Bad breadth: Nifty at new high but broader market weak

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Published: November 29, 2019 2:06 AM

Since July 5, Nifty has risen 2,514 pts; of this, 10 stocks have gained 2,623 pts

Nifty, Reliance Industries, Bharti Airtel, Vodafone-Idea, Avendus Capital, Nomura, Sensex, FPIOn Thursday, the Nifty closed at a record high of 12,151.15 even as Reliance Industries became the first Indian company to be valued at Rs 10 lakh crore.

The economy may be slowing to new multi-year lows, loan growth may be at its most sluggish and earnings growth subdued, but powered by a handful of stocks, the benchmark stock indices are soaring. On Thursday, the Nifty closed at a record high of 12,151.15 even as Reliance Industries became the first Indian company to be valued at Rs 10 lakh crore. Since July 5, 2017, Nifty has gained 2,513 points but the rally has been fulled by just 10 companies which have gained 2,623 points together.

The broader markets remain weak as most companies reported lacklustre results in Q2FY20 compelling analysts to downgrade earnings forecasts. For a sample of 1,714 companies (excluding banks and financials) net profits in Q2FY20 fell 11.5% year-on-year even after disregarding the exceptional losses of Bharti Airtel and Vodafone-Idea. For the first time in many years, revenues fell by 2.4% y-o-y.

Operating profit margins contracted nearly 300 bps y-o-y.  Analysts at Jefferies noted, earnings estimates have come off by 3% in the last month alone even though the corporation tax rate has been lowered.

Moody’s said on Thursday the credit profiles of ‘rated companies’ are unlikely to improve significantly over 2020-2021, due to elevated debt levels, weakening profitability and the continued economic slowdown, which is pressuring both investment and consumption.

FPIs remain buyers having invested a chunky $3 billion in equities in November. That’s despite India being an expensive market; the Sensex now trades at a price to earnings multiple of nearly 20 times the estimated 12-month forward earnings. The Kospi is way cheaper and trades at 11.6 times while the Shanghai composite trades at 10.63 times.

Andrew Holland, CEO at Avendus Capital, cautioned the economy was not out of the woods yet, adding that while the government has taken steps to revive the economy, it is not immediately picking up. “The stronger or the bigger companies would get bigger. Once economy starts recovering, we might look at the broad-based rally,” Holland said.
India will report GDP numbers for the September quarter on November 29 and most economists believe growth it would be sub 4.7% year-on-year. If growth falls to sub 4.3% — Sonal Varma of Nomura has forecast 4.2% y-o-y — it would be the lowest since 4.3% y-o-y reported in FY13.

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