Biggest Profit Upgrades Since 2007 Boost Stocks: Corporate India

India’s stock analysts are raising profit estimates for companies in the S&P BSE Sensex at the fastest pace since 2007 amid growing confidence Asia’s third-largest economy will rebound from a decade-low expansion.

Projections for earnings growth for the next 12 months rose 9 percent last quarter, the most since end-2007, and climbed another 0.5 percent in January, according to data compiled by Bloomberg. Analysts predict a 31 percent profit gain for companies in the Indian gauge in the next 12 months, versus 20 percent for the MSCI Emerging Markets Index.

Higher net incomes at companies from Hindustan Unilever Ltd. to Infosys Ltd. may help extend a rally in shares that sent the Sensex to a record on Jan. 23, according to Birla Sun Life Asset Management Co. and Bajaj Allianz Life Insurance Co. The nation’s $1.8 trillion economy, which grew at the weakest pace in a decade in the year ended March 2013, will probably accelerate in the next fiscal year, the central bank forecasts.

“Earnings growth seems to have bottomed out,” Hiren Ved, the chief investment officer at Alchemy Investment Management Ltd., which oversees $350 million, said in an interview yesterday. “You could see a double-digit return from the market this year, if earnings growth picks up.”

Seventy eight percent of the 18 Sensex companies that posted earnings for the quarter ended Dec. 31 so far have beaten or matched analyst estimates, data compiled by Bloomberg show. That compares with 70 percent in the previous quarter and 47 percent in the quarter ended June 30.

Unilever, Bajaj

Hindustan Unilever, the nation’s-biggest consumer-goods company, reported a 22 percent jump in fiscal third-quarter profit, while Larsen & Toubro Ltd., the largest engineering company, and two-wheeler maker Bajaj Auto Ltd. both posted an 11 percent increase.

Infosys, the nation’s second-biggest software exporter, raised its sales forecasts after posting higher-than-expected earnings on an increase in global information-technology spending. Larger rival Tata Consultancy Services Ltd. predicted a “stronger” year ahead.

The Sensex has slipped 5.4 percent from its high on Jan. 23 amid a selloff in emerging-market currencies triggered by political turmoil from Turkey to Thailand, China’s economic slowdown and reduced monetary stimulus in the U.S. Reserve Bank of India Governor Raghuram Rajan unexpectedly raised interest rates on Jan. 28 to fight inflation after the rupee weakened. The stock gauge was little changed at 20,211.93 in Mumbai today.

Rally Roadblocks

Stimulus reduction by the Federal Reserve and political uncertainty before Indian elections due by May are the biggest roadblocks to a rally in stocks, according to Ambit Capital Pvt.

The Fed said on Jan. 29 it will cut monthly bond purchases by $10 billion to $65 billion, paring a record stimulus plan that had fueled capital inflows into higher-yielding emerging markets. Indian opinion polls signal the possibility of an unstable coalition, with the ruling Congress and opposition Bharatiya Janata Party struggling for a majority.

Foreign investors sold $12.8 million of domestic stocks in January, the first outflow in five months, according to data compiled by Bloomberg. They bought $20 billion in 2013, the most in Asia after Japan, the data show.

“Any rally in the market will be after the elections,” Saurabh Mukherjea, chief executive officer for institutional equities at Mumbai-based Ambit Capital, said in an interview. He expects the Sensex to climb to a record 24,000 by year-end, 19 percent above today’s closing level.

India PMI

Signs of improvement in the economy will help lift shares, Mahesh Patil, co-chief investment officer at Birla Sun Life Asset Management, which has $13.8 billion, said in an interview to Bloomberg TV India on Jan. 28.

India’s manufacturing activity in January expanded at the strongest pace since March 2013, driven by faster growth in exports and domestic orders, according to HSBC Holdings Plc and Markit Economics purchasing managers’ index released yesterday. The index climbed to 51.4 from 50.7 in December. A PMI reading above 50 signals expansion.

The economy will probably grow between 5 percent and 6 percent in the year to March 2015 if inflation slows, versus “a little below” 5 percent this year, the RBI said Jan. 28. Price gains in India averaged about 10 percent in 2013.

While consumer-price inflation cooled to 9.87 percent in December from a two-year high of 11.2 percent in November, the pace is the fastest in a basket of 17 Asia-Pacific economies tracked by Bloomberg. The RBI forecasts retail inflation will exceed 9 percent in the three months ending March, and range between 7.5 percent and 8.5 percent in the same period next year. Rajan, who raised the policy rate by 25 basis points to 8 percent on Jan. 28, said a further increase isn’t anticipated as long as price pressures subside as projected.

‘Bottoming Out’

“A lot of the negatives we saw last year are bottoming out, and this year, we expect some of them to improve,” Birla Sun Life’s Patil said in an interview with Bloomberg TV India on Jan. 28. Patil last month added shares of companies tied to the economy including Coal India Ltd., the world’s top producer of the fuel and Power Grid Corp., India’s electricity distributor, data compiled by Bloomberg show.

The Sensex is valued at 12.7 times projected 12-month profits, versus 8.9 times for the MSCI Emerging Markets Index. The Indian gauge will probably climb to 23,200 by the end of the year, 15 percent higher than today’s close, according to the average of eight analysts’ predictions compiled by Bloomberg in December.

“India will come out of the slowdown in six months,” Sampath Reddy, the chief investment officer at Bajaj Allianz Life Insurance Co., which manages $6 billion and has been buying shares of capital-goods companies, said in an interview yesterday. “We are bullish on the markets.”

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