The Sensex is now about 15 points away from the year?s high of 18,131. If the market has shrugged off India Inc?s indifferent performance in the June 2010 quarter, it?s probably because it?s expecting companies to play catch up in the rest of the year and thereafter. While stocks have reacted to bad numbers, the market remains resilient. That?s probably because the macro-environment remains friendly enough; a better fiscal situation, some reform on fuel pricing, the fact that the central bank isn?t in a rush to raise interest rates and prospects of a reasonably good monsoon have convinced investors that the numbers will come through.
Also, it?s many of the larger companies ? Maruti, Hero Honda, HUL, Cairn, Larsen and Toubro that have fallen short of the Street?s expectations. As brokerage CLSA points out, Sensex earnings (for results that are out so far) are up 8% year on year. Many of the smaller companies, however, like an Asian Paints or a Titan have managed to hold their own and there?s confidence that firms focussed on the home market will keep up the good work. In the financial services space too, it?s the relatively smaller Axis Bank that?s stolen the show rather than the larger banks.
For CLSA?s broader universe, while reported profits were expected to be up 26%, the actual numbers are about 2% lower. F or a sample of 1251 companies (ex-banks, financials and oil), studied by The Financial Express, the growth in the top line has been reasonably good at 23.6% but operating profit margins have been dented by nearly 340 basis points leaving the operating profit virtually flat with the result that the bottom line has risen just 10%. With disappointments outnumbering surprises 4:3, in the three months to June, CLSA observes that the estimated Sensex earnings, for 2011-12, have been trimmed by 2%. With the outlook for the developed world none too clear, there wasn?t really a likelihood of an upgrade to earnings, but there are certainly likely to be some downgrades now, perhaps in sectors such as metals.
Margins in the cement, real estate and power spaces have been under pressure. Banks, which have done fairly well in the June 2010 quarter to grow their bottom lines on the back of increased lending and the relatively low cost of funds, are expected to continue to do well as the economy chugs along and, with the investment cycle on an uptrend, so are capital goods.
So there?s no dearth of businesses to buy into, which is probably why money continues to pour into the Indian market; this is only the eighth occasion, Morgan Stanley points out, when foreign flows have been in excess of $3.5 billion a month, as they were in July at $3.8 billion. FII inflows for 2010 so far have crossed the $10 billion mark while domestic institutions have bought stocks worth just over $one billion.
In all this flood of money, the CNX Midcap has gained more than 13% plus since the start of the year, the CNX Nifty Junior has seen returns of close to 12 % while the Nifty has posted returns of just 4%. However, with I ndia trading above its five year trailing average and its 12-month trailing PE premium versus the EM at 49% at the end of July, the market?s looking pricey. Earnings need to play catch up fast.