Green shoots sprouting in the economy

The report states that other factors such as falling inflation and interest rate cuts as well as the rise in non-food credit are also adding to the positive sentiment.

Green shoots sprouting in the economy

Increased demand for products ahead of the festival season, the Pay Commission hikes and a good monsoon appear to be helping India Inc’s fortunes, reports the Hindu Businessline.

According to the report, an analysis of 510 companies that have announced their quarterly numbers so far — excluding financials, and oil and gas — indicates that growth is coming back after seven consecutive quarters of decline. This, coupled with the Nikkei India Manufacturing Purchasing Managers’ Index hitting a 22-month high and higher auto sales in October, indicates better prospects for the economy. Also, the core sector grew 5 percent in September 2016, up from the 3.7 percent in September 2015.

The report states that other factors such as falling inflation and interest rate cuts as well as the rise in non-food credit are also adding to the positive sentiment.

But analysts point out that it is still early days and the economy is not out of the woods yet, especially with external factors like the US elections and the prospect of a Donald Trump win.

Corporate performance during the July-September quarter has been in line with, or better than, analysts’ expectations. Revenue has grown 6.9 percent year-on-year. This is higher than the 2.9 percent rise seen in the previous quarter, according to data provided by Capitaline.

Automobiles, cement, capital goods, metals, and oil & gas have exceeded expectations, while media and financials (primarily Axis Bank) have disappointed.

A Motilal Oswal report said the second-quarter earnings season has been in-line so far on headline numbers but much better on internals (earnings breadth, upgrade/downgrade ratio, and so on). “Of the 30 Nifty companies that have declared their results, 12/14 companies have reported earnings ahead of/in-line with our estimates, while only 4 missed our estimates. Earnings upgrade/downgrade ratio is skewed in favor of upgrades, with 10 companies seeing upgrades of 2 per cent plus and only 4 companies seeing downgrades of 2 per cent plus,” it said in the report.
Topline growth has been mainly led by automobile companies such as Maruti Suzuki, Hero MotoCorp, and TVS Motor Company followed by JSW Steel. Besides these firms, net profit numbers were healthy at Reliance Industries, Bharti Airtel, Adani Ports and Special Economic Zone, Grasim Industries, Cairn India, Bharti Infratel and UltraTech Cement.

Yet, market watchers, according to the report, advise caution. “It is too early to celebrate an enormous economic turnaround based on the first 500 results. Big results are yet to come. It will be wrong to extrapolate the first 500 results to the whole universe. Generally, good results are out first,” said UR Bhat, Managing Director at Dalton Capital Advisors.

For example, the results of Axis Bank and associate banks of State Bank of India defy expectation that everything is hunky dory with the banking system, which forms around 30 per cent of Nifty. Also, volume growth at most fast-moving consumer goods companies has been worrying. The results of ICICI Bank and State Bank of India are largely awaited.

Moreover, the market is currently worried about external factors like Donald Trump’s improved chances of winning the US presidential elections and the FOMC (Federal Open Market Committee) meet. “Our markets are currently dancing to a global tune and we believe this scenario will continue until next week,” said Jayant Manglik, President, Retail Distribution, Religare Securities.

Vinod Nair, Head of Research, Geojit BNP Paribas Financial Services, adds: “Investors believe that the volatility will rise until the expectation of US election result is really factored in. The Fed is likely to maintain the key rates but the market is focusing on any signs of rate hike trajectory.”

Though few expect a rate hike by the US Federal Reserve, emerging markets including India, have many reasons to worry if Trump wins as he has been an opponent of globalization, free trade, immigration and outsourcing policies.