Surges on liquidity despite investor caution that Indian market overvalued, downward revisions to earnings estimates
Driven by an abundance of liquidity and a big appetite for Indian stocks from both foreign and domestic investors, the Nifty on Monday crossed a new milestone to close at a record 10,153 points, up 67.70 points, or 0.67%. The NSE Bank Nifty breached the 25,000 mark to hit an all-time high of 25,105.35. So far in 2017, local institutions have bought stocks worth more than $7.2 billion, compared with foreign portfolio investors (FPIs) who have run up a tab of $6.67 billion. In 2016, FPIs bought stocks worth $2.9 billion while home-grown wholesale investors spent $5.6 billion. The Sensex surged 151 points to end the session at 32,423.76 points, a six-week high. 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 downwards 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 in1QFY18, 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 about1.5-2%, 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 (goods and services tax),” the brokerage noted.
It added that government expenditure can support GDP growth up to a point. Deutsche Bank observed that the profit for Nifty in Q1FY18 fell sharper than its estimates of a 6% decline, thanks to subdued domestic growth, an appreciating rupee and the GST hiccup. Nevertheless, foreign flows into Indian bonds and stocks remain strong as geopolitical concerns ease, ahead of the US Federal Reserve meet this week at which it is expected to leave interest rates untouched. The markets will watch to see whether the Fed given any indication it will trim its balance sheet.