Q2 results are predicted to be modest; additional downgrades might occur in the Indian stock market.
The Q2 earnings season is predicted to get off to a mixed start with a bias toward the negative. In the next one to two quarters, there’s a chance of just modest progress.
We were operating in a precarious position, which contributes to the greater impact on the local stock market. The local market has not been doing as well as other EMs in the previous few weeks. As investors started moving money to Asian equivalents like China, who are trading at substantially lower valuations—10x to 25x ahead P/E in dollar terms, compared to India’s premium valuation—the underperformance grew worse. India’s economic dominance caused it to trade at a premium value for a considerable amount of time. However, recent increase in corporate profits has stabilized with a negative slope, suggesting that India would need to accept a value adjustment.
In comparison to the worldwide clampdown, the Indian stock market has been disproportionately affected by the rising tensions in West Asia. Nifty 50 has decreased by 4.5% since September 26th, although major global indexes have only decreased by 1.25%—with the exception of China, which has increased by more than 10%. The world is getting along better, but because India depends on imports of crude oil, the increase in oil prices directly affects its trade imbalance. The 10% increase in oil prices is causing instability, which is impacting the currency and stock markets.
We continue to believe that India would underperform other emerging markets in the near run, with midcap equities falling behind local large caps. This change in perspective was already underway before to the most recent Israel-Iran war, which has made matters worse. It is anticipated that the increased tension will keep the level of uncertainty high while everyone watches to see how Israel responds to the missile attack from Iran. The larger worry—or hope—is that this historic skirmish stays small and doesn’t turn into a full-scale conflict in which the United States plays a crucial supporting role.
Global supply networks were badly disrupted by the war between Russia and Ukraine, which had significant economic ramifications. Ukraine faced significant export obstacles. Ukraine is an important provider of essential food commodities to countries like China, including corn, wheat, and edible oil. Russia, a major provider of metals, gas, and oil to Europe, experienced disruptions to its commodities flows at the same time. The conflict broke out in February 2022, when the globe was already in flames due to low capacity utilization brought on by COVID-19, which was disrupting supply and causing hyperinflation worldwide.
Iran and Israel have very little economic commerce with the rest of the world since they don’t produce many necessities, which lessens their direct influence on global inflation. However, the incident is taking place close to important shipping routes and the oil trading zone, which is already driving up crude prices. Iran is the ninth-largest oil producer in the world. India is predicted to suffer from this, increasing the likelihood of underperformance.
Starting next week, Q2 profits
This week’s commencement of the corporate Q2 reports will be another important subject of emphasis in India. First up will be the IT industry, where a little uptick in quarterly profits growth is anticipated. Another question is if they are strong enough year over year to support the current reasonable high valuation. Data centers, North America, the healthcare industry, and ERP are the main drivers. Deferred salary increases and client budget limitations are anticipated to keep sector margins uneven and cause consumers to reduce discretionary expenditure. Clients are still cutting back on discretionary spending and tightening their budgets. Despite these difficulties, indications point to a steady improvement in client expenditure, notably in modernization and discretionary sectors. The US Fed is anticipated to reduce rates significantly in the near future, hence the outlook for BFSI is predicted to improve. The IT industry is probably going to keep growing in the foreseeable future, albeit more slowly. The industry has done well over the past three years, driving up value to a three-year high, which will have an immediate impact on performance. Due to the sector’s defensive character, which is predicted to persist, investments in it are gaining traction domestically.
Banks, a crucial industry to begin the session, have a muted opinion. Margin challenges are predicted to persist in the second quarter due to the Central Government’s lower-than-planned budgeted spending and the muted growth of advances and deposits. Only 4.05% QoQ increase in industry advances is anticipated, which is far less than the 8% QoQ growth that was attained the previous year. As a result, only slight increases in bank earnings are predicted. Stress in the SME sector may also result in higher-than-expected provisioning due to a rise in delinquencies, which would further impair bank profitability.
It is anticipated that the second quarter results season would begin with a mixed bag and a negative bias. In the upcoming one to two quarters, there is a chance of modest successes. As the market continues to believe that profits growth would regress, this might result in downgrades. The impact of the national election made Q1 poor. The market consensus is that future profits growth will be supported by stable local demand, a change in global demand, and lower inflation than it was a year ago. We’ll test this perspective in Q2.
The Chief of Research at Geojit Financial Services is the author, Vinod Nair.
Disclaimer: The above article is for educational and news purposes, this is not a buying or selling recommendation. TraderPulse recommends that users to check with certified experts before making any investment decisions.
