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Liquidity rules!
Essence of the Week
Sep 12, 2016 | Source: AxisDirect
Liquidity rules, as Fed hike seems improbable in September (probably post elections in November). EU’s growth forecasts were revised lower to 1.6% (earlier est 1.7%) in 2016 and BoJ reiterated its stance of providing further stimulus, if needed, to achieve inflation targets, and expanded asset-buying program and negative interest rates. Thus, flows to India continue to be strong, even as Brent goes back to $50 amid huge inventory drawdown, and the Rupee keeps creeping up vs the USD.
Q1 earnings for 157 companies (ex OMCs) from our universe bettered expectations by ~350 bps at 1% YoY. However excluding major drags (TAMO, PSBs and Resources) earnings grew by a healthy 12% YoY (vs 7% estimated), the fastest in past 8 quarters. EBITDA growth (ex OMCs) was in-line and grew by ~8% YoY on the back of lower commodity prices. Earnings for 28 Sensex companies saw a YoY decline of 2%, but Sensex exTAMO growth is 7% (vs 4% est).
Sensex consensus EPS estimates for both FY17 & FY18 saw downgrades of ~100 bps respectively during Q1FY17 results season thus far. However, since the beginning of Apr-16, consensus EPS estimates saw cuts of 1.9% for FY17 and 1.4% for FY18. EPS for FY17 is currently at Rs 1,594 and FY18 at Rs 1,895.
Thus, fundamentals are being driven by better margins rather than higher volumes, not a good sign. A slowing monsoon is also a slight worry with reducing probability of La Nina this year. With reservoir level (largely rain-fed) in the Southern region also low at 44% (LT avg is 72%), the Rabi (winter) crop could suffer.
But with abundant global liquidity in a low return (both debt and equity) world, Indian growth stands out relatively, with better interest rates and appreciating currency. All in all, the Indian financial mood is joyous, in sync with the start of the festive season this week.
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