Corporate profits in Q3FY19 have been more than disappointing with a host of heavyweights, including Tata Motors and Vodafone-Idea, reporting large losses.
As many as 59 of the BSE-500 stocks slumped to 52-week lows on Monday, exacerbating the one-year long bearish trend in India’s stock markets.
Weak corporate earnings for the December 2018 quarter and the uncertain environment ahead of the general elections are prompting investors to take risk off the table. Last Friday, the number of stocks with a market capitalisation of Rs 1,000 crore or more hit a two-year low, in a reflection of how poorly the majority of stocks have performed. Indeed, flows into equity schemes of mutual funds have been sluggish in December and January as returns on most schemes have been very poor.
Corporate profits in Q3FY19 have been more than disappointing with a host of heavyweights, including Tata Motors and Vodafone-Idea, reporting large losses. While revenues have risen reasonably well, higher expenses have eaten into profit margins leaving the growth in net profits very small. With demand for consumer goods being subdued and cash flows under pressure, companies are feeling the pinch.
Sales of passenger vehicles fell for the third straight month in January, data from SIAM (Society of Indian Automobile Manufacturers) showed. While the Reserve Bank of India (RBI) adopted a dovish stance trimming the repo rate by 25 basis points last Thursday, investors remain unconvinced that loan rates will trend down meaningfully given the large extra budgetary borrowings by the government. The anticipated global slowdown could further hurt India’s already faltering exports.
The indices have gained in value, thanks to just a handful of stocks, including Reliance Industries (RIL), Infosys, HDFC Bank, Tata Consultancy Services (TCS) and HDFC. They have contributed about 970 points to the Nifty rally of around 400 points since January 2018 with the remaining constituents giving negative returns.
Vedanta and Coal India are among the biggest losers; the market value of Vedanta has more than halved to Rs 56,539 crore in the last one year, while Coal India has seen an erosion of Rs 50,497 crore.
“Lower oil prices have created a positive environment for India, but we are downbeat on the economic outlook as we expect the economy to transition from a growth sweet-spot in 2018 to a soft patch in 2019,”economists at Nomura wrote recently. “In particular, we expect the slowdown to worsen in H1 2019 to around 6.2%, from a peak of 8.2% in Q2 2018 before staging a recovery to 7.2% in Q4 2019,” they added.
The broader BSE-500 index, which represents nearly 94% of the nation’s market capitalisation, has given up more than 2% between January and now. The index had lost 3.1% in 2018 and has corrected 10.3% from its August highs.
Among the BSE-500 pack, Thyrocare Technologies and Graphite India plunged the most on Monday, after both the firms reported subdued numbers for the quarter ended December 2018. Share prices of both the companies slid 10% each. With Monday’s fall, the stock of country’s electrode maker — Graphite India — has come off 23% in the last seven sessions. The company reported weak numbers for the quarter ended December, 2018 which was impacted by higher-than-expected operating costs (especially needle coke) and lower than expected volumes.
While shares of National Aluminium declined about 9%, shares of GIC of India and Minda Industries declined 6.7% each. The stock of Mahindra & Mahindra fell over 5% to post its biggest single day drop in nearly four months.
Jefferies, which reduced M&M’s target price by 9.3% to Rs 780, observed, “Implementation of BS-6 emission rules in all vehicles to be a drag.” The brokerage has cut its FY19-21 estimates to account for weaker tractor and light commercial vehicle volumes. Meaningful earnings growth has eluded corporate India for three years now and private sector investments remain subdued.
The negative sentiment rubbed off on all the sectoral indices. Of the 19 sectoral indices, all barring BSE IT and BSE Teck posted losses on Monday with BSE Healthcare and BSE Energy falling over 1.5% each. The overall breadth of the market was sharply negative on Monday, with 801 gainers against 1,747 losers on the BSE. On the NSE, 1,296 stocks ended in the red against 546 stocks closing higher.