Robust growth ahead for India Inc

Varun Goel
Head-Equity PMS, Karvy Private Wealth

May turned out to be a lack-lustre month for the markets with the Nifty declining by 3.3 per cent. The RBI’s more than anticipated hike in interest rate led to a dampening of the market sentiment. The FIIs withdrew around Rs 5,000 crore from the Indian markets. The Q4 earnings’ season has ended with more negative surprises than positive ones. Sectors like energy, PSU banks and real estate disappointed with their Q4 numbers. On the other hand, private banking, pharma and the IT space delivered a good set of numbers. What has been clearly visible is the margin pressure for engineering, construction and manufacturing companies due to an increase in the commodity prices and the rising interest rates.

Metal companies on the other hand benefited from the rise in commodity prices. Concerns are again emerging on the fiscal health of the peripheral euro zone countries. Greece has been finding it difficult to bring its budget deficit under control and the European and IMF officials are expected to announce a second bail-out package for Greece by the end of this month. Other countries like Italy, Portugal and Spain are also undergoing a debt crisis. Any misstep by the EU financial authorities on this issue can lead to a fresh round of risk aversion trade across the world. In the US, the Q1 GDP growth and employment numbers have continuously surprised on the negative side and the US economy might require a fiscal or monetary stimulus soon.

With a good monsoon season on the cards, we expect food inflation to come down. However, crude oil prices have not come down and have been hovering around USD 110/barrel for Brent crude. A partial passing over of this is expected with an anticipated increase in the diesel prices. This would put further upward pressure on the inflation numbers which could average around 8.5-9.0 per cent for the next six months. In an effort to bring down the headline inflation, the RBI has raised its policy (repo) rate nine times by a total of 250 basis points since March 2010 but the increasing fuel costs and commodity prices have kept the inflation above the acceptable levels.

The real estate and capital goods’ space could see moderation in demand due to this increase in the borrowing costs. Pharmaceutical and IT sectors are those which are relatively immune to inflation and interest rate pressures and would do well going forward. Since the beginning of this calendar year, Nifty has corrected by more than 9 per cent. Post this, the markets are trading at a very reasonable valuation of 14 times’ the FY12 earnings. Despite the expectation of an economic slowdown, the economy is still expected to grow at 7.5-8.0 per cent for FY12. There are short-term concerns like inflation, interest rates and global volatility but a large part of that has already been discounted by the market.

We look forward to Q1 earnings for FY12 starting in July to provide more clarity on the full FY12 earnings. The monsoon session of the parliament, also starting in July, could see some reform measures being announced. We expect a robust earnings’ growth of 17-18 per cent for FY12 which will drive equity market returns in the medium to long term.