India’s Sensex Drops Amid Valuations Concern; Unilever Tumbles

Indian stocks retreated for the first time in four days amid concern the recent gains have outpaced the outlook for earnings growth.

The BSE India Sensitive Index, or Sensex, lost 0.6 percent to 19,981.57 at the close. The gauge’s 14-day relative strength index, measuring how rapidly prices climbed or fell, was 69.5 yesterday. Some investors see readings above 70 as a signal to sell. Hindustan Unilever Ltd. sank 3.3 percent after India’s biggest home-products maker increased royalty payments to its parent and profit missed estimates. GAIL India Ltd., the largest gas supplier, dropped for the first time in seven days.

The Sensex has risen 2.9 percent this year, after jumping 26 percent in 2012, as government measures to narrow the fiscal deficit prompted foreigners to invest a net $2.7 billion into local shares, almost twice the level than at the same time in 2012, exchange data show. Companies on the gauge are valued at 15.8 times estimated earnings, the most expensive among the BRIC nations, data compiled by Bloomberg show.

“On a price-earnings multiple basis, India doesn’t look that attractive” relative to other emerging markets, including China, Gary Dugan, chief investment officer for Asia and Middle East at Royal Bank of Scotland Group Plc’s wealth management unit, said in an interview today. “India will take its fair share of overseas flows but people will not chase stocks aggressively if market were to go up 10 to 15 percent in the first quarter.”

Brazil’s Bovespa Index is valued at 11.7 times estimated profit, Russia’s Micex Index at 5.6 times and China’s Shanghai Composite Index at 9.9 times. That compares with a multiple of 11 for the MSCI Emerging Markets Index, the data show.

Royalty Payment

Hindustan Unilever retreated 3.3 percent to 480.9 rupees, the lowest close since Aug. 8. Profit increased to 8.71 billion rupees ($162 million) in the three months ended December from 7.54 billion rupees a year ago, the company said in a statement today. That missed the 8.8-billion rupee median estimate in a Bloomberg survey. The royalty the company pays its parent will increase to 3.15 percent of revenue in steps through the year ending March 2018 from 1.4 percent, Hindustan Unilever said.

GAIL India plunged 4.7 percent to 369.95 rupees, ending a six-day, 6.5 percent rally. Tata Motors Ltd. lost 1.5 percent to 318.55 rupees, a third day of declines. State Bank of India Ltd., the nation’s biggest lender, lost 1.4 percent to 2,464.45 rupees, ending a three-day climb.

Aluminum maker Hindalco Industries Ltd. lost 2.4 percent to 119.75 rupees. Tata Steel Ltd., the biggest producer of the alloy, dropped 1.3 percent to 408.7 rupees.

Policy Measures

The Sensex climbed above 20,000 last week for the first time in two years as the government allowed refiners to raise diesel prices to cut fuel subsidies that have stoked the budget gap, adding to policy measures since September. The steps taken include opening industries such as retail and aviation to more foreign investment, reducing taxes on overseas borrowing and setting up a panel to speed up infrastructure projects.

The measures attracted $24.5 billion of foreign flows into domestic stocks last year, the highest among 10 Asian markets tracked by Bloomberg, excluding China.

“We have seen huge flows from September onwards and that tap is going to slowdown a bit,” Toral Munshi, head of India equity research at Credit Suisse Wealth Management, said in an interview to Bloomberg TV India today. “In the near term there might be a small correction. If the policy momentum continues, and with that if you get some earnings upgrades, then that will be the key driver for the market.”

Only two out of 11 Sensex companies that have reported December-quarter earnings have trailed forecasts. That compares with 40 percent of index firms in the three months ended Sept. 30, the same as for the three months ended June, data compiled by Bloomberg show.

The S&P CNX Nifty Index on the National Stock Exchange of India Ltd. lost 0.6 percent to 6,048.50. The India VIX index, which measures the cost of protection against losses in the Nifty, added 1.7 percent to 13.89. The BSE Mid-Cap Index lost 0.9 percent, the lowest level since Dec. 27.

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