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By Alex Gabriel Simon
India’s largest paint maker is the latest victim of nervous investors turning more unforgiving of stocks failing to meet their earnings expectations.
Asian Paints Ltd.’s disappointing second-quarter results spurred a near 10 per cent slump in the company’s shares Monday, and prompted a downgrade from Goldman Sachs Group Inc. and JPMorgan Chase & Co. The reaction highlights an emerging trend in India’s $4.6 trillion stock market, where investors are quick to aggressively punish companies whose earnings haven’t lived up to their elevated valuations.
A net income miss for Nifty 50 Index companies triggered a median decline of nearly 1.9 per cent in the stock prices in the current reporting season, according to data compiled by Bloomberg. That compared to a drop of about 1.3 per cent in each of the previous two quarters. The average decline is sharper at 2.9 per cent, versus about 1 per cent previously.
“This is the largest correction for earnings misses in the last seven quarters,” said Souvik Saha, a strategist at DSP Mutual Fund. “The market is acknowledging that the overall demand environment hasn’t been impressive and now signs of an urban slowdown are emerging.”
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Indian companies have seen profit downgrades following the reporting season that showed weak consumption demand. This deterioration is making investors nervous at a time when valuations remain elevated and persistent selling by global funds continues to weigh on the market. The Nifty logged its worst month in more than four years in October.
Asian Paints tumbled to the lowest level in more than three years Monday, even as the benchmark gauge closed nearly flat. Bajaj Auto Ltd., IndusInd Bank Ltd. and Avenue Supermarts Ltd. are among other large companies that saw a sharp one-day slump in their share price after reporting an earnings miss in recent weeks.
Stocks in sectors such as railways and defense that had run up sharply earlier this year have suffered deeper losses. Small- and mid-caps have cooled off much more than larger peers.
Still, the current weakness could be a period of consolidation, and any further declines would make Indian markets attractive, Saha said.
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Even after the recent drop, the Nifty 50 Index’s valuation remains the priciest in emerging Asia. The gauge trades at more than 20 times its 12-month forward earnings, slightly higher than the five-year average multiple of 19.4 times.
As investors turn focus to fundamentals and valuations, so-called quality stocks have started to reverse their underperformance of the past two years.
The market has shift in approach from ‘reward good news, ignore bad news’ until recently to ‘reward good news, punish bad news,’ analysts at Kotak Institutional Equities wrote in a note.
“The violent reaction to earnings misses in the second quarter results season reflects a negative shift in expectations about future returns among more market participants,” the analysts said.
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