June 3 (Bloomberg) -- Reliance Capital Asset Management Ltd., India’s second-biggest money manager, expects earnings at the nation’s biggest companies to expand more than 15 percent because of falling commodity prices and lower borrowing costs.
Profit growth in the year to March 2014 has the “potential of surprising” the 12 percent to 15 percent gain forecast by analysts on the “upside,” Sunil Singhania, head of equities at Reliance Capital Asset, said in an interview to Bloomberg TV India today. Singhania, whose mutual fund unit had $17 billion of assets as of March 31, said he favors drugmakers and software companies.
India’s S&P BSE Sensex advanced to more than a two-year high on May 17 as tumbling prices of oil and gold help trim the import costs of a nation that buys more than 80 percent of its crude from abroad and is the world’s top bullion buyer. Profit at just eight, or 27 percent, of the 30 companies in the Sensex have missed forecasts for the March quarter, compared with 43 percent in the three months ended Dec. 31 and 40 percent in the previous two quarters, data compiled by Bloomberg show.
“Fewer number of companies disappointed this March than in the last four quarters,” said Singhania, whose Reliance Growth Fund has beaten 98 percent of its peers over the past decade. “With declining commodity prices and falling interest rates things should start to improve on the bottom line from June.”
Singhania joins JPMorgan Chase & Co. in forecasting an improving outlook for Indian corporate earnings.
“We have seen the worst of the earning cycle downgrade,” Adrian Mowat, chief Asian and emerging-market strategist at JPMorgan, said in an interview to Bloomberg TV India on May 30.
Profits at companies including Hindustan Unilever Ltd., the Indian unit of the world’s second-biggest consumer-goods company, Mahindra & Mahindra Ltd., the largest producer of sport-utility vehicles, beat analysts’ estimates in the quarter ended March amid lower raw-material costs.
The Sensex measure has climbed 1 percent this year as overseas funds purchased a net $15.1 billion of Indian shares and a drop in commodity costs improved the outlook on the state of the nation’s public finances.
The Standard & Poor’s GSCI measure of 24 raw materials has slid 9 percent from its high this year reached in February as slowing growth in China crimped demand for commodities. Brent crude has declined 9.1 percent in 2013 and gold has plunged 17 percent. Declines in oil and gold may help cut India’s import costs by almost $7 billion in the 12 months to March 2014, Barclays Plc said in an April 17 note.
“India is in the best position,” said Singhania. “We have a surge in liquidity -- we need those dollars -- and we have soft commodity prices. For the first time in years we are seeing commodities soften despite a surge in liquidity, which points to the fact that commodities are fundamentally weak.”
Indian stocks are influenced by fund from abroad. Inflows climbed to a record $29.3 billion in 2010, making the Sensex the best performer among the world’s 10 top markets that year. The largest-ever outflow in 2008, during the global financial crisis, triggered the biggest annual slump in the gauge of 52 percent. Foreigners have been net sellers of Indian stocks in just two of the past 13 years, according to data compiled by Bloomberg going back to 2000.
“It is possible that in the near term flows might slow or turn negative but on an annual basis our view is that inflows will be quite strong,” said Singhania.
The weakness in the rupee may weigh on equity prices in the near term, he said. The Sensex retreated to a one-month low today, after tumbling the most in 14 months May 31, amid a drop in the rupee to an 11-month low to 56.7650. A weak currency fuels consumer prices and makes imports costlier for a nation whose current-account gap is at a record.
“Some uncertainty you are viewing in the market might be reflective of the” rupee’s move over 56, he said. “The rupee has not depreciated to that extent against other currencies, but still anything above 56 definitely causes a bit of concern.”
The Reserve Bank of India last cut the repurchase rate by 25 basis points on May 3 to 7.25 percent, extending this year’s decrease to 75 basis points. Governor Duvvuri Subbarao said May 14 the latest data showing inflation eased to a 41-month low in April will be factored into policy decisions on June 17. Asia’s third-largest economy grew a decade-low 5 percent in the year ended March 31, official data showed on May 31.
“We had a period of time where Indian growth was poor and inflation was high, and now that poor growth is translating into less inflation the central bank has a lot of flexibility to cut rates,” said JPMorgan’s Mowat.
Singhania said he favors drugmakers over consumer stocks because of valuations. The S&P BSE Fast Moving Consumer Goods Index trades at 31.1 times projected 12-month profits compared with 19.5 times for the S&P BSE India Healthcare Index. Pharmaceuticals accounted for 15.3 percent of Reliance Growth Fund’s assets on April 30, followed by lenders and beverage producers, data compiled by Bloomberg show.
Singhania said he also likes software makers, without naming any. The S&P BSE Infotech Index has climbed 10.4 percent in the past year and is valued at a price-to-earnings multiple of 15.6 times. The 50-stock CNX Nifty index has rallied 23 percent in the period and trades at 16 times reported earnings, data compiled by Bloomberg show.
“For the first time in the last eight to 10 years the IT sector is trading at a PE lower than the CNX Nifty index. It definitely makes sense to have it in the portfolio.”
Reliance Growth Fund, which held 47 billion rupees in assets at the end of April, has returned 29 percent annually in the 10-year period through May 31, compared with a 22 percent annual gain in the Sensex, data compiled by Bloomberg show.
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