Lack of reforms, European crisis affecting Indian markets

A lot of factors are currently affecting the Indian markets. The first quarter 2013 results have started coming in. For the Sensex companies, till now, the top line growth has been close to 18%, while the EBITDA growth has been very muted at around 2% with a 220 bps fall in the EBITDA margin. This is because the raw material cost as a percentage of sales has crossed 40%. The bottom line growth has been slightly better at around 11% against 9% expectation. At the margin, the interest cost and forex losses have been comparative lower in this quarter. We are currently trading at valuations slightly below 14 times price-earning on a forward basis, which is at a slight discount to the long-term averages. On a price-to-book value, we are around 2.1 times, which is at an 8% discount to the long-term average. But it is justified because the ROEs have fallen from 19% to around 15% over the past few quarters. A lot of factors are currently affecting the markets. One positive thing is that oil prices have fallen over the last few weeks by around 15% to 20%. If the prices stay at the current levels for the next few months, then the current account deficit which, is expected to be 4.2%, may actually come down by 100 bps to 3.2%. This will be a big positive. Certain metal prices like coal etc have also fallen, which is a positive. The rupee has also fallen by 17%-18%, which is a good sign. Last year, there were lots of earning downgrades, but this year the expectations are low. Hence there are some chances of an upgrade. Also, the FIIs have put in close to $10 billion in the current calendar year, which is a big positive. On the negative side, the headwinds continue and inflation, on the CPI basis, is still high. Lack of monsoon and the possibilty of drought are worrying factors because they will tie down RBI's hands to cut down interest rates. On the political front, after the Presidential elections, a lot of expectations were build-in about reforms. But as of now nothing concrete has happened. On the global front, everyday we keep hearing news about the European problems escalating. There is a lot of dichotomy in Europe. The 10-year Spanish bond yields are around 7.6%, while the 10-year US treasuries are at an 80-year low of 1.38%. They were around 2% in 1931 after the great depression. It went to 15% during 1981 and after that it has been continuously coming down. Today it is less than 1.4%. It shows that a risk-averse nature is there globally. So all these factors are currently affecting the Indian markets and that is why they are seeing some kind of pressure.