Lackluster results cloud outlook for Indian shares

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By V. Phani Kumar, MarketWatch

HONG KONG (MarketWatch) -- A lackluster Indian earnings reporting season so far this month has introduced a sense of caution that some analysts say will make it harder for Indian equities to rise in the near term.

While a number of blue-chips including State Bank of India, Tata Motors and Bharti Airtel have yet to declare results, weaker-than-expected results from other front-liners such as Infosys Technologies, Maruti Suzuki India and Sterlite Industries have taken the fizz out of the market.

"We are almost halfway through the earnings season and there have been more and larger earnings misses than beats [so far]," Citigroup analysts led by Aditya Narain wrote in a report. "We believe aggressive estimates are a reason for the disappointment, but weak absolute numbers are probably a bigger reason," the analysts said.

The analysts added that the earnings revision cycle for Indian companies, which has been weak over the last quarter, has weakened further during the results season for the April-June period.

"This isn't great support for a sharp outperformance of Indian equities and makes us wonder if an 'end of season sale' is up ahead?" Citigroup added.

The earnings scorecard has been mixed so far, despite some notable disappointments.

In Mumbai on Thursday, the 30-constituent Sensex fell 0.2% to 17,928.30, in line with weak regional markets.

Shares of Reliance Industries dropped 0.7%, Infosys Technologies /quotes/comstock/15*!infy/quotes/nls/infy (INFY 60.41, -0.02, -0.03%) slipped 0.2% and Sterlite Industries /quotes/comstock/13*!slt/quotes/nls/slt (SLT 14.98, -0.10, -0.66%) gave up 0.5%. Shares of Housing Development Finance Corp. rose 1.7%, while motorcycle maker Hero Honda Motors climbed 0.4% ahead of its quarterly results, due later in the day.

Among major companies that have announced results so far, Infosys reported a 2.4% drop in quarterly net profit as higher wages and weakness in billing rates bit into its operating margins, while its larger rival Tata Consultancy Services beat estimates with a 21.3% rise in profits.

Maruti Suzuki, India's largest car maker suffered broker downgrades after it reported a 20% drop in profit because of an increase in raw material and royalty costs. Results at non-ferrous metals producer Sterlite Industries reporter fell short of expectations primarily because of a temporary impact on its zinc production during the quarter, which some analysts expect to pick up in coming months.

And shares of market heavyweight Reliance Industries dropped more than 3% Wednesday after some brokers downgraded the shares on concern that an expected increase in the company's production of natural gas might be delayed. The company, India's largest by market capitalization, reported a stronger-than-expected 32% rise in quarterly profits earlier this week.

Citigroup analysts said the results announced so far were skewed in terms of industries, with only banks delivering a meaningful outperformance. The analysts noted that while sales growth has been relatively robust for companies under its coverage, profit margins have been more vulnerable so far.

Some other analysts also expect the market to lack triggers for a short-term rebound, though they are more optimistic about earnings growth in coming quarters.

"Front-line stocks aren't going to go up in a hurry because they're fully valued and there is little headroom left room in the short term," said Deven Choksey, managing director at K.R. Choksey Shares & Securities in Mumbai.

However, he noted that despite some disappointments, overall earnings haven't been weak. He said there could be improvements in coming months as robust economic conditions drive volume growth, especially in the metals, automobile and housing sectors.

Also, with the local currency still weak at around 47 rupees to a U.S. dollar, foreign fund inflows were likely to be strong and were expected to support Indian shares, he added.

The U.S. dollar was buying 46.70 rupees, down from 46.76 rupees in the previous session, but higher than the 44.90 rupees it was buying on April 1, the beginning of the current financial year for most Indian companies.

In wider Asian equity markets, China's Shanghai Composite rose 0.5%, Hong Kong's Hang Seng Index gave up 0.1% and Japan's Nikkei Stock Average declined 0.7%. South Korea's Kospi was flat.

Varahabhotla Phani Kumar is a reporter in MarketWatch's Hong Kong bureau.