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The Nifty will struggle at the current level. If it breaks out of 6,030, it may head towards 6,220
The market closed higher for the third week in succession on supportive global cues and upbeat results from IT major Infosys. Assurance from US Federal Reserve that the central bank will continue with its bond buying programme for the “foreseeable future”, and quarterly results from Infosys which beat expectations were seen as the main reasons for the gains. Investors will focus on headline inflation figures for June and quarterly results from corporates in the week ahead.
The Sensex closed the week at 19,958, up 463 points (2.37%) and the Nifty settled 141 points (2.40%) higher at 6,009. The market alternated between losses and gains in the early part of the week while positive cues boosted the market in the last two days. The Nifty will struggle at the current level. If it breaks out of 6,030, it may head towards 6,220.
The fall of the rupee to an all-time low against the dollar and weak global cues led the market lower on Monday. Positive global cues help the indices close higher on Tuesday. The market closed near the lows of the day on Wednesday on concerns that quarterly earnings from corporates would come in below expectations.
Assurances from the US Fed that it will continue with its stimulus programme boosted the market on Thursday. The market settled higher on Friday on support from IT and technology stocks after Infosys’ quarterly results beat estimates.
BSE IT (up 10%) and BSE TECk (up 8%) were the top sectoral gainers this week while BSE Auto (down 2%) and BSE Oil & Gas (down 1%) settled at the bottom of the list.
The top gainers in the Sensex list were Infosys (up 14%), Sun Pharmaceuticals, Wipro (up 7% each), Larsen & Toubro (up 6%) and BHEL (up 5%). The main losers were Maruti Suzuki (down 7%), Mahindra & Mahindra, ONGC (down 6% each), GAIL India and Tata Motors (down 1% each).
Infosys (up 14%), HCL Technologies, Kotak Mahindra Bank (up 8% each), Reliance Infrastructure, Sun Pharma (up 7% each) were the top performers on the Nifty. The key losers on the index were L&T (down 29%), Maruti Suzuki, M&M (down 7% each), ONGC and BPCL (down 6% each).
Domestic passenger car sales fell 9% to 1,39,632 units in June 2013 over June 2012, as demand continued to suffer due to rising ownership costs and sluggish economic growth. Sales of motorcycles fell 9.2% in June to 799,139 vehicles while truck and bus sales were down 13.5% at 56,197 units, the Society of Indian Automobile Manufacturers (SIAM) said.
India's merchandise exports declined 4.56% to $23.78 billion in June 2013 over June 2012, government data released on Friday showed. Imports rose 0.37% to $36.03 billion. The trade deficit in June 2013 stood at $12.24 billion down from $20.1 billion in the previous month.
India’s consumer price index (CPI) or retail inflation rose to 9.87% (combined) in June 2013 as compared to 9.31% in the previous month. The corresponding inflation rates for rural and urban areas are 9.63% and 10.13%, respectively.
IT major Infosys on Friday reported a 3.7% increase in consolidated net profit to Rs2,374 crore for the first quarter ended 30 June 2013, up from Rs2,289 crore in the year-ago period.
Consolidated revenue for the reporting quarter was up 17.2% to Rs11,267 crore from Rs9,616 crore in the year-ago period.
While, Infosys kept its US dollar revenue guidance unchanged at 6%-10% for this fiscal, it revised its rupee revenue guidance upwards to 13%-17% from 6%-10% for the same period.
In international news, US Fed chief Ben Bernanke on Wednesday said the economy still needs help from the Federal Reserve’s low interest rate policies. The comments boosted world markets the next day.
Analysts from Nomura and BNP Paribas are pessimistic on the upcoming earnings season and suggest that the overall economic growth has still not bottomed out. Yet they expect Sensex to close above 21,000 in FY 14
Last quarter (Q4FY13), Moneylife analysed data of 1,144 companies, and noticed that sales, operating profit and net profit were subdued, due to challenging market conditions and macro-economic headwinds (Read: India Inc Q4 net sales up 6%, net profit down 3%.) Research firms are being largely negative on earnings growth for Q1FY14, as the earnings season kicks off with Infosys’s results announcement. “June-quarter results suggest a continuation of the trend of steadily weakening top-line growth that has been at play over the past two years,” says a research report from Nomura. Analysts of BNP Paribas are of the opinion that, “revenue and earnings growth will remain tepid with profit growth (ex oil marketing companies) forecast to decline from 5-7% y-y growth in the first three quarters of FY13 to 3.7% y-y growth in Q1FY14.”
Nomura research expects sales to continue to decline and doesn’t expect any bottoming out soon. It expects June quarterly earnings to be weak. It said in its report, “Net sales growth is estimated to fall below 5% year-on-year (y-o-y) for the first time in four years. The continuing slide in topline growth suggests that overall economic growth has likely not bottomed out yet.” Yet the firm mentions that it , “continues to expect around 10% growth in market earnings in FY14F, compared with a 16% growth being forecast by consensus. Our Mar-14 ending target for Sensex remains at 21,700 which implies 11% potential upside from current levels.”
Research firm BNP Paribas, in its report, state “Earnings will face a double whammy from both slowing revenue growth and continued pressure on margins... We expect economic headwinds to continue to weigh on the earnings outlook.” The firm however mentions that it “has maintained a Sensex target of 21,300 since the beginning of 2013. Since we had assumed some downside to BNPP analyst earnings estimates at the beginning of the year, we see no reason to change the target.”
On the earnings front, the Nomura report goes on to say that “While profitability in the quarter will be hit on account of forex losses resulting from the 9% depreciation of the rupee, a commensurate depreciation in the same quarter last year will attenuate the y-o-y impact on earnings.” On the other hand, BNP Paribas has given a different perspective on the earnings preview. They believe that the market has not discounted many negatives, and therefore there’s a possibility of a downslide. In their report to clients, they state: “Recent risks to the Indian market include capital outflows and currency depreciation, domestic demand slowdown, policy direction moving towards populism again, and the postponement of an Asian economic recovery. These risks don’t seem to be adequately factored into earnings estimates.” Furthermore, they state: “Revenue growth moderation appears even more severe than the decline in earnings growth. Stocks and sectors depending on the domestic economic cycle – particularly autos, financials and capital goods – may see some earnings downgrades”
On how the different sectors are expected to perform, the Nomura report mentioned, “Key sectors expected to deliver sub-5% sales growth are autos, capital goods, metals and utilities.” It is overweight on pharmaceuticals, consumer discretionary and cyclical while it is surprisingly underweight on information technology. Further, it said, “the growth environment remains weak and y-o-y operating margin compression is expected to continue for capital goods, metals and transport infrastructure plays.” Unlike Nomura, BNP Paribas are bullish on information technology, while bearish on autos, PSU banks, telecoms and materials as well as cyclicals. It expects autos, financials, capital goods and metals to witness earnings downgrades. They also expect EBIDTA margin to decrease 90 basis percentage points on their universe of stocks.
However, both Nomura and BNP Paribas are bearish on public sector banks. The worsening of asset quality is one of the factors that will affect PSU banks. We had written exclusively on this in our cover story last year (Public sector banks - Loans turning bad), long before analysts the realised extent of the mess. Nomura is bearish on State Bank of India but bullish on select private banks. On the other hand, BNP Paribas is bearish on PSU banks in general, stating: “PSU banks have a downside risk from worsening asset quality”.