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Pressures prevail on the markets

| 9/12/2011 5:48 PM Monday

Rakesh Goel
Senior Vice President - Bonanza Portfolio


Considering the European debt crisis and recessionary fears in the US, the Indian market looks good to invest in from the perspective of a one to two year timeframe. According to EPFR, investors worried about a weakening global economy have rushed to buy stocks of countries with higher credit ratings, such as Germany, Canada and Switzerland.

As for India Inc.'s Q1 FY12 performance, we feel that though aggregate sales for Q1 have shown a robust 32 per cent YoY growth, they have declined two per cent on a QoQ basis. The YoY growth has been in line with the previous quarters, averaging between 20 and 30 per cent. An analysis of revenues shows that demand continues to be strong. Domestically, the RBI’s tighter monetary policy regime continues to squeeze the margins of India Inc. Operating profits, despite growing 24 per cent YoY, declined 12 per cent QoQ, whereas the bottomline has increased by over 28 per cent on a YoY basis, but has declined 13 per cent QoQ. The decline in profitability indicates that corporate houses were unable to pass on the increased costs fully to the end users.

Margins have come under considerable pressure during the quarter, due to repeated hikes in interest costs by the RBI and an increase in input costs for the industry. The operating margin, which has been averaging around 18 per cent for the last three quarters, declined to 16.3 per cent. The PAT margin, which was fluctuating between 11.2 and 12.2 per cent, declined to 10.8 per cent for the same period.

Despite the RBI maintaining a hawkish stance on inflation and increasing interest rates numerous times in the last 12 months, inflation continued to inch upwards unabated. Right now, inflation is the biggest concern plaguing the Indian economy. The latest food inflation figure has inched past the psycho-logical barrier of 10 per cent, reaching 10.05 per cent. GDP growth for Q1 FY12 has come in at 7.7 per cent, lower than 8.6 per cent (YoY). All eyes are on the RBI, and its stance in the upcoming meeting scheduled for 16th September, 2011. Interest rate-sensitive sectors like auto, bank, realty and capital goods are likely to be adversely affected, and will underperform the market for the time being.

Global markets are reeling under one problem or the other. The Euro zone markets are facing headwinds in the form of sovereign debt crises threatening to engulf even bigger economies like France and Italy. American markets are faced with the possibility of an economic slowdown, leading to a recession in the world’s biggest economy. All in all, equity markets world over are currently trading under sideways to a downward trend, while precious metals like gold are gaining on investors’ appetite for safety.

Going forward, corporate performance for Q2 FY12, along with the RBI’s monetary stance to be unveiled at its policy meeting on the 16th September, 2011, are two factors that are likely to influence the market trend in the coming months. We remain bullish on sectors like health-care, FMCG, paints, pharmaceuticals and media. We believe that investors should look for companies with stronger reserves and surplus on their balance sheets. These are generally better placed to deal with an uncertain environment. One should start buying fundamentally strong defensive stocks only when there is some sign of stability in the market. Companies with greater European and US exposure should be avoided, as these regions are undergoing an economic upheaval. The best method to invest in the current market scenario is through an SIP in fundamentally strong stocks.

 

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