With foreign portfolio investors (FPIs) continuing to take risk off the table, both the Nifty and the Sensex fell for the sixth straight session on Tuesday. FPIs have offloaded stocks worth $1 billion in September on the back of sales to the tune of $1.7 billion in August. Although domestic institutions remain buyers, both benchmark indices have recorded a cumulative loss of 2.5% over the last six sessions. Over the last five sessions, close to Rs 4.5 lakh crore of investor wealth has been eroded. On Tuesday, the Sensex closed at 31,599.76 points, down 26.87 points or 0.08 %, marking its longest losing streak since December 2016. The total market capitalisation of BSE listed companies at the end of the session was Rs 132. 34 lakh crore. Geopolitical tensions in the region apart, foreign funds are believed to be booking profits as they believe the Indian market is now hugely overvalued and earnings are expected to grow at a very sedate pace.
With the economy slowing considerably — GDP grew at just 5.7% year-on-year in the June quarter — there’s little chance of it clocking a 7%-plus growth in FY18, say economists. Reports that the output of foodgrain for the kharif season would be slightly lower than in 2016 has also dampened sentiment, as it might cap rural consumption. So far the talk about additional stimulus to the economy to add momentum to growth hasn’t been convincing enough. While the government announced a programme to electrify 40 million households by December 2018, analysts pointed out that discoms were cutting power supplies to connected households by 1-19 hours since it was not remunerative. As such they felt the new scheme might not really turn out to be effective. Brokerages have been expressing caution the Indian market is overvalued, trading at close to 20 times one-year forward earnings, well above its long-term historical valuations of around 15 times. Moreover, they have also flagged the downward revisions to earnings estimates.
“There is a clear and present risk to the earnings turnaround in FY19, as consumption, which has been the sole driver of growth, will not likely be strong enough due to weak fiscal push and job growth The capex cycle remains nascent and limited to pockets of infrastructure,” Macquarie wrote in a report. Net profits for the Nifty set of companies fell around 11% year-on-year in Q1FY18, disappointing the Street. “Consensus Nifty FY18 EPS growth now stands at 11% year-on-year and we continue to believe over the next two quarters this may fall to single digits,” Credit Suisse wrote.
Profits for FY18 are now expected to grow by just about 1.5-2%, according to Kotak Institutional Equities, following the earnings downgrades in several sectors such as banks, metals & mining and pharmaceuticals. “We do not rule out further downgrades if the economy fails to recover quickly from the temporary disruption arising from demonetisation and implementation of GST,” the brokerage noted. It added that government expenditure can support GDP growth up to a point. Deutsche Bank observed that the profits for Nifty in Q1FY18 fell sharper than its estimates of a 6% decline, thanks to subdued domestic growth, an appreciating rupee and the goods and services tax hiccup. While FPIs have been continuously booking profits, domestic institutional investors have remained buyers. In August, they shopped for stocks worth $2.4 billion, cushioning the market to some extent against sales by foreign investors. So far in September, again they picked up shares worth $1.8 billion. Between January and September 26, they have purchased equities worth $8 billion against FPIs’ purchase of $6.1 billion during the same period.