Although Indian equity markets have had a volatile ride so far this year, in the near-term they look to be oversold, given the fact that most of the bad news is in the price. Also, at 13-14 times FY14 estimated earnings, Sensex valuations look attractive from medium-term perspective, as India's economic growth is likely to improve gradually.
Inflation is falling due to subdued business climate. Further, the index of industrial production is showing some signs of recovery for the past two to three months. Still, a sustained revival will take some more time due to slack in the capex cycle. One of the big positives for India is that the fiscal deficit has been brought down in FY13 which stood at 4.80 per cent vs. budgeted deficit of 5.20 per cent. The finance ministry is confident about meeting the FY14 fiscal deficit target of 4.80 per cent.
As far as the investment cycle is concerned, the government spending will likely pick up gradually, especially with the general elections less than a year away, while corporate investments might also witness an uptick, as the government takes more steps to boost investment sentiment. Monsoon is expected to be good this year after a below-par performance last year. Monsoon rains have been 35 per cent above average in the week to June 12.
Interest rates have clearly peaked out (the RBI has cut repo rate by 75 bps in CY13) and are headed south going forward (50-75 bps further cut estimated in FY14). Lending rates will start tapering once the liquidity situation improves.
On the external front, government steps and the Reserve Bank of India (RBI) measures to tame gold imports seem to be working. Therefore, the high current account deficit (CAD) is expected to soften to 4.5 per cent of gross domestic product in FY14. Acceptable level for India is about 3.-3.5 per cent. Foreign Institutional Investor (FIIs) inflows did slow down in March ($1.6 billion) and April ($1 billion) but picked up in May ($4 billion) again. June has not been good in terms of FII inflows, but the selling has not been vicious. Trend in the rupee could be crucial for driving FII flows going forward.
Globally, the recovery in the US economy is not yet convincing and there might be some hiccups due to uncertainty over the Federal Reserve's quantitative easing, but overall monetary stimulus is unlikely to be withdrawn in a hurry. The Euro zone remains in the grip of a recession while Japan is struggling to get out of the deflation trap and China's double digit growth is unlikely to be anytime soon.
Coming to the currency market, the rupee had been hovering in 53-55 range for the last few months before almost touching 59 on June 11, in line with weakness in emerging market currencies viz-a-viz the US dollar which was due to mounting fears that US Fed could start tapering its asset purchase sooner than anticipated. Fedral Open Market Committee's policy meeting on June 18-19 could address this issue. The rupee might remain under pressure in case FII selling in the debt market fails to abate.
As far as the health of India's companies is concerned, overall the numbers were weak but ahead of our expectations. What is more encouraging is that the beat was primarily due to a positive surprise of 1.10 per cent on revenue side and 30 bps on earnings before interest, tax,depreciation and amortisation (Ebitda) margins. In fact, Ebitda margins climbed 39 bps year-on-year owing to lower raw material costs.
In terms of earnings downgrades, though FY13 numbers were in line with estimates, FY14 consensus numbers were downgraded three per cent to Rs 1,372 (Edelweiss: Rs 1,343). The current earnings per share (EPS) forecast of 11-12 per cent EPS growth for FY14 looks achievable.
The author is Head of Research - Retail Capital Market, Edelweiss Financial Services
