The Indian markets have been trading at premium valuations given India’s structural growth story, long term fiscal boost, growing domestic consumption, and a rising preference for India amongst global investors.
And while there has been increasing consensus on the Indian narrative, valuations haven’t been finding uniform comfort. The MSCI India index was trading at a 25% premium to MSCI World, and a 75% premium to MSCI Emerging Markets - valuations that made many think about risk-reward more often.
Typically, high valuations imply high expectations. And when high expectations aren’t met, there is bound to be a downward reset. With stocks, this simply results in a combination of earnings downgrade and valuation de-rating, which leads to sharp falls in the stock price. And that’s exactly what has been happening this earnings season.
Just over the last week, there have been multiple stocks that have seen a 5-10% correction, led by poor/missed earnings. The long list includes the likes of Apollo Tyres, Mazagon Docks, Sanofi India, Concor, Hero Motocorp, MTAR Technologies, Torrent Power, Lemon Tree, Biocon, Granules, BSE, GMR Power, IRCTC, Bata, and many more.
The low tolerance for error seems to have been exacerbated by a not-so-bright backdrop, which has been putting additional pressure on the markets, dragging the Nifty down by 3% last week. While the RBI’s status-quo on rate hikes was in line with expectations, there was a hawkish bend to the commentary, coupled with a reflection of near-term inflation concerns on forecasts.
There has been a spike in inflation for several commodities recently - tomatoes, cereal, pulses, which could result in a near-term spike in inflation. The RBI upped its inflation forecast for the year by 30 bps to 5.4%, and for the coming quarter by 100 bps to 6.2%. The upping of inflation forecasts have pushed many to shift rate cut expectations from end of FY24 earlier, to FY25 now.
Even with the tweaking of inflation forecasts, the grave worries from last year of (i) uncontrollable inflation, and (ii) hardcore rate hikes and its likely impact on the economy have receded. But the entire near-two-year episode has its set of ripples which are now seen in earnings.
There has been a series of disappointment this earnings season across sectors like technology services, chemicals, commodities, and export-heavy sectors. With valuations at an all-time high, sharp negative reactions haven’t been a surprise. India’s growth story may be intact over the long run, but is definitely not immune to interim shocks.
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