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India's stock-market rally has failed to keep up with the fastest increase in profit estimates since 2009, making shares cheaper even as the S&P BSE Sensex index rises to all-time highs.
While the benchmark gauge has gained 5.8 per cent in the past two months and rose to a record on Wednesday, 12-month profit projections have climbed 7.2 per cent, according to about 800 analyst forecasts compiled by Bloomberg. The Sensex is valued at 15.5 times estimated profit, down from this year's high of 16.3.
The improved outlook for Indian earnings underscores how falling oil prices are reducing import costs while confidence is growing that Prime Minister Narendra Modi's policies will revive the economy after he won the May election by the biggest margin in three decades. The projected 21 per cent jump in Sensex profits in the next 12 months compares with an 11 per cent growth estimate for the MSCI Asia Pacific Index.
"The market is not fully factoring in the higher earnings growth in the next few years," Mahesh Patil, the co-chief investment officer at Birla Sun Life Asset Management Co, which oversees $16.3 billion, said in an interview on Tuesday. Indian shares may return about 18 percent annually over the next four years, in line with earnings growth, he said.
Modi has so far taken steps to cut bureaucracy, speed up project approvals, reduce income taxes and allow more foreign investment in the defense and railway industries. In his Independence Day speech on August 15, he pledged to provide bank accounts and life insurance for millions of poor people and revive manufacturing in Asia's third-largest economy.
Bharti, Tata
The Sensex has gained 26 per cent this year, the most among the world's 10 biggest markets, as global money managers bought a net $12.9 billion of shares and $16.8 billion of bonds. The gauge rose 0.3 per cent to a record 26,638.11 in Mumbai.
Per-share earnings for the 30-stock gauge will probably increase to about Rs 1,710 in the next 12 months, from the current level of Rs 1,418, according to projections compiled by Bloomberg. The last time earnings estimates climbed this fast was November 2009, immediately after the worst of the global financial crisis.
Sun Pharmaceutical Industries, India's biggest drugmaker; Bharti Airtel, the largest mobile-phone carrier; and Tata Motors, the top automaker by revenue, are projected to increase profits by at least 65 per cent in 12 months, the fastest pace among Sensex companies. State Bank of India's earnings are forecast to climb 29 per cent, versus 18 per cent growth for members of the MSCI Emerging Markets Financials Index.
Upgrade cycle
Credit Suisse Group AG analysts raised their fiscal 2015 earnings estimate for Tata Motors by 11 per cent and lifted projections for the following year by seven per cent in an August 12 report on anticipation of higher profit margins for the firm's Jaguar and Land Rover units. Spark Capital Advisors, a securities firm in the southern India city of Chennai, boosted its FY16 net income projection for Sun Pharma by 15 per cent to reflect rising drug prices on August 14.
"For the next two to three years it will be an earnings upgrade cycle," Sampath Reddy, the chief investment officer at Bajaj Allianz Life Insurance Co, which manages about $6 billion, said in an interview on August 26 from Pune, near Mumbai. "I don't think the market is expensive because the earnings upgrade potential is much higher."
That potential has yet to show up in companies' reported results. About 43 per cent of Sensex members posted earnings in the June quarter that beat or met forecasts, down from 60 per cent in the March quarter and 73 per cent in December.
Relative value
The latest earnings season was "good but not great," Sanjeev Prasad, a Singapore-based analyst at Kotak Institutional Equities, wrote in a report dated August 18. "There is limited evidence of meaningful" earnings improvement, he wrote.
The Sensex is also valued at a higher level than developing-nation peers, trading at a 36 percent premium over the MSCI Emerging Markets Index. It's 91 per cent more expensive than China's Shanghai Composite Index.
The Indian economy has reached a "turning point" that will lead to an acceleration in growth over the next few years, said Geoff Lewis, a global market strategist at JPMorgan Asset Management, which oversees about $1.5 trillion worldwide.
DSP BlackRock Investment Managers Pvt, the Indian joint venture of the world's biggest money manager, predicts Sensex earnings will rally at a 20 per cent annual rate in the next three years as business confidence and capital spending increase.
Growth outlook
India's passenger vehicle sales rose 6.5 per cent in July from a year earlier, the third month of recovery, after posting the first annual drop in a decade last year. A private gauge of manufacturing rose to 53 in July, the highest reading since February 2013. India's wholesale-price inflation slowed to a five-month low in July, while Brent crude is trading near a 14-month low. The country gets about 80 per cent of its oil from abroad.
The $1.9 trillion economy may expand as much as 5.7 per cent in the year ending March 2015, and 6.7 per cent in the following period, from 4.7 per cent in 2014, Arvind Virmani, a New Delhi-based adviser to the Reserve Bank of India, said in an e-mailed response to questions on August 26.
"There are expectations building up of an economic growth recovery and that's attributable to a cyclical upturn and the policies of the new government," Mahesh Nandurkar, an equity strategist at CLSA Asia-Pacific Markets in Mumbai, said by phone on August 20. "There will be more upgrades going forward."
