Diwali is the festival of lights, and the equity markets certainly seem to be in a festive mood. Global investors continue to pour money into the emerging markets, and India in particular. This year, foreign institutional investors, or FIIs, have already poured in $25 billion, the highest ever. The Coal India issue reaffirmed the faith in India as FIIs scrambled to get an allocation. And if the US Fed has its way, this Diwali may last much beyond November 5 as billions of additional dollars, by way of quantitative easing, will again chase out-performance in markets like India.
The Sensex is close to its peak and one of the key reasons is the upbeat performance of India Inc in this earnings season. In fact, corporate India has done much better than its counterparts in most parts of the globe, where earnings fell sharply in 2009 and are showing a tepid recovery only now. India Inc.'s earnings growth, which was flat in 2009, has spurted to a new high.
It could possibly slow down in the coming quarters because of headwinds such as rising costs, but pricing power is likely to be better and may be a source of upside surprises. The main market risk now will be from a sustained rise in crude oil prices.
Consumer discretionary demand has shown a sharp spurt in India. For example, passenger vehicle sales grew 33 per cent year-on-year (YoY) in the second quarter, higher than the growth reported during the first quarter and the year ended March 2010. While investors continue to watch expectantly for signs of continuation of the traditional consumer-led cyclical rebound, we think that a pick-up in business spending instead will be the key over the coming quarters. Thus, it is not consumer spending but corporate spending that will propel stronger growth. This, in turn, will create opportunities for companies operating in the consumer as well as industrial and capital goods sectors. Let us now look at some interesting trends across sectors.
FMCG companies reported mixed volume growth trend across the categories. Extended monsoons, floods, high food inflation and communal tensions (Ayodhya verdict) resulted in lower offtake in mass market, highpenetration categories like soaps and shampoos. However, the secular growth trend remains intact. Lower food inflation and rural demand will aid growth in the second half.
For IT companies, volume momentum was maintained as billing rates stabilised. Headwinds included the rupee appreciation, salary hikes and increased marketing investments. Volumes are expected to be steady, while deal signings are likely to improve. But profitability could be hit by currency appreciation and higher attrition for select players.
Most banks saw their margins widen, supported by lower growth in their deposit base and redeployment of resources. Credit growth was strong for most players but dominated by large infrastructure loans.
|19% is the topline growth of India Inc in Q2 at the time of going to press|
India Inc's earnings growth, which was fl at in 2009, has touched a new high
Consumer discretionary demand has shown a sharp spurt in India
The main market risk now is a sustained rise in crude oil prices
The improved business climate will strengthen the capex cycle
Pick-up in business spending will be the key over the coming quarters
Policymakers must avert overheating and prevent formation of asset bubbles