India’s Sensex Retreats From One-Year High on Earnings Concern

  • Dr. Reddy’s slides as 1Q net slumps; Maruti declines on sales
  • Foreigners buy $1.2b of shares in July, surpass June’s $771m

Indian stocks dropped as concern mounted that the rally that pushed up the benchmark index to near a one-year high on Monday isn’t supported by corporate earnings.

Dr. Reddy’s Laboratories Ltd. tumbled the most in eight months after the drugmaker’s first-quarter group net income slumped 76 percent. Maruti Suzuki India Ltd. slid the most in a month after its June-quarter results showed operating margin narrowed. Motorcycle maker Hero MotoCorp Ltd. retreated the most in six weeks. State Bank of India and ICICI Bank Ltd. were among the worst performers on the S&P BSE Sensex.

The Sensex lost 0.4 percent at the close in Mumbai. The gauge’s 22 percent rebound from a low in February amid persistent inflows from overseas funds has sent its valuations to a 15-month high. That makes it prone to declines if the recovery in company earnings fails to gather steam. Six of the 10 firms in the index that have reported results so far have disappointed investors.

“The fall we saw towards the end of the day was because some of the earnings were not up to the mark," Rajesh Agarwal, the head of research at AUM Capital Market Pvt, said by phone from Kolkata. “A correction is due, but any drop would be a buying opportunity in the medium term as we’ve seen continuous buying by foreign investors. That is driving the market up.”

The Sensex is set for its fifth monthly climb, the longest run of advances since August 2014, as foreigners bought $1.2 billion of shares in July amid speculation emerging-markets will benefit from additional stimulus following Britain’s vote to exit the European Union. Global investors have been buyers of Indian shares for five months, the longest stretch since November 2014, as above-average rain improves the outlook for economic growth and food prices.

Still, high valuations are damping investor enthusiasm in the near term. For instance, the rollover rate in July futures tied to the NSE Nifty 50 Index was at 41 percent at 5.10 p.m. in Mumbai. That compares with a six-month mean of 43 percent two days before expiry, data compiled by Bloomberg show. In India, monthly derivatives contracts expire on the last Thursday of the month.

“Not many people are willing to take big bets as valuations are high,” said Kishor Ostwal, managing director at CNI Research Ltd., an equity research provider in Mumbai. “The market is poised for a correction in the next few days.”

Earnings Scorecard

Dr. Reddy’s tumbled the most since Nov. 26. Its first-quarter group net income slumped 76 percent to 1.54 billion rupees. Sales were 31.6 billion rupees compared with 37 billion rupees a year earlier.

Maruti Suzuki fell 1.7 percent, paring this month’s gain to 6.8 percent. Net income climbed 23 percent to 14.9 billion rupees ($221 million) in the three months ended June. Car sales rose 2.1 percent from a year earlier, but fell 3.3 percent compared with the period ended March. Exports slid to 26,103 units from 35,635 a year earlier. Ebitda margin narrowed to 15.1 percent from 15.6 percent in previous quarter, and 16.6 percent a year earlier.

“Fall in exports and concerns on local volume growth are the key factors weighing on the stock,” Md. Shaukat Ali, an analyst at Quantum Securities Ltd., said by phone. “Also, the yen appreciation is likely to hurt Ebitda margins by around 30-40 basis points in the next two quarters."

Hero MotoCorp retreated 2.1 percent, the most since June 9. State Bank of India fell 1.4 percent and ICICI Bank plunged 2.6 percent.

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