Good Numbers From India Could Ignite a Market Rally

[HenryTo]

Quote: "After surging more than 50% in 10 months to a high of 6,900 in early March, the Bombay Stock Exchange's 30-share Sensitive Index, or Sensex, has slipped 7% in the past month to 6467.92 on Wednesday."

"If earnings are on track, the Sensex could climb as much as 20% in the next 12 months, predicts Pathik Gandotra, head of research at SSKI Securities in Bombay."

I don't like to be a party-spoiler here but I think the Indian stock market has topped out for now. Outsourcing is still understated in the long-run but in the short-run, the India stock market will more or less have a huge positive correlation with the U.S. stock market. I also believe that investors will turn cold towards emerging markets as an asset class in the upcoming months.
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Good Numbers From India
Could Ignite a Market Rally

If Corporations Announce
Strong Profits, Projections,
Flood of Funds May Come
By ERIC BELLMAN
Staff Reporter of THE WALL STREET JOURNAL
April 15, 2005; Page C14

BOMBAY, India -- Strong profit growth forecasts could spark a rally on the Indian stock market, many local and international analysts and investment managers say.

During the next two weeks, Indian companies will be announcing results for the quarter ended March 31. Analysts expect many blue-chip concerns to report earnings growth of more than 20% from a year earlier.

Because the January-March quarter marked the end of the fiscal year for most Indian companies, many of them are also expected to make profit projections for the year that began April 1. Robust economic growth at home and growing demand for India's products and services abroad are likely to mean upbeat forecasts from many companies.

"Most sectors should report positive earnings [growth] including the metals, petrochemicals, software, capital goods and oil refining companies," says Dhiraj Sachdev, portfolio manager at ASK-Raymond James Securities in Bombay.

After surging more than 50% in 10 months to a high of 6,900 in early March, the Bombay Stock Exchange's 30-share Sensitive Index, or Sensex, has slipped 7% in the past month to 6467.92 on Wednesday. (The Indian market was closed Thursday for a local holiday.)

Fund managers have been hoping a bright outlook for earnings in the new fiscal year could be enough to reignite the rally. If earnings are on track, the Sensex could climb as much as 20% in the next 12 months, predicts Pathik Gandotra, head of research at SSKI Securities in Bombay.

"As long as good earnings come, funds will find their way here," he says. "There are a lot of new local funds and foreign funds that are just starting to get a taste of India."

India's economy is among the world's fastest growing as companies expand production facilities, the government spends billions on new roads and power plants, and an expanding middle class of 300 million Indians spends more. In the year that ended March 31, India's inflation-adjusted gross domestic product grew almost 7%. Many economists project growth of more than 6% this fiscal year.

Analysts expect some of India's largest concerns to announce year-to-year profit growth of at least 40% for the quarter ending March 3. Among the companies for which such a performance is generally expected are software and outsourcing companies Wipro and Satyam Computers Services, aluminum refiner Hindalco Industries, oil refiner Oil & Natural Gas Corp. and energy companies Tata Power and Reliance Energy.

In the first major earnings announcement of the current season, Infosys Technologies Thursday reported that its net profit surged 67% to 5.58 billion rupees ($127.7 million) in the last quarter compared with the year-earlier period. Infosys predicted its earnings per share would increase more than 23% in its current year, which ends March 31, 2006.

The only companies analysts feel are likely to announce lower quarterly profits are in the pharmaceutical and automobile sectors, which have been hurt by a recently introduced value-added tax. Companies such as Ranbaxy Laboratories and Tata Motors could be among those in this category, says Mr. Sachdev of ASK-Raymond James Securities.

Despite anticipated rising profits at many Indian companies, some international analysts suggest Indian stocks are relatively pricey right now, compared with other Asian stock markets. Adrian Mowat, chief equity strategist for J.P. Morgan Securities in Hong Kong, notes, for example, that India's blue-chip shares are trading at an average price earnings ratio of around 12 times earnings for the current calendar year.

While that is in line with India's historical average, most Asian markets currently boast P/E ratios much lower than their historical averages. Taiwan, for example, is trading at about 12 times 2005 prospective earnings, when it historically trades at P/Es of 20. The Singapore market's P/E ratio for this calendar year is almost 14, compared with a historical average of 17.

"I think India looks positively unattractive on valuation grounds," Mr. Mowat says. "As an international investor there is very little that would compel me to up my allocation in India."

Still, Mr. Mowat sees the Sensex index advancing more than 20% this year, thanks to local investors. Even if some international investors decide they can get a bigger return on other Asian markets, domestic investors will be bidding up Indian stocks, he predicts.

Indian fund managers and analysts concur, suggesting that stock prices will rise once quarterly earnings confirm optimistic expectations.

"Considering all the [profit} growth, India is not expensive at all," says Mr. Gandotra. He has a target of 7,800 for the Sensex, more than 20% above its current level.

Write to Eric Bellman at eric.bellman@awsj.com