But, watch out for companies with direct exposure to euro zone.
Re-emergence of the Greek crisis and its likely impact on the euro zone have seen global and Indian markets slide lower. Concerns on the Chinese economy slowing due to liquidity tightening and a bubble in its real estate have added to worries. Export markets may remain volatile. On the positive side, since Indian markets are quoting at their average historical valuations, based on 2009-10 earnings, there is cushion. Also, for an economy expected to grow by 7-8 per cent annually, investors can expect corporate profitability to remain healthy.
“Fundamentally, nothing wrong has happened with Indian markets. But, if the flow of global news and events persist and foreign money drifts out, Indian markets, too, can correct due to selling pressure,” says Deven Choksey, managing director KR Choksey Shares and Securities. However, the impact is unlikely to be significant. “If you look at the American sub-prime crisis, it did not materially impact Indian economy. But, we saw markets fall. Now we will see a correction but not a crash,” says Ambareesh Baliga, vice-president, Karvy Stock Broking.
Indirect impact
While India may not get significantly hit, it cannot be unscathed. There is likely to be a rise in cost of borrowing, fluctuation in currency and withdrawal of foreign institutional investor (FII) money from equity markets. Says Vikas Khemani, Co-Head of Institutional Equities, Edelweiss Capital, “India cannot remain unimpacted; it is part of the global financial system. There will be some impact on risk premiums, with short-term risk appetite going down. And, if a company has exposure to the region, there will be some impact.”
A major issue would be currency fluctuations. Companies exporting to or owning subsidiaries in the euro zone are likely to see some pressure on this count, depending on their hedging policies.
Direct exposure
Investors will need to watch companies with direct exposure to the euro zone. On a broad level, while India’s exports to Europe are a fifth of its total exports, there are many companies with subsidiaries operating in European markets.
“There is no immediate direct impact. Greece is just 2-2.5 per cent of the euro zone economies. But, in the long run, if pain-struck European countries have to cut their deficits and manage finances, they may have to curtail spending and that could impact demand, which could impact Indian companies having exposure to such markets,” says Apurva Shah, head of research, Prabhudas Lilladher.
Experts believe if the Greek crisis worsens, counter-party risk would increase, making banks wary of lending, which could accentuate the problem. Liquidity could dry up and growth would shrink further in these countries, which would impact Indian companies with exposure in European markets.
Prominent firms
For information technology companies, Shah said, “Within the EU, most of them have large exposure to the UK, where the problem is not as severe as with the other regions. But, the biggest risk is that the euro is depreciating against the dollar and the rupee.”
Suzlon Energy, too, has exposure to European markets through its subsidiary, Repower. Analysts believe there’ll be some impact on demand from new projects. Tight liquidity and demand could also mean challenges for Crompton Greaves, which generates over 20 per cent of its revenue from European markets. Tata Steel gets 80 per cent of consolidated revenue from European markets. Steel demand and utilisation had recently improved. If demand gets impacted, it could feel the heat.
Europe accounts for nearly 40 per cent of India’s $4-billion (Rs 18,000 crore) auto component exports. While FY09 and FY10 saw single-digit growth, FY11, too, could turn out to be a no-show.
Bharat Forge, which gets half its revenues from Europe, might feel the pinch. Tata Motors’ subsidiary, JLR, gets a quarter of its sales from mainland Europe and about 30 per cent from Britain. It could see a fledgling recovery in European sales stutter. Similarly, Maruti Suzuki will also get impacted.
To conclude, experts believe if markets correct by 5-10 per cent, investors could use the opportunity to buy fundamentally good stocks which are a play on domestic consumption, with a medium to long term perspective.
