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Morgan Stanley Sees Profit Surprise for Nifty: Corporate India

June 07, 2013

Earnings growth at India’s largest companies may exceed analysts’ forecasts as input and interest costs drop and the economy recovers from the slowest expansion in a decade, Morgan Stanley and Reliance Mutual Fund predict.

Profit for the 50 companies on the CNX Nifty Index (NIFTY) may expand about 16 percent to 18 percent in the year to March 31, said Ridham Desai, managing director and head of India research at Morgan Stanley. Net income growth at the 30 firms comprising the benchmark S&P BSE Sensex has the “potential of surprising” the 12 percent to 15 percent increase forecast by analysts, according to Sunil Singhania, head of equities at Reliance Capital Asset Management Ltd.

Expectations of a rebound in earnings have risen after inflation slowed to 41-month low in April and as the Reserve Bank of India cut interest rates last month for a third time this year, extending the only reduction in benchmark borrowing costs in 2013 in the BRIC group of the largest emerging nations. India’s economy grew 4.8 percent in the January-March quarter from a year earlier, up from a revised 4.7 percent the previous quarter, data showed May 31.

“The macro is a lot better, inflation is coming off and growth is getting better,” Desai said in Mumbai on June 4. “The earnings trajectory has been getting slightly better in the last two to three quarters. We’re seeing a big recovery in earnings over the next 12 months, a pretty counter-consensus view. We’ve seen the bottom.”

‘Fewer Disappointments’

Profit at just eight, or 27 percent, of the 30 companies in the benchmark S&P BSE Sensex (SENSEX) missed forecasts for the March quarter, compared with 43 percent in the three months through December and 40 percent in the previous two quarters, data compiled by Bloomberg show.

“Fewer number of companies disappointed this March than in the last four quarters,” Singhania of Reliance Mutual Fund, the nation’s second-biggest money manager with $17 billion in assets, said in a June 3 interview. “With declining commodity prices and falling interest rates things should start to improve on the bottom line from June.”

The Sensex has jumped 7.6 percent from a seven-month low on April 9 as inflation eased and prices of oil, India’s biggest import, fell. The Standard & Poor’s GSCI (SPGSCI) gauge of 24 raw materials has fallen about 7.8 percent from this year’s high in February as slowing Chinese growth hurt demand for commodities.

Brent crude has slid 6.7 percent in 2013 while gold has lost 16 percent. Declines in oil and bullion may help reduce India’s import costs by almost $7 billion in the year to March 2014, Barclays Plc said in an April 17 note.

‘Worst Over’

“The worst is over on an aggregate” for company profits, Rukhshad Shroff, an investment manager and India country specialist at JPMorgan Asset Management, said in an interview broadcast on Bloomberg TV India today. “We have seen a very savage downgrade in earnings over the last two years.”

Still, a further drop in the rupee, which yesterday fell to 57 to a dollar for the first time in a year, may increase the cost of importing raw materials.

The currency “can be volatile given what’s happening globally and to other emerging market currencies,” Sam Mahtani, who oversees about $5 billion as director of emerging markets at F&C Asset Management Plc, said in an interview to Bloomberg TV India yesterday. Should inflation accelerate “there could be little bit more pressure on the currency.”

Profits at companies including Hindustan Unilever Ltd. (HUVR), a unit of the world’s second-biggest consumer-goods company, and Mahindra & Mahindra Ltd. (MM), the largest producer of sport-utility vehicles, exceeded estimates in the March quarter, helped by lower raw-material costs.

‘Margin Expansion’

“The key takeaway from the latest quarter is that margins are improving and that is likely to continue” as interest-rate cuts pare companies’ borrowing costs, Desai of Morgan Stanley said. “Margin expansion will be the key driver of earnings.”

The aggregate Sensex operating profit margin increased 20 basis points from a year earlier to 16.6 percent in the three months ended March after narrowing for the past three quarters, Bank of America Corp. wrote in a report dated June 5.

The brokerage still predicts per-share earnings for the 30 Sensex firms to grow 8 percent to 1,260 rupees in the year ending March 2014, compared with the consensus estimate of a 14-percent expansion, according to the report.

The Sensex has risen 18 percent in the past 12 months, the best performance among benchmark stock indexes in the BRIC group that includes Brazil, Russia and China. The Indian gauge trades at 13.5 times 12-month projected profits, about 24 percent less than its valuation in November 2010 when the measure rose to an all-time high, data compiled by Bloomberg show.

GDP Outlook

“Valuation is not at all a problem for the market and most of our valuation indicators are suggesting pretty strong returns for equities,” Morgan Stanley (MS:US)’s Desai said. The bank has a year-end target of 23,000 for the Sensex, he added. The gauge climbed 0.8 percent to 19,679.50 at 12:14 p.m.

Morgan Stanley expects India’s gross domestic product to expand 6 percent in the 12 months to March. GDP climbed a decade-low 5 percent in the year ended March, below the 10-year average of about 8 percent, official data showed May 31.

The Sensex climbed to more than a two-year high on May 17 as foreign funds accelerated purchases of Indian shares after central banks from Europe to Australia cut borrowing costs to bolster economic growth, boosting demand for emerging-market assets, and as the drop in commodity costs improved the outlook on the state of India’s public finances.

‘Best Position’

Foreigners have bought a net $15.3 billion worth of Indian shares in 2013, a record for the period and the second-largest among 10 Asian markets tracked by Bloomberg, behind Japan. They purchased a net $3.8 billion of stock in May, the most in three months, data compiled by Bloomberg show.

“India is in the best position,” said Singhania, whose Reliance Growth Fund (RELGROF) has beaten 98 percent of its peers over the past decade. “We have a surge in liquidity -- we need those dollars -- and we have soft commodity prices. For the first time in years we are seeing commodities soften despite a surge in liquidity, which points to the fact that commodities are fundamentally weak.”

Falling input costs will lead the revival in earnings, according to Sundaram Mutual Fund, which manages $2.6 billion of assets.

“The recovery, initially, might be more bottom line led as you see the benefits of lower commodity prices coming through to the margins,” S. Krishnakumar, head of equities at Sundaram Mutual, said by phone on June 5 from Chennai in Southern India.

To contact the reporter on this story: Shikhar Balwani in Mumbai at sbalwani@bloomberg.net; Rajhkumar K Shaaw in Mumbai at rshaaw@bloomberg.net

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net.


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