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Nachiket Kelkar
Nachiket Kelkar

equity markets

Markets tumble, analysts see some correction ahead on expensive valuations

bse-sensex-reuters (File photo) Representational image

Expensive valuations, uncertainties looming ahead in the form of the near-term impact of the Goods and Services Tax (GST), farm loan waivers in various states and the long wait for corporate earnings recovery could lead to a gradual correction in India's equity markets in the near-term, say some analysts.

On Tuesday, a sell-off across banking stocks hit equity markets, with benchmark indices closing around 0.6 per cent lower. The BSE Sensex slipped below the 31,000 mark for the first time since May 29, and the NSE Nifty too ended at a month's low.

Equity markets had opened positively after a long-weekend, but went into reverse gear, with both the BSE Sensex and NSE Nifty declining close to one per cent at one point in-intra trade. The Sensex finally closed the session at 30,958.25, down 180 points or 0.6 per cent. The wider NSE Nifty 50 index closed 64 points or 0.7 per cent lower at 9,511.40.

India's stock market valuations had run up sharply this year, on the back of strong domestic as well as foreign fund flows. Between January and May, equity mutual funds have seen net inflows of over Rs 40,000 crore. Foreign institutional investors too have pumped in Rs 53,500 crore in equity so far in 2017.

“Valuations are definitely on the higher side right now. Very few companies qualify for premium valuations,” said Mayuresh Joshi, fund manager, Angel Broking.

While valuations have run up, a broad-based earnings recovery is yet to be seen and with the GST rollout also expected to hurt growth for at least a couple of quarters, there could be intermittent correction in the market, added Joshi. The BSE Sensex has already declined 1.8 per cent from the life high of 31,522.87 it hit on June 22.

There are several instances where earnings performance of companies has deteriorated over the last three-four years, but stock prices have surged. For instance, cement companies like Ultratech, Ambuja and ACC have either seen their earnings remain flat over financial year 2013-2017, or declined, but their stock price has gained by 25-100 per cent.

“It seems that investors are enamored by the stock price performance and oblivious to the financial and operating performance,” said Sanjeev Prasad, co-head, Kotak Institutional Equities, in a recent report.

On Tuesday, banking stocks were the biggest losers, after ratings agency CRISIL said while recent steps by the Reserve Bank of India would help time-bound resolution of non-performing assets of banks, lenders would need to increasing their provisioning for NPAs and may have to take a 60 per cent hair cut on some of the stressed assets.

Punjab National Bank tumbled 4.7 per cent; State Bank of India and Bank of Baroda declined more than 3 per cent and others like ICICI Bank, Axis Bank, Kotak Mahindra Bank and Yes Bank were down one to two per cent.

Other major losers included Infosys, which slipped 1.8 per cent. The country's second largest software services exporter agreed to pay $1 million in a civil settlement of a visa rules violation case to New York state, according to a press release on New York State attorney general's website last week.

Other losers on Tuesday included Infosys' rival Tata Consultancy Services, which was down 0.6 per cent, Asian Paints declined 1.7 per cent, Bajaj Auto skid 1.6 per cent and Larsen & Toubro declined 1.2 per cent.

The looming rollout of Goods and Services Tax from July 1 is also making investors nervous. While GST is expected to positive over the longer period, concerns have been raised over the near-term disruption it may cause, given the multiple tax slabs and rules still being framed and key issues being addressed at the eleventh hour.

“There is no questioning the positive impact of the successful GST implementation. However, the road to GST implementation is fraught with a lot of problems,” said V.K. Sharma, head, private client group, HDFC Securities.

While the larger players had the wherewithal to deal with the intricacies of GST, smaller manufacturers and traders were the “weak links” in the chain, Sharma, said adding, there were infrastructure challenges in implementation of GST too.

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Topics : #Equity market | #nifty

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