Expect the market to react on a stock specific basis - Sanjay Sinha

Sanjay Sinha

CEO, L&T Mutual Fund

I think FY11 is expected to close with a robust Sensex earnings growth of more than 27 per cent. Increasing cost push owing to higher raw material prices and a higher fuel and power cost is expected to put pressure on the EBITDA margins in Q4FY11. Volume growth continues to remain robust despite corporates passing on the cost push through price increase on the back of strong consumption demand. Overall, the earnings momentum is expected to remain intact. We expect the market to react to the result season on a stock-specific basis based on merit of earnings surprises and misses. With the Sensex at 19000, trading at long-term average of 15x FY12 earnings will react positively if the broader market surprises positively on earnings. 

Going forward, we are bullish on banking and financial services on the back of a robust credit demand, which is expected to continue following an equally robust consumption. Lower than expected government borrowing will keep the interest rates in check while a declining trend in inflation will keep the Reserve Bank of India’s (RBI) monetary policy benign. The capital goods sector is expected to gain from increased capacity expansion activity, especially in power, oil and gas, etc. Natural gas is the sector which will continue to increase its market share among the energy basket because of its relative cost advantage over crude and environment-friendliness. Companies creating LNG terminals and gas transport network will drive the growth in the sector. 

External events such as the earth quake and tsunami in Japan may not affect Indian companies substantially, but the recent M&A activity from Japanese corporates may slow down.However, unrest in the Middle East may be crucial for the country if crude prices spike because of a supply crunch owing to the unrest spreading to larger countries in the region. 

Whereas the market seems to have taken in its stride the political turmoil of the past three months, a slew of scams has led to India under-performing vis-a-vis other emerging and developed markets since the beginning of 2011. In the medium term the market will now focus on earnings growth and sustenance of consumption demand in the current inflationary scenario despite the fact that most of the corporates have been passing on higher raw material cost through regular price increase. The market will be closely monitoring the progress of some of the key regulations in the financial sector that have been pending for a long time. 

Of late the market has been quite volatile and unpredictable owing to some internal and external events. Midcap and small-cap stocks have under performed considerably over the past three to six months with some stocks falling more than 50 per cent from their highs. MFs remain the most cost-effective way to invest in equities for retail investors because of the rationalised cost structure as compared to other investment products.Investors should start investing in equity through SIP as income comes in monthly rests, so investment and savings must also be built in a similar way. This can also be done through DIP (daily investment plan) as it directly deals with volatile market conditions through rupee cost averaging as it invests on a daily basis.