Mumbai: A rally that's taken India's stock market to record highs faces a reality check as profits at some blue chips have been bolstered by non-operating items such as tax credits and investments, rather than by a revival in demand.
The reliance on other income to pad profits in January-March quarter results reported thus far indicates that an anticipated economic recovery has yet to take hold, and that the current rally may be running ahead of fundamentals. "Markets would increasingly start looking expensive if earnings don't keep pace with it," said Aneesh Srivastava, Chief Investment Officer at IDBI Federal Life Insurance in Mumbai.
Recent share-price gains "would be futile unless operating margins and profits follow," he added. Both the NSE index, the country's biggest stock exchange, and the BSE Sensex have hit record highs since February. A market rally for the NSE t has been driven by bets that the opposition Bharatiya Janata Party (BJP) will handily win elections concluding this month, and by hopes that India's economy is on the mend after hitting a decade-low growth pace.
At this year's peak - on April 23 - the index was up 8.5 per cent. As of Friday, it was 6.2 per cent ahead in 2014. Analysts had widely expected core earnings to recover after an analysis of 128 companies in the BSE 200 index showed operating margins fell to 14.7 per cent in the October-December quarter, the lowest since December 2008.
