Motilal Oswal has come up with its quarterly review and is bullish about the future and expects the Sensex to grow at 16% CAGR till FY14, despite economic headwinds and deteriorating macroeconomic conditions

With the third quarter earnings season more or less done, corporate India has disappointed once again despite record amount of foreign institutional investor (FII) money pouring in and which propped up markets and kept investors giddy. According to Motilal Oswal (MOSL), Sensex profit after tax (PAT) grew only 7% for the December quarter. Large-cap stocks such as ONGC, Infosys, Reliance, Ultra Tech, Sun Pharma, Zee Entertainment performed satisfactory (though not great). Some of the biggest letdowns were DLF, Hindalco, Ambuja Cements, Godrej Consumer Products, Hero MotoCorp and Tata Steel. In the face of disappointing results, MOSL downgraded FY13 and FY14 earnings per share (EPS) estimates by 1.5% and 1.1% respectively to 5% and 16%, respectively.
 

According to MOSL, Sensex aggregate sales grew 9% (in line with estimates), EBIDTA grew 8% (versus estimate of 6%) and PAT grew 7%. Out of the Sensex 30 companies, 10 companies reported PAT above estimates; 11 companies reported below estimates and nine reported in line, according to MOSL’s estimates. Some of the best performers were Maruti Suzuki, Sun Pharma, M&M, HDFC Bank, ICICI bank, Dr Reddy’s, Coal India and Cipla. The companies which disappointed were Tata Steel, Bharti, Tata Motors, Tata Power, BHEL, Hero MotoCorp and Hindalco.
 

Sector-wise, Sensex’s best performers were healthcare, NBFC and private banks while the worst performers were telecom, real estate, auto and metals.
 

Some of the biggest upgrades by MOSL were HCL Technologies, ONGC, UltraTech Cement, REC, Power Finance Corporation, Reliance Industries, and Coal India. Some of the biggest downgrades were Tata Steel, Tata Power, Bank of Baroda, Tata Motors and Hindustan Unilever, DLF, Hindalco, Ambuja Cements, Hero MotoCorp.
 

According to MOSL, the macro-economic view looks promising and optimistic, with inflation at three year low at 6.6% and GDP touching a decade-low of 5%. The brokerage expects the market to bottom here and have estimated that the economy will grow at 6.5% in FY14. 
 

With the liquidity conditions improving and inflation moderating, the Reserve Bank of India (RBI) has cut cash reserve ratio as well as repo rate to pump more money into the economy. The easing of the cyclical risks increased inflation. MOSL expects RBI to cut rates by as much as 75 basis percentage points for the remainder of the current fiscal, towards FY14. This means market participants are expecting a growth stance from the central bank going forward with increased risk of inflation.
 

Even if investors remain optimistic, there are several concerns with current account deficit being the chief concern of all. According to MOSL, both trade deficit and current account deficit were at ‘record’ highs and stood at 10.9% and 4.8% of the GDP, respectively.

However, MOSL expects these to come down to 9.9% and 3.9% by FY14, another optimistic guess. Fiscal deficit stood at 4.9% even as the government started the fiscal consolidation process to keep fiscal deficit at 3% of GDP by 2017. This is a tough task considering government is also chasing growth. MOSL expects fiscal deficit to be 5.4% by FY13 and 4.9% by FY14 and expects no major change in tax rates.
 

The net inflow from foreign institutional investors (FIIs) for the calendar year 2013 so far has been $7.85 billion. This has been an important trigger for a stable rupee, despite deteriorating external trade. The selling intensity of domestic institutional investors (DIIs) have been rising with a net outflow of $4.6 billion in 2013, following an outflow of $10.9 billion in 2012.
 

FII holdings in Indian equities at an all-time high