"There is also this
benefit in brag, that the speaker is unconsciously expressing his own ideal.
Humor him by all means, draw it all out, and hold him to it."
-Miguel de Cervantes (Spanish,
1547-1616)
Word for the day
Frabjous (adj)
Wonderful, elegant, superb.
(Source: Dictionary.com)
Malice towards
none
Looking for some fundamental
reasons to be bullish on Indian equities.
Share if you have some!
Don't trust TINA this time
The first result cycle of FY16 has just concluded. Overall the
earnings were well below expectations. Post disappointing 1Q most analysts have
modified their forecasts by earnings downgrades. The latest forecasts are
mostly assuming single digit earnings growth for FY16 with material downside
risks.
The current producer price inflation trajectory suggests that
lacking pricing power and dismal demand environment has continued in the
second quarter as well.
A disappointing 2Q coupled with poor monsoon, could likely result
in a second consecutive year of no or little earnings growth, just like
FY09-FY11. Though at present consensus is expecting a double digit growth for
the current year (FY16) and a material jump in earnings in FY17.
In post result market interactions managements of various
companies appeared hopeful that economic conditions will improve later in the
year. However, their stance appeared driven more by hope than any concrete
evidence.
Some large companies like L&T were candid about the prospects
and felt that the government is not doing enough to motivate demand in the
economy. Many consumer companies like HUL and Dabur also highlighted the
challenging environment.
The precipitous fall in commodity prices has reflected in margin
improvement of many user companies, especially those companies using petroleum
products as major input like paints, chemicals and tyres etc. On the flip side
most commodity producers reported material decline in margins.
For the companies having global operations, the growth in overseas
businesses mostly reflected the poor global economic conditions. Exporters also
reported poor realizations as INR remained relatively strong to most currencies
besides USD.
The current estimate of earnings and management hopes are
reflecting a "mostly sunny day" condition prevailing in 2HFY16 and
"bright sunny day" condition in FY17. This may eventually turn out to
be overly optimistic.
However, given the fast deteriorating global economic conditions
(likely slower external demand, rising financial stress of commodity
producers, and reversal of capital flows), rising specter of drought even over
Rabi crop (raising clouds over quality of farm loans and consumer prices),
persistent stress on bank's asset quality (hampering their lending abilities),
and little sign of a sustainable solution to the political stalemate - one
would have to work really hard to find reasons to be bullish in Indian
equities.
An optimistic 8% earnings growth in FY16 and a reasonable 15%
earnings growth in FY17 would imply a 10-15% return in next 12months. Adjusted
for the risk of a global meltdown like 2008-09, and risk free rate of close to
8%, the return appear meaningless.
Making a case for Indian equities is therefore a tough task. TINA
supported Indian equities during July 2007 and January 2008 but got neutralized
in just two months after that. So I am not trusting her this time. More on this
next week.
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