India Profit Growth Curbed by Slowing Economy, Kotak Says

India’s slowest economic expansion in a decade is limiting profit growth at the biggest companies even as foreigners remain net buyers of the nation’s stocks, according to Kotak Institutional Equities.

Earnings-per-share for the 30 companies making up the benchmark S&P Dow Jones Sensex Index in the year ending March 31, 2014, will probably be 1,320 rupees, 2 percent below previous estimates, Sanjeev Prasad, co-head and senior executive director at Kotak, said yesterday in Mumbai. Profits grew 7.5 percent in the December quarter, missing an 11 percent projection, he said.

“We may have reached a bottom but I’m not sure whether we will see recovery any time soon,” Prasad said at the broker’s “Chasing Growth” investor conference. “Underlying trends in volume, margin, profitability and banking sector non-performing loans are very disappointing. Earnings downgrades are still taking place.” Kotak has been named the best local brokerage in the Asiamoney Brokers Poll for seven years through 2012.

Credit Suisse Group AG said Feb. 18 that its earnings growth forecast for the 50 companies on the CNX Nifty Index may drop to between 7 percent and 8 percent for the fiscal year ending March. India’s gross domestic product will rise 5 percent this year, below last year’s 6.2 percent and the least since the 4 percent increase in the 2002 to 2003 period, India’s statistics office said Feb. 7. Data last week showed factory output fell for a second month in December.

Government Borrowing

The government pared its annual borrowing program this week after Finance Minister Palaniappan Chidambaram curbed spending and raised $4 billion selling stakes in state-owned companies to pare the fiscal deficit. The moves are part of a wider policy overhaul since September to revive economic growth by further opening up Asia’s third-biggest economy to foreign investment.

Chidambaram, scheduled to present the federal budget this month, is under pressure to keep a pledge to narrow the deficit to 3 percent of gross domestic product in four years, from a targeted 5.3 percent for this fiscal year. Officials are trying to avert a ratings downgrade after Standard & Poor’s and Fitch Ratings said last year that they may demote India to junk status, citing the shortfall and a widening current-account gap.

“India will have to continue with the reforms it started in September and signal overseas investors and ratings agencies that fiscal consolidations will take place, and then take steps to revive the investment cycle,” Kotak’s Prasad said.

‘Inflection Point’

Policy measures have prompted overseas funds to buy a net $7.92 billion of local shares this year, extending last year’s net purchases of $24.5 billion that were the highest among 10 Asian markets tracked by Bloomberg, excluding China. Asian equity funds attracted $535 million in the week to Feb. 13, a 23rd week of inflows, Citigroup Inc. said in a Feb. 15 report.

“We are close to an inflection point in the earnings cycle and that will be key driver for Asian markets including India in the second half of the year,” Geoff Lewis, global market strategist at JPMorgan Asset Management in Hong Kong, said in an interview to Bloomberg TV India today. “We are maintaining our overweight stance on India.”

The Sensex trades at 13.9 times projected 12-month earnings, data compiled by Bloomberg show. That compares with a multiple of 10.3 times for the MSCI Emerging Markets Index. The Indian gauge closed at a two-year high on Jan. 25 and advanced less than 0.1 percent to 19,642.75 today.

“There is money flowing in on the back of strong global liquidity and India will get its fair share because the longer term prospects still look OK,” said Prasad. “Five percent GDP growth on a relative basis is better than what we are seeing elsewhere. India must play its part. It is not given that money will keep coming. Valuations are no longer cheap.”

Prasad said he holds more stock of oil and gas explorers and drugmakers than their weight in the benchmark. He prefers shares of Coal India Ltd., the world’s biggest producer of the fuel, NMDC Ltd., the nation’s largest iron ore producer, and utilities NTPC Ltd. and Power Grid Corp. because they may benefit from reforms to the industry.