Aberdeen Sees Sensex Earnings Slowdown on Polls: Corporate India

Aberdeen Sees Sensex Earnings Slowdown on Polls: Corporate India

Profit growth at Indian companies is set to slow from the fastest in six quarters as elections delay projects and higher borrowing costs hurt economic expansion, said Aberdeen Asset Management Plc and Bank of America Corp.Net income at companies in the benchmark S&P BSE Sensex index led by Tata Steel Ltd. (TATA) and Infosys Ltd. (INFO) rose 9.3 percent in the three months to Sept. 30, the best since the quarter through March 2012, according to data compiled by Bloomberg. Earnings growth for the year ending March 31, 2014 may slow to 8 percent, falling short of a previous estimate of 12.5 percent, according to Bank of America.

National elections, due to be held by May, are prompting companies to defer spending as they await the outcome, with opinion polls predicting no majority for any single party. Automakers and exporters of software and drugs led the jump in earnings last quarter helped by the rupee’s plunge to a record even as rising inflation and interest rates weighed on an economy that expanded at the slowest pace since 2003.

“We are going to have at least a couple of rough quarters to go,” Adrian Lim, a Singapore-based portfolio manager at Aberdeen, said in an interview to Bloomberg TV India on Nov. 19. “A lot of corporates have been holding back.” Aberdeen oversees $322 billion worldwide.

Singh, Modi

Last month, a Times Now and C-voter survey found an alliance led by the main opposition Bharatiya Janata Party under Gujarat Chief Minister Narendra Modi will top Prime Minister Manmohan Singh’s ruling coalition in the 2014 polls. Neither the BJP nor Singh’s Congress will be in a position to form a government on its own as both will fall short of a majority in the 545-member lower house of parliament, the opinion poll showed.

Modi is highlighting his record of governance and stronger-than-average economic growth in the state he has ruled since 2001 in an attempt to propel his party to national power. Goldman Sachs Group Inc., in a report this month, said investors are hopeful Modi’s BJP will win national elections and mend the $1.8 trillion economy.

Graft allegations, indecision, stalled legislation and the risk of a sovereign credit downgrade by Standard & Poor’s have marked Singh’s second term in office. HSBC Holdings Plc predicts growth in Asia’s third-biggest economy may slow to 4 percent in the year through March 2014 after a 5 percent expansion last year.

‘Most Important’

“The forthcoming Indian elections is going to be the most important political event for investors in Asia next year,” Christopher Wood, chief equity strategist at CLSA Asia-Pacific Markets, told reporters in New Delhi on Nov. 18. “The perception of investors is that the investment cycle in India is partly driven by government policies and changes.”

Factory output grew an average of less than 1 percent in 2012 and 2013 even as consumer-price inflation has stayed around 10 percent since April 2012, the fastest in a basket of 17 Asia-Pacific economies tracked by Bloomberg. That prompted Reserve Bank of India Governor Raghuram Rajan to raise the benchmark repurchase rate twice in as many months to 7.75 percent.

A rebound in the local currency will damp inflation, while the best monsoon rains in six years will increase farm income and stimulate demand, helping revive the economy, said Deven Choksey, managing director of Mumbai-based K.R. Choksey Shares & Securities Pvt.

Projects Cleared

“We have seen the worst of economic slowdown and corporate earnings,” he said in an interview yesterday. “There will be positive effect of rural demand due to a good monsoon. The government’s efforts to kick start stalled projects can shore up their report card before they go to the voters.”

Facing elections, Singh began policy changes last September to spur investment. The steps included setting up a panel to speed up stalled infrastructure plans. Projects worth 3.84 trillion rupees ($61 billion) have been cleared by the panel up to Aug. 27, according to the government.

Choksey is advising investors to buy shares of lenders, metal producers, capital goods companies that benefit from a pick-up in economic growth. He remains positive on shares of software exporters as a stronger demand in developed markets offsets the impact of the currency.

Rupee Swings

The Sensex (SENSEX) has rallied 17 percent from this year’s low reached in August to a record on Nov. 3 boosted by the second biggest foreign inflows by overseas investors. Institutional investors have bought $17 billion of local stocks this year, the most in Asia after Japan.

The rupee has gained 9.5 percent from a record-low of 68.845 a dollar touched on Aug. 28, paring the year’s loss to 12.5 percent. A weaker rupee increases the cost of imports such as crude oil, fueling inflation, while increasing the value of repatriated earnings of exporters. A falling currency also limits the ability of the central bank to cut borrowing costs and boost growth.

The average profit growth of the Sensex companies couldn’t have exceeded analysts’ estimates had it not been for the performance of the overseas units of Tata Steel and Tata Motors Ltd. (TTMT), including Jaguar Land Rover, Bank of America analysts Jyotivardhan Jaipuria and Anand Kumar wrote in a report dated Nov. 19. Excluding the two units, Sensex earnings grew just 1.3 percent compared with 2 percent increase estimated by the lender.

Unreliable Surveys

Indian elections are difficult to predict and a coalition led by either the Congress party or BJP will form the government, Taina Erajuuri, who helps manage more than 2 billion euros ($2.7 billion) of assets at FIM Asset Management Ltd. in Helsinki, said in an interview to Bloomberg TV India yesterday. CLSA, in a presentation made in New Delhi on Nov. 18, said though opinion polls are unreliable, the markets favor the main opposition BJP over the Congress-led United Progressive Alliance.

Modi’s alleged role and failure to control attacks on Muslims during 2002 riots in Gujarat will deter potential partners he may need to form a government, according to Nitish Kumar, chief minister of the eastern state of Bihar who broke away from the BJP-led group in June. Modi has denied the allegations.

In elections being held in five states through Dec. 4, an opinion poll published by India Today and ORG this month showed the BJP will retain two and win in two.

“One should not make too much of the second quarter numbers,” Saurabh Mukherjea, the chief executive officer for institutional equities at Ambit Capital Pvt. in Mumbai, said in an interview with Bloomberg TV India on Nov. 18. “Expectations were severely battered by the time we entered the season. Underlying fundamentals have not yet shored up.”

To contact the reporter on this story: Rajhkumar K Shaaw in Mumbai at rshaaw@bloomberg.net

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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