Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

It will soon be time for companies to start telling the world how well or badly they fared in the third quarter. Nowhere in Asia are hopes as stretched as in India, where analysts are predicting a 9 percent increase in earnings from the previous three months. That optimism, which has made India the region's bubbliest market, could be a recipe for disappointment.

High Hopes
Companies in Nifty, India's benchmark index, are expected to post best earnings growth in 24 quarters
Source: Bloomberg

Considering that such profit growth was last seen in 2010, when the aftershocks of the global financial crisis were beginning to recede, investors are betting on a somewhat miraculous turnaround in India's corporate fortunes.

The 25 percent rally in the benchmark Nifty index since just before the federal government's annual budget in February is already looking ready to lose some steam. Fewer than 4 percent of the 50 stocks in the gauge hit new 52-week highs on Wednesday, compared with 31 percent on Sept. 6. Six out of 10 stocks are trading above their 50-day moving average price; back in April, eight to nine were in that category.

A Tad Tired
Fewer stocks in India's equity benchmark are hitting 52-week highs now than just two weeks ago
Source: Bloomberg

To analysts, shrinking market breadth is a bearish signal. But money is still piling in. Global investors have taken $350 million this month out of Indonesia, and purchased almost $770 million of Indian stocks, taking their tally for the July-September period to almost $4 billion. That's the most optimistic buying by foreigners in six quarters.

Granted, a lot of the bullishness is underpinned by monetary policy. Speculation about an interest-rate cut next month has pushed 10-year government bond yields to near a 2009 low, and is fueling demand for equities.

Still, there's much that can go wrong this earnings season. For one thing, banks, which may finally be coming to grips with their bad-loan problem, could struggle to make money. With large corporate borrowers continuing to deleverage, credit growth is anemic. Lenders are hoping that their outsize investments in government bonds (plus margins on buoyant retail loans) will be sufficient to make provisions for soured credit, and still leave enough to keep shareholders happy. That's a heroic assumption.

The other industry in the grip of a bullish frenzy is autos. Carmakers and motorcycle manufacturers are piling up inventory ahead of next month's festive season, but truck sales are falling again.  

Trucks Going South
Revival in India's commercial vehicle demand didn't last
Source: Bloomberg, Society of Indian Automobile Manufacturers

It's also doubtful that large Indian industrial companies, such as Larsen & Toubro, are witnessing much in the way of new order flows. Nevertheless, stalled projects are getting restarted, and that's probably reflected in a post-monsoon recovery in cement prices in several parts of the country.

However, if there's some pricing power in cement, there's none in telecoms. The entry of a deep-pocketed new player is leading to steep discounting in data charges, while revenue from voice is facing an existential threat.

Bubbling Over
India's benchmark index Nifty is the most overvalued in Asia*
Source: Bloomberg
*Valuation score calculated as z-scores of each index relative to the mean score of the index basket. The score is a composite measure, comprising earnings-to-price ratios, book-to-price ratios and dividend yield.

Based on price-to-earnings and price-to-book multiples as well as dividend yields, India is Asia's most expensive market. More than anything else, it's the weight of investors' own expectations that could trip them up.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andy Mukherjee in Singapore at

To contact the editor responsible for this story:
Matthew Brooker at