The market has had a good run and is well ahead of average valuation, writes Vijay Singhania of TradeSmart.
The Indian market has moved in tandem with its global counterparts since the start of the pandemic, both during a sharp fall and then a solid recovery. But halfway through the run, it broke away from the pack and started to outpace frontline peers. The general commentary then was that the Indian market is way beyond fundamentals and there is no justification for the rally.
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Corporate earnings declared since the start of the pandemic have pleasantly surprised every market enthusiast.
For six straight quarters, India Inc has posted double-digit growth. For the December 2021 quarter, cumulative net profits of more than 3,000 companies that have declared their results have increased by 26.9 percent on a year-on-year (YoY) basis and net sales by 24 percent.
However, growth has not been uniform across all sectors. As has been the trend over the last few quarters, financial, metals and oil & gas spaces have outperformed others. These sectors accounted for 60 percent of the total profit of all companies as against 45 percent in the pre-pandemic days.
Though revenue growth has been visible across sectors, manufacturing has been impacted by higher input costs. With demand still limping back to normalcy during the pandemic-led shutdowns in many states, companies had to absorb the high cost that they could not pass on.
India’s exports continue to contribute meaningfully, with engineering goods, petroleum products, gems and jewellery, organic and inorganic chemicals, and drugs and pharmaceuticals being the top categories.
With the market reacting to the Russia-Ukraine crisis, and the possibility of quantitative easing and interest rate hikes, what will the future numbers look like? Just like the rally foretold the improving numbers, does the recent correction tell us about corporate growth slowing down.
There are signs of economic activity slowing as reflected by the Index of Industrial Production (IIP), which slumped to 0.4 percent in December 2021 -- the lowest in 10 months. The manufacturing sector, which accounts for over three-fourths of the IIP, shrank by 0.1 percent YoY, the first contraction since February 2021.
While the manufacturing sector may have paused a bit, the services sector continues to have a positive outlook. Commentary of most banks reflects the positive outlook for the near future. The Budget has provided the required push by way of increased government spending, which can spur credit growth and improve manufacturing activity.
The IT sector continues to be the bright spot, and set to reach $350 billion by 2026 from the current level of $227 billion, adding $30 billion of incremental revenue to take the overall growth rate to 15.5 percent - the fastest in 11 years, according to Nasscom. The industry believes FY23 will also be about rapid growth.
Overall, there are no signs of any meaningful decline that can be expected in corporate earnings in the last quarter of the current fiscal year, however, there is little probability of positive surprises too.
The biggest headwind for corporate earnings and the economy is oil prices. Supply side issues are likely to keep the rate high.
Higher energy prices can worsen inflation, and impact interest rates and consumption not only in India but also around the globe. There are certain sectors that will flourish under this environment.
Are we in a situation where the fundamentals are ahead of the market after the recent fall? Not really, the market has had a good run and is well ahead of average valuation. It is still pricing in high earnings growth, which may not be the case in the current environment of high oil prices and rising bond yields.
Rising inflation and hikes in key interest rates may act as a dampener.
Though the market has retreated more than 10 percent from its peak in mid-October 2021, we are still not in the comfort zone. The fear of the unknown is still high.
--Vijay Singhania is Chairman of TradeSmart. The views expressed in this article are his own.