We are living in a turbulent world. World markets are inter-linked and are affected by a variety of factors. Though our markets have withstood some of the turbulence of the European economy, we are still not decoupled from the rest of world. The initial acceleration in all the markets over the past 15 months was due to the huge fiscal stimuli provided by major countries. In most economies, the correction is not due to any fundamental improvement but is mostly led by infusions from respective governments and a general euphoria and eagerness to bounce back from one of the world’s biggest financial downfalls.
On the back of such global events, two strong signals come from the Indian economy — strong growth, represented by robust IIP number (17.6 per cent FY10 as compared to 1.13 per cent FY 09) and higher advance tax payment (total of Rs 12,662 crore paid is 19-20 per cent higher than last year). This, coupled with strong growth of internal consumption has clearly revived the domestic story. We may not be fully decoupled from global sentiments and FII inflows but fundamentally, Indian companies are proving their strength on the basis of domestic growth and unlevered strong balance sheets.
If we look at earnings growth of BSE 30 companies for FY11, the energy sector accounts for about 27 per cent earnings growth, followed by banking with 15 per cent and technology with 13 per cent. Tata Steel, RIL, ONGC, Sterlite and Tata Motor account for two-third of FY11 earnings growth. Reliance Industries accounts for almost 12 per cent earnings growth, led largely by increase in earnings from the KGD6 gas (so very stable!).
The current volatility in metal prices and currencies has made us think about the earnings estimates in the near term. We believe that though the Indian economy has recovered better than other emerging markets, there could be some risk to future earnings.
The major risk to earnings, therefore, can come from the metal sector, which is impacted by global events. Companies like Tata steel, Hindalco and Sterlite account for 31 per cent of FY11 earnings growth and any weakness in metal prices can hurt their earnings. Currencies have been volatile but it’s difficult to quantify cross-currency exposure due to various hedges in place. The most important event to watch out for is to what extent the European crisis derails global growth, another being monetary tightening in China that could further slow growth. If it happens, it would definitely impact earnings of Indian companies, which according to us would be moderate.
So, with minor road blocks on the way as we stand today, we expect Sensex companies to grow 18-20 per cent in the first quarter.
The author is Group CEO, Alchemy Capital Management
