Not So Fast on India Stock Rally as Profit Bar Too High, Says UBSBy and
March-quarter results can disappoint on cash ban impact
FY18 consensus earnings estimates can see further cuts
Gains that sent Indian stocks to a record are at risk of reversing as investors ignore the possibility of earnings disappointments in the wake of Narendra Modi’s currency clampdown, according to UBS Group AG.
Results for the March quarter have the “potential to surprise” as the full impact of the prime minister’s cash ban filters through, Gautam Chhaochharia, head of India research at UBS, said in an interview. “If the fourth quarter disappoints, which we think it will, then that is an important thing to watch out for.” His year-end target of 8,800 for the NSE Nifty 50 Index implies a drop of about 3 percent from Wednesday’s close.
Stocks climbed to a record last week after Modi’s resounding victory in state elections was taken as a referendum on his economic policies including the junking of high-value currency notes in November. While the move disrupted businesses, the rally drove India above Japan as the most expensive in the region. Investors have show little concern for risk even though the Nifty’s estimated price-earnings ratio is the highest since 2010.
“The markets are trading at all-time-high multiples and are pricing in a lot, or expecting reforms to continue and growth to come back fairly quickly,” Chhaochharia said. “The risk-reward is definitely not attractive.”
Skeptics like Chhaochharia are becoming harder to find as foreign and local investors pile into equities and analysts predict further gains. The S&P BSE Sensex will climb to 32,000 by year-end, up 10 percent from current levels, according to a survey of traders and investors by Bloomberg News on March 14, three days after Modi won the state polls. Citibank, which previously forecast the Sensex to reach 30,000 by September, now sees the gauge at 31,500 in December.
Overseas investors have plowed a net $3 billion into Indian equities in March, the biggest monthly inflow in a year, while mutual funds have been buyers for seven months through February. The liquidity-aided euphoria saw a department store chain double in its trading debut on Tuesday, and an exchange-traded fund of state companies on Friday got bids for about four times the target.
While bulls say Modi’s victory has improved prospects for continuation of his reform agenda, Chhaochharia says the market overestimated the strength of the recovery from the cash ban because of better-than-expected earnings for the December quarter. Credit demand and fuel usage has slowed, while two-wheeler and truck sales are still muted, he wrote in a March 14 note.
“There is no debate in our mind that November-December were impacted because of the liquidity crunch,” he said. Company results were probably buoyed by sales being brought forward in those two months, which may unwind in the current quarter, he said.
Net income at companies in the Nifty will expand 12 percent in the year ending March 2018, compared with consensus expectations of 19 percent growth, he said. This leaves scope for a further reduction in next year’s estimates, he said.
The Nifty, which closed at a life-time high on Friday, has lost momentum this week amid a drop in global equities. The gauge fell for three days through Wednesday, the longest run of losses since December. It gained 0.6 percent to 9,086.3 on Thursday.
“Consensus earnings growth expectations are too high. We expect further cuts,” he said.
— With assistance by Santanu Chakraborty, and Abhishek Vishnoi