Q4FY13 Results Likely To Remain Weak

Rajnish Kumar
CEO
Fullerton Securities & Wealth Advisors

• POLITICAL PRESSURES - India has not been able to sustain its January momentum of FII flows because of political uncertainties clouding the investment climate. On the economic front, the government seems unable to deal with the mounting twin deficit.
• SECTOR PICKIN - Sector specific choices are limited in the present scenario. The current global and domestic set-up favours sectors like IT and Pharma at this point in time.

On a YTD basis, India has widely underperformed other emerging markets with the Nifty giving negative returns of -3.61% while countries like Indonesia (+14.62%), Philippines (+18.91%), Thailand (+13.08%), and Turkey (+9.14%) have done quite well. A sharp drop in the period February - March 2013 wiped off the strong gains made in January 2013 over some serious efforts by the government at policy reforms.

India is currently in this state largely owing to its own vulnerabilities caused by the twin deficits – fiscal and current account. Other countries have gained from capital flowing out of a subdued Europe. Some like Indonesia and Philippines have also gained from the massive 17 per cent drop in the Yen over the last six months as they stand to gain from cheaper imports from Japan. Globally, barring Europe, other developed markets are likely to do well. Both China and US economies are looking much better and will support the global markets.

India has not been able to sustain its January momentum of FII flows because of political uncertainties clouding the investment climate. On the economic front, the government seems unable to deal with the mounting twin deficit. Inflation is expected to remain high with food inflation constantly moving up due to a supply demand mismatch. These factors have a cascading effect on the Indian rupee that is expected to depreciate against the US dollar going forward.
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A higher deficit is created when the amount of imports exceeds the amount of exports. The interest rates will go down gradually and will remain at these levels for most part of the year. With inflation likely to flare up with a weaker rupee, bringing down interest rates may not be an easy option for the RBI. The headline inflation for the month of February 2013 stood at 6.84 per cent against 6.62 per cent in the month of January 2013 thus dampening the outlook for domestic currency.

In fact worsening macros can lead to a FII fund outflow which can lead to a sharp drop in the rupee further damaging the trade deficit.

After a reasonably positive budget, the markets had got some encouragement from the government’s intent of fiscal consolidation. However, the markets are likely to remain weak till the political climate improves. If the government gets back in the saddle firmly, the markets will move up from the current levels. They would now keenly track the second half of the Budget session of Parliament which begins on April 22 to see if it is able to pass important bills regarding land acquisition, food security, insurance and pension bills. Moreover, the RBI’s annual monetary policy review towards the end of April will give a further direction to the markets. The month will also see the Indian Meteorological Department coming out with its first forecast of the 2013 southwest monsoon. A positive news on the monsoon front can boost market sentiments.

The fourth quarter results for FY13 are likely to remain weak as consumption, which had driven the topline for some time, continues to be weak. We are likely to see a low single digit growth in profits with revenues growth also coming under a fair bit of stress. Cyclical sectors like the Auto, Metals, Industrials and Telecom will continue to witness an earnings downgrade.

Sector specific choices are limited in the present scenario. The current global and domestic set-up favours sectors like IT and Pharma at this point in time. However, for long-term investors there will be good stock picks across sectors in such a market. A long-term investor should continue to invest in blue chip stocks as the valuations are very attractive.

Fundamentals of the Indian economy continue to be strong and with the return of political stability, we will see a sharp pull back in the market. While Mid-Caps look attractive and can give very good returns, one can buy selectively but be cautious of tapping only those companies where the balance sheets are not too leveraged so that they can tide over this lean patch.