerging Markets Index, and is valued at 13 times estimated earnings, more than in Brazil, Russia and China.

While foreign investors sold $1.8 billion of Indian shares in June and the central bank raised interest rates July 15 to stem the rupee’s dlifr, strategists say the Sensex will gain as profits jump 19 percent in the year to March. State spending will surge by a record in the second half, according to Macquarie Capital Securities (India) Pvt. Prime Minister Manmohan Singh is seeking to boost his Congress Party ahead of elections with more food aid and infrastructure investment,

“You will see the numbers come through in the second half and this probably is the time to get into the game,” Rakesh Arora, the head of research at Macquarie in Mumbai, said in an interview yesterday. “The risk-reward ratio is extremely good.”

Favorable Valuations

His 22,600 forecast for the Sensex is the second-highest among strategists surveyed by Bloomberg after the 23,000 estimate from Saurabh Mukherjea at Ambit Capital Pvt. Arora, whose July 2011 prediction that the Sensex may fall 15 percent proved prescient after the gauge sank that much in the next 11 weeks, said he favors Larsen & Toubro Ltd. (LT), India’s largest engineering company, and Mahindra & Mahindra Ltd. (MM), the nation’s biggest maker of sport-utility vehicles and tractors.

The Sensex fell 0.9 percent to 19,851.23 yesterday. The gauge’s valuation of 13 times analysts’ projected earnings during the next 12 months compares with 18 times when the index peaked in 2010, data compiled by Bloomberg show.

“Valuations are reasonably favorable,” Vetri Subramaniam, who oversees $2.3 billion as the chief investment officer at Religare Invesco Asset Management Co. in Mumbai, said in a telephone interview on July 11.

Compared with the rest of the BRIC markets, Indian shares look expensive. Brazil’s Ibovespa is valued at 10.5 times estimated profits, a 26 percent discount versus the Sensex. Russia’s Micex Index trades at 5.3 times and China’s Shanghai Composite Index at 8.5 times.

Weak Growth

The combination of rising import costs, India’s weakest economic expansion in a decade and slower progress with the government’s reform plan will restrain profit growth, according to CLSA Asia Pacific Markets.

Gross domestic product in Asia’s third-biggest economy expanded 5 percent in the year ended March, the weakest pace since 2003. Industrial output unexpectedly declined in May, while car sales dropped for eight straight months through June, reports showed last week. Steel consumption rose last quarter at the slowest rate in at least five years.

Singh’s biggest effort in a decade to open India’s economy was curtailed in recent weeks amid protests over alleged graft in government disrupted parliament, delaying bills to ease tax rules and open up more industries to foreign investment.

The rupee depreciated to a record 61.2125 per dollar on July 8 as speculation the U.S. Federal Reserve will pare back its bond-purchase program sparked capital flight from developing nations.

Market Overhang

The Sensex declined the most in two weeks yesterday after India’s central bank raised two interest rates and said it will drain cash from the financial system to stem the currency’s slide.

Foreign investors pulled the most money from Indian stocks in June since August 2011, and sold a further $929 million this month through July 15, data compiled by Bloomberg show. That pared net inflows this year to $12.4 billion.

“The economic slowdown has not been factored fully,” Mahesh Nandurkar, an analyst at CLSA Asia-Pacific Markets in Mumbai, said in an interview yesterday. “Earnings downgrades, depreciation of the rupee and some political uncertainty will be an overhang on the market.” He predicts the Sensex will end the year at 20,000.

The rupee’s decline is boosting revenue at some of India’s biggest companies. Infosys Ltd., the second-largest software exporter, surged the most in six months on July 12 and sparked a 1.4 percent rally in the Sensex after the company’s sales forecast in dollar terms beat analyst estimates.

Good Rains

Rainfall so far during the monsoon season, which began June 1 and accounts for more than 70 percent of the country’s annual rain, is the biggest for this time of year since 2001, according to the weather bureau’s website. Agriculture accounts for about 20 percent of the nation’s economy and 55 percent of the cropland doesn’t have access to irrigation, according to the farm ministry.

“The Indian economy is in the early stages of a recovery and this will drive earnings growth,”Mukherjea, the chief executive officer for institutional equities at Ambit Capital in Mumbai, said in an e-mail yesterday. Mukherjea, who predicts the Sensex will climb to 23,000, favors shares of automakers and oil and gas companies.

Per-share earnings in the Sensex will probably climb to 1,345 for the fiscal year ended March 31, versus 1,132 in the year-ago period, according to the average of seven strategist estimates compiled by Bloomberg.

Food Security

With a national ballot due before the end of May, Singh and Finance Minister Palaniappan Chidambaram are spending more to boost living standards for low-income voters in India, where World Bank data shows more than 800 million people live on less than $2 per day. India’s Cabinet approved a $21 billion-a-year program to provide cheap food to the poor on July 3.

Singh has formed a panel to “accelerate” infrastructure investments worth 1 trillion rupees ($17 billion), according to a July 15 release on the prime minister’s website. The panel, whose first meeting is due on July 19, will also clear a backlog of railways projects estimated at 2 trillion rupees.

“This year we will not compress expenditure,” Chidambaram told reporters in New Delhi on June 13. “Whatever is being provided in the budget will be made available to the ministries and departments. I have encouraged every one of them to accelerate spending.”

Limited Downside

The government plans to increase expenditure by 16 percent in the year to March, compared with a 9.7 percent gain in the previous fiscal year and 9 percent a year before that, data compiled from the government’s annual budget show. Spending in the six months to March will surge 30 percent, according to Macquarie Capital, the fastest pace since the firm started tracking the data for the financial year ended 1998.

Larsen & Toubro, with headquarters in Mumbai, may climb 13 percent in the next year, according to the average estimate of 45 analysts tracked by Bloomberg. Earnings are projected to increase 5.7 percent this year and another 15 percent in the 12 months to March 2015. The stock has slid 9.4 percent this year.

Mahindra & Mahindra, India’s most acquisitive manufacturer, has declined 2 percent since the end of December. The shares may rally 15 percent as earnings increase about 10 percent this year, according to analyst estimates compiled by Bloomberg.

“All the negatives have played out,” Macquarie’s Arora said. “The cost of going wrong is not too high.”

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

To contact the editor responsible for this story: Michael Patterson at mpatterson10@bloomberg.net

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