The Hindu : Corporate profit outlook declines

Online edition of India's National Newspaper
Sunday, Sep 22, 2002

Business

Business

Corporate profit outlook declines

By Oommen A. Ninan

MUMBAI SEPT. 21. The equity, bond and foreign exchange markets shrugged off rating agency Standard & Poor's (S&P) downgrading of India's sovereign rating after initial jitters in the early part of the last trading day of the week. However, equities are showing a strong downtrend and a reversal of this trend is almost remote as the industry is bound to take a hit on account of early deficiency of the monsoons.

"For any hope of avoiding a sharp decline, the Sensex needs to remain above 2986 or close the week above 3030," said Saumil Trivedi, Vice-President, Asit Mehta Securities. According to him, for establishing a reversal of current downtrend to uptrend, the Sensex has to stay above 3137 and close above 3106. "Odds are heavily stashed against the later possibility," Mr. Trivedi added.

The declining trend gathered further momentum during the week with the benchmark Bombay Stock Exchange 30-share sensitive index (Sensex) lost 74.59 points or 2.41 per cent at 3024.35 during the week ended September 20 against 3098.94 in the previous week. On the National Stock Exchange, the S&P CNX Nifty index lost 22.40 points at 969.60 against 992. Mr. Trivedi said significant support range of 3070-3080 was breached on Wednesday and the Sensex did not manage to get above the same during the rest of the week. The institutional fund flow was strongly negative during the week.

Merrill Lynch said Indian stocks looked undervalued by 15 to 25 per cent, according to a survey it conducted among fund managers. "Fund managers continue to believe the market to be grossly undervalued, with consensus expectations being market is undervalued 15 to 25 per cent," it said. However, poor monsoons and a weakening trend in global markets have led to decline in fund manager optimism on corporate profit outlook. Only 30 per cent expect a strong improvement in profits as compared to double that number in the previous few months. Consensus expectation of profit growth, however, still remains between 15 and 20 per cent.

In terms of sector profitability "We have seen a fall in the bullishness on automobile following the weaker monsoon and this is in line with our view of increased margin pressure on two-wheeler companies". There has been an increase in optimism on software stocks following reports that large orders may be awarded to Indian companies. However, there is greater bearishness on prospects of the global cyclical companies like petrochemicals and non-ferrous metals.

Cyclicals continued to be favoured over defensives. Information technology had become the most favoured sector among the fund managers given the uncertain prospects for the domestic economy. There had been a slight reduction in preference for automobile and banking sectors. The pharmaceutical sector continued to see a split in prospects with strong believers and opponents. However, Merrill Lynch said, "We continue to overweigh the sector and believe the generic story should lead to sharp earnings growth over the next few years".

While no fund manager is bearish over a 12-month view, they turn more sceptical and 50 per cent of the fund managers now expect the market to be below 4000 a year from now. "The triggers look negative for the stock market in the coming weeks," said Subir Gokarn of Crisil. According to him, there is lot on uncertainty about the disinvestment process and though the Government's bailout package for the Unit Trust of India has removed pressures on the Trust to undertake distress sales, it is unlikely to spark off a sustained rally. Also, the military strikes by the U.S. on Iraq will exert inflationary pressures on the world economy primarily through a rise in oil prices. This is going to have a negative impact on the foreign asset allocation to equities in general.

Printer friendly page
Send this article to Friends by E-Mail

Business

Stories in this Section

Corporate profit outlook declines

Spate of product launches at Connect 2002

Forex reserves dip

SICAL MD quits

Declining tax-GDP ratio

Rubbishing the S&P rating

New products in manufacturing intelligence

CII team for CBF

High performance video chip from TI