Stronger corporate earnings and signs of an improving economy should provide renewed vigour to Indian stocks, which climbed to all-time peaks on Friday after a sedate start to the new year. Cash-flush investors are expected to focus on shares in technology companies that have been laggards in the past year.
Tata Consultancy Services, the country’s top software services exporter, is set to unveil its quarterly results on Thursday, followed the next day by Infosys, the No. 2 in the sector. Information technology companies, which get most of their revenue from overseas, particularly the US, have been hobbled by protectionist tendencies in their primary markets.
Still, with the global economy picking up momentum, new orders are coming in. The companies also are looking for more value-added services and niche avenues to stay in the reckoning. So, despite tougher measures by the US to stem the flow of jobs overseas, the outlook is expected to be better.
“Everyone is waiting for quarterly results and guidance,” said equity salesman Mehul Dalal. “The forecasts will be key. There is a strong belief the worst is behind us.”
After the markets closed on Friday, the government said the economy should expand 6.5 per cent in the current financial year that ends on March 31, a notch below market expectations and off 7.1 per cent in the previous year. It would be the slowest growth since Prime Minister Narendra Modi swept to power in 2014. Growth has been weighed down by the messy launch of a new national sales tax in July, and the November 2016 decision to remove high-value bank notes that constituted 86 per cent of currency in circulation.
High-frequency indicators, however, show the tide is changing for the better. Manufacturing activity in December expanded at the fastest clip in five years, according to a private survey, while output of eight core sectors in November grew at the quickest pace since the demonetisation drive a year earlier.
The Nikkei Manufacturing Purchasing Managers’ Index, compiled by IHS Markit, rose to 54.7 in December from 52.6 in November, marking its fifth successive month above the 50 level that separates expansion from contraction.
“India’s goods-producing economy advanced on its recovery path, with operating conditions improving at the strongest pace since December 2012,” said Aashna Dodhia, an economist at IHS Markit. “Strong business performance was underpinned by the fastest expansions in output and new orders since December 2012 and October 2016, respectively. Anecdotal evidence pointed to stronger market demand from home and international markets.”
The new orders sub-index, a proxy for domestic demand, rose to 56.8 in December, the highest since October 2016. Export demand expanded at its quickest pace since June.
“Challenges remain as the economy adjusts to recent shocks, but the overall upturn was robust compared to the trend observed for the survey history. This outlook was shared by the manufacturing community as sentiment picked up to the strongest in three months amid expected improvements in market conditions over the next 12 months,” Dodhia said.
Benchmark stock indices, which had hit a series of all-time highs in 2017, resumed their record-setting run in the new year as investors bet on an earnings-driven rally. The top-30 Sensex jumped to 34,188.85 for the first time ever and closed at 34,153.85, up 0.3 per cent over the week. The 50-share Nifty also notched similar gains at 10,558.85 after hitting a record 10,566.10.
Analysts at IDFC Securities forecast the Nifty would hit 11,300 points by the end of March as the slew of structural reforms like the Goods and Services Tax (GST), increased focus on digitisation and fiscal stimulus, recapitalisation of state-run banks and a national highway-building programme begin to bear fruit.
“We believe these initiatives will address key issues (non-performing assets leading to weak credit offtake, weakness in small and medium enterprises segment and manufacturing) plaguing the Indian economy in the last few years,” IDFC said.
Foreign securities houses Deutsche Bank and CLSA were conservative with their forecasts, with the latter projecting 11,400 for the Nifty by end-December.
“We expect the earnings trajectory to improve meaningfully this year with disruptive changes like demonetisation and GST implementation behind us and as a solid foundation for long-term improvement in economic growth rates and corporate profitability has been laid,” CLSA said in a note.
Deutsche forecast the Nifty to reach 11,500 by December, and set the Sensex target at 37,000.
Credit Suisse said investors could outperform the market in the medium term by picking five themes — rural demand, affordable housing, infrastructure focus, energy and resolution of the bad debts ailing banks.
The brokerage believes the government would take measures to support the rural economy ahead of 2019 general elections, and is positive on a revival in rural and semi-urban demand with improving access to finance. Its picks in this sector are: Cholamandalam Investment & Finance Co, Dabur India, Edelweiss Financial Services, Emami, Hero MotoCorp, Mahindra & Mahindra Financial Services, PI Industries and Shriram City Union Finance.
It expects New Delhi to accelerate spending on affordable housing and boost jobs in the construction sector. Top bets are: Ahluwalia Contracts (India), Crompton Greaves Consumer Electricals, Indiabulls Housing Finance, Kajaria Ceramics, Pidilite Industries, PNB Housing Finance, Shree Cement and Voltas.
The government has been stepping up spending on infrastructure, and this trend should stay the course. Credit Suisse recommended shares in Dilip Buildcon Ltd, KEC International Ltd, Larsen & Toubro Ltd, Sadbhav Engineering Ltd, Tata Steel Ltd and VA Tech Wabag Ltd.
One of the priorities of the government is to curb energy imports and to enable this it is likely to provide a favourable policy to boost investment in the sector. The brokerage’s picks for the theme are Indian Oil Corp, Oil & Natural Gas Corp and Petronet LNG.
It’s upbeat on State Bank of India, the country’s biggest lender, as New Delhi’s recapitalisation plan and efforts to address stressed accounts should help reduce non-performing assets and pave the way for credit expansion and profitability.
Jitendra Gohil, head of India equity research at Credit Suisse, wrote in a note to clients that shares were unlikely to see sharp or prolonged correction because of strong fund inflows. By focusing on long-term structural themes, investors would be able to offset high valuations and volatile macroeconomic environment.
The writer is a journalist based in India.