Cheer returns to India share market

After a sharp correction in March Indian shares are poised for a rally, powered by a rebound in manufacturing activity and a rise in government spending, particularly in sectors such as highways and railways, at the start of a new financial year.

In a sign of change in sentiment, the widely tracked top-30 Sensex got off to a flying start on the first day of April and it should steadily maintain the trend as confidence improves. Participants, including more than 1,200 institutional investors, hedge funds and rich individuals that collectively managed assets worth over $18 trillion (Dh66.1 trillion), at an Asian investment conference organised by Credit Suisse were upbeat on Asia and India.

“More than two-thirds of the attendees were of the view that the Asia Pacific index will be up 10 per cent to 20 per cent this year. China (A shares) and India were again the markets that attendees were most overweight on, followed by Japan, as the third most overweight,” the brokerage said.

The conference was held during March 23-27 and attendees included more than 300 companies from 15 countries in the region, policymakers and political leaders. Participants surveyed at its previous conference had correctly identified India and Indonesia as likely strong performers and Australia and Malaysia as among the worst, Credit Suisse said.

The Sensex fell 4.8 per cent in March, its biggest monthly drop in more than two years, as investors took profits following a fiscal squeeze by the government to balance its books before the financial year end. Doubtlessly, quarterly earnings of companies are bound to show the scars of sluggish demand although the blow could be cushioned by softer commodity prices.

Now, that is behind us, and fund managers are looking ahead to a pick-up in earnings in the coming quarters. Underscoring the resilience of the economy, the HSBC Manufacturing Purchasing Managers’ Index surprisingly rose to 52.1 in March from 51.2 in the preceding month, riding a wave of new orders despite the spending crunch by the government.

It must be also noted that the Sensex was up 24.9 per cent at the end of March from a year earlier, indicating that the monthly correction was a minor aberration. The benchmark also posted its first weekly gain in four, rising 2.9 per cent in the holiday-shortened week to 28,260.14. The broader 50-share Nifty also climbed as much to 8,586.25.

Rates seen on hold

The big event in the coming week is the Reserve Bank of India’s monetary policy meeting on Tuesday, and the consensus forecast is for the central bank to hold rates.

“With no new data points to act on, we see no reason for Governor Raghuram Rajan to cut on 7 April after the last inter-meeting cut on 4 March. We continue to expect the RBI to pause in April and cut rates by 25 basis points in June with CPI inflation set on the below-6 per cent January 2016 target,” economists Abhishek Gupta, Indranil Sen Gupta and Rohit Garg at DSP Merrill Lynch said in a report.

The central bank has lowered its policy rate, the repo rate, by a total of half a percentage point since January 15, but commercial banks are yet to cut their lending rate showing weak transmission of policy. This has also frustrated the corporate sector and slowed the process of recovery in the economy.

Taimur Baig and Kaushik Das, economists at Deutsche Bank, says there are four key reasons why banks have been reluctant to reduce their lending rates so far — peculiarities of the funding structure, uncertainty about credit quality, balance sheet concerns weighing down loan demand and persisting liquidity tightness in specific areas of the financial system.

“Even if monetary policy moves are transmitted with some lag, banks are unlikely to match the RBI’s rate cuts,” they wrote in a report, citing the last easing cycle between April 2012 and June 2013 when banks only reduced their lending rate by 50 basis points when the repo rate was slashed by 125 basis and the cash reserve ratio by 75 basis points.

“Clearly more rate cuts and liquidity support measures would be needed to nudge banks toward lower rates in the coming months,” they said.

Moving beyond

Fund managers are convinced that India’s growth story far outweighs short-term niggles that the country have to put up with its multi-party democracy, which often resembles a functioning anarchy. For instance, the session of parliament that ended in March was the most productive in many years, with some crucial bills like raising foreign ownership in insurance ventures to 49 per cent from 26 per cent getting approved.

New Delhi was also successful in auctioning telecom air waves, coal mining contracts as well as for minerals such as iron ore. Besides giving the cash-strapped government windfall revenue that can be used to invest in building infrastructure, these measures have removed a major stumbling block that had stalled industries for the better part of the previous administration.

One of the priorities for the government when parliament resumes later this month is to pilot a legislation for a Goods and Services Tax, which would replace a wide range of central and state taxes with a uniform levy across the country, enabling ease of doing business, better compliance and higher revenue.

Stock picks

In the emerging scenario, Standard Chartered has chosen 12 shares as having the biggest potential to outperform. These include engineering and construction giant Larsen & Toubro whose domestic order pipeline should be boosted by the dedicated freight corridor, metro rail and transmission and distribution. A large defence opportunity also awaits the company.

Drug makers Cipla and Lupin are seen riding strong overseas demand for their products. While Cipla is expanding in African markets and has launched inhalers in Europe, Lupin is expected to benefit from rising US demand, monetisation of its product pipeline and inorganic push to strengthen its presence in emerging markets.

Other stocks the bank has picked are: private-sector lenders ICICI Bank and Axis Bank, automobile makers Maruti Suzuki and Tata Motors, software companies Tech Mahindra and HCL Technologies, energy conglomerate Reliance Industries, steel producer Tata Steel and cigarette firm with a growing interest in consumer products ITC.

Meanwhile, HSBC has raised its target price for Kaveri Seeds to Rs1,150 from Rs1,075, with a buy rating. The stock has risen 8.8 per cent over the past one month to Rs1,018.20. It said seed sector experts believe that high density cotton planting and mechanical harvesting would become increasingly critical in India over the next 8-9 years.

“Kaveri is the only domestic seed company, which has reasonable market shares across all the three seed categories of cotton, maize, and hybrid paddy. Apart from 18 per cent market share in cotton, it has 13-14 per cent share in maize hybrid sector and we expect this to inch up to 17-18 per cent by 2017-18,” HSBC said.

Credit: The author is a journalist based in India.