Results to be a mixed bag

Attaining new highs may be an uphill task, as macro headwinds persist.

If there’s one word to describe financial year 2010-11, it would be complex. The year saw both great highs and lows. It attracted the highest-ever foreign inflows ($25 billion) in a year. A large part of these came in the second and the third quarters, pushing up the Sensex to the highs it recorded in 2007. As the US economy showed signs of a recovery, the rotation of funds started in late January and triggered a fall of more than 13 per cent in the Sensex. Consequently, net investments into equity markets by foreign institutional investors and domestic mutual funds have been largely muted in the fourth quarter.

However, the Japan crisis and the failure of the second round of quantitative easing in the US changed the perception of emerging markets, especially India. Thanks to the rapidly-changing global scenario, Indian markets have been on a see-saw. With strong macro headwinds blowing from all sides, the question of what their impact on Indian equities would be looms large. Strategists are now looking at the past to get a sense of what the future has in store.

The performance of the Sensex and key sectoral indices show a preference for low-risk and high-growth domestic themes in 2010-11. Cyclical sectors lagged through the year. In 2010-11, public sector banks delivered 36 per cent returns, fast-moving consumer goods 27 per cent and information technology 25 per cent, compared to 11 per cent by the Sensex. The major stars were: Tata Motors (65 per cent), Tata Consultancy Services (51 per cent), Bajaj Auto (45) and ITC (36 per cent).

With the earnings season slated to start next week, the big question is whether or not these sectors and companies would maintain the momentum in the fourth quarter and financial year 2011-12. Motilal Oswal (MOSL) expects aggregate profit-after-tax of companies under its coverage to grow 22 per cent year-on-year (excluding oil refining and marketing companies) in the fourth quarter. MOSL expects Sensex PAT growth at 19 per cent year-on-year, the financial sector’s PAT at 27 per cent and the information technology sector’s earnings growth at 19 per cent.

Every sector would see one heavyweight driving the growth in earnings. So, watch out for the winner in each sector. However, equities would see difficult times before a recovery in the second half of 2011-12. Given that the Sensex is quoting at 15.5x FY12E earnings per share, a 10 per cent premium to its long-term average, upsides are likely to be capped. Attaining new highs may well be an uphill task.