Stronger-than-expected earnings may boost India stock rally further

By Chiranjivi Chakraborty

 

India’s recent crop of corporate earnings is emerging as another positive catalyst that’s likely to help its nascent stock-market rally gather steam. 

Earnings at over half of the companies in the benchmark Nifty 50 Index that have reported results for the quarter ended March have exceeded analyst estimates, according to a BofA Securities report published on May 5. 

 

If the trend holds, it will shore up confidence in a market that has outperformed many of its biggest rivals in Asia over the past month on bets that India’s domestically driven economy is relatively insulated from US President Donald Trump’s trade war.  

 

 

 

“We do not expect a contraction in profit margins this year, which at least puts a lid on earnings downgrades,” said Rajat Agarwal, Asia strategist at Societe Generale. “This quarter is not as disappointing as feared.”

 

Hindustan Unilever Ltd., the country’s largest staple goods maker, joined other firms in forecasting a pick-up in demand among India’s 400 million-strong mass of urban shoppers. “Looking ahead, we anticipate demand conditions to gradually improve over the next fiscal year,” Chief Executive Officer Rohit Jawa said as the results were released in late April.  

 

There are other positives: New Delhi’s decision to award a $11.5 billion tax break to middle class consumers earlier this year is expected to further lift consumption. Interest-rate cuts by the Reserve Bank of India will make borrowing cheaper, potentially boosting spending and investment.

 

Optimism is also brewing that a likely trade deal with the US will result in tariffs for Indian exports that are lower than other emerging-market peers. And analysts see corporate profit margins widening from sliding prices of key commodities like wheat, palm oil and crude oil.

 

Still, the risks for India come from outside its borders. Trump’s pugilistic approach to global trade remains a concern even with recent hopes for a deal, and a recent flare-up of tensions with Pakistan has the potential to test investors’ nerves. 

 

Morgan Stanley said US levies could drive India’s gross domestic product growth to fall short of the bank’s previous 6.5 per cent estimate. The disruption caused by US tariffs wasn’t fully reflected in the most recent quarterly earnings.

 

The Nifty gauge has climbed over 10 per cent since its low in early April and global funds are back to piling money into Indian stocks. Investors have broadly shrugged off concerns about potential for earnings downgrades following the current reporting season, given Nifty 50 saw earnings cut in both February and March.

 

Singapore-based Vishal Gupta, who runs the Emerging Leaders Equity fund, is bullish on the prospects of India’s corporate earnings and local equities are among his top bets. 

 

“While there has been some slowdown in the economy in recent months, we expect it to be transient in nature rather than structural,” he said by email. India is “relatively better sheltered compared to the rest of the emerging markets in the midst of on-going tariff friction,” he added.