Indian Markets : Is it bottoming Out?

The Indian market went through an impressive five-year bull market, beginning in 2003 and running until January 2008, fuelled by over $50 billion in FII inflows. During this period, corporate earnings surged at an unprecedented annualised rate of 32%, while multiples expanded from 9x to 19x at their recent peak.

Unfortunately, since then, India’s market sell-off has been equally intense, accompanied by higher credit costs, inflation, lower industrial production, and several high-profile earnings disappointments. Although recent quarterly earnings growth has remained high, the trend has been one of QoQ deceleration, with contracting EBITDA margins (23% vs 26% last year) and net profit growth of 22% compared to 32% last year.

And rising commodity pricing, particularly oil, of which India is a net importer, are likely to strain margins and earnings growth for the foreseeable future. It is instructive to look at India’s high inflation environment in the mid-1990s.

In 1994, inflation was high at 10.8% compared to today’s 11.42%, and the market was trading at similarly high P/E multiples of 23x. A very sharp correction of over 40% and a de-rating of the market P/E to around 13x soon followed.
Today, by contrast, market multiples have already contracted to 14x. Moreover, in addition to lower inflation, today’s GDP growth is forecast at 7%+, versus only 6.3% in 1994. In short, a strong argument can be made that the economy, as well as the market, are in better shape today.

Nevertheless, the situation could quickly worsen if oil prices continue to rise. India’s net imports of oil as a percentage of GDP is likely to rise to 6% this year, and research shows that every 10% increase in oil prices can shave off at least 0.1% in GDP growth and add 0.4% more inflation. Much, then, depends on where oil prices are heading, not something anyone can confidently predict.

So has the Indian market survived this correction, or can it de-rate further to, say, a 10x multiple, like in 2003? Past bear markets in India have fallen 40- 55%, while MSCI India has already fallen 40% since December 2007. On the plus side, an argument can be made that India’s corporate sector today is stronger, deeper, and better positioned to weather this slowdown than in the past.

In addition, though the economy is not without challenges, with the exception of the oil price, many of these appear less daunting than they have in the past. Combined with a growth to valuation profile that remains attractive relative to global peers, we would argue, the Indian market can avoid a further significant de-rating, unless commodity prices continue to rise.

Nevertheless, we would hasten to add that any immediate upside is also unlikely. Absent improvement on the global market front, the Indian market is likely, more than anything else, to be range-bound.

Ever since markets slid precipitously in January and continued on the downward turn, one has been wondering if the market has fallen enough to see a sustainable trend reversal. Amidst around 7,000 point fall in sensex from January peak till date, there have been as many as four 1,000-point rallies, including a 20% rise from mid-March low to end-April high.

Debate as appeared in ET.

Nifty: Under pressure

” As soaring crude oil prices, high inflation and weak global cues dampened sentiment, the Indian bourses hit the lowest level in calendar year 2008 during the week”. BS 16th June 2008 

In a process NIFTY has lost nearly 28% from its peak(week ending 05th Jan2008) and  a long term investor like me has lost  more than 33% during the same period.

Is it really worth holding to the investment made during NIFTY’s bull run upto 6275?  

What is more worrysome that till how long this blood bath will continue in the market? (No body can say it for sure).

One can only make educated guess to the above by doing close scuritiny of the Market situation & fundamental shift/changes in last six to nine months. Following factors come to my mind however there could be more :

• High Crude Price : lead to further inflation & secondary effect of transportation will also dampen the demand . see also : Indian Currency: Impact of High Crude Price
• Devaluation of Currency: Higher import cost, could adversly effect the capital invetment & capacity building rate will come down. see also :Currency Valuation : fiorces on play
• Inflation : week after week Inflation is breaching the past record & its already nearing 10% mark. Soaring Inflation & Its impact on economy (covered else where)
• Interest Rates : recent hike in Repo rate will lead to raising of PLR by banks, will further squeeze the already tight liquidity situation 
• FII Exit : If FII outflow is any indication FII are already started quitting Indian market for search of safer heavens, devalued currency has come as a bonus to FII.

Technical Prespective

• The Nifty formed a Doji pattern on Friday’s charts, which indicates uncertainty on the directional front. This pattern is formed when a security opens and closes at the same level.
• According to a technical analyst at Motilal Oswal, the Nifty’s failure to fill the gap at 4,530 and the range-bound trading on Friday indicated continued uncertainty about further downside, and this was further supported by the appearance of Parabolic SAR.

Nifty, above 6000

The market is likely to range trade between 5,950-6,250 in the next week with slightly lower volumes. This would be a normal consolidation after a breakout. In the  intermediate to long-term ( 6-8 weeks), we can look forward for 6,350 for the Nifty.

The short-term trend is negative, the intermediate and long-term trends are positive.

Weekly/daily Charts patterns suggest that the 6,350 target will be reached, but, the past two sessions also suggest that it will take several sessions to absorb selling pressure between 6,050-6,250. On the downside, 5,950 will provide strong support.  

Nifty, on a run

November series closed at 5635, however the month ended with a bang at 5763. Month to month Nifty has lost some 137 points however week to week Nifty is on a run.

Momentum seems strong on the technical charts, in case Nifty continues its gain from the week end, it has an upward bias & likely to cross 5950 & on the downside 5700 shows strong support.  

Volatility is low on the last three trading sessions, front runners are back in action. Last week Mid caps given a run for the money. 

Nifty EOD, Icharts

Market Outlook

Nifty had fantastic last week ended almost 400 points up at 5906, crossing 5950 in the process (Pls refer last post). On the daily charts once again all indicators are in the positive zone which gives me confident that Nifty surely cross the 6000 level this week comfortably & march forward.

Nifty

Not only Nifty  touch 5705 but convincingly surpass the pass 5750 on the upside on the backdrop of the left clearance to the centre for Nuke discussion.

 On the back drop of the local & strong global cues from US market, Nifty is likely to have a Gap up opening around 5775-5800. RIL & LT likely to see upward move.

Nifty

Nifty likely to touch 5705-5725 on upside, while maintaining the support at the 5650 & 5575 on lower side.

Considering the low volume & decline in the market,  high volatility seems to be the order of the day can lead to higher margins.