Baiting The Bull

Investors brace themselves as India's markets head towards bear territory.

- Samar Srivastava

As Hindustan Unilever Ltd (HUL) prepared to report earnings on October 15 there was every expectation that India’s largest consumer goods company would present a stellar set. Nearly four years of low consumer price inflation had put more money in the hands of Indian consumers. The company had benefited from benign commodity prices and a cut in tax rates. Urban consumers had uptraded to more expensive varieties of toothpastes, soaps and detergents while their rural counterparts had entered the consuming class.

The results, announced after market hours, clearly met expectations. Volumes had grown 10 percent while profitability rose 12 percent. What didn’t meet expectations was the stock reaction. The next trading day the stock closed down 2.2 percent, shaving $1 billion (7,400 crore) of fits $45 billion market cap. The benchmark Sensex ended the day up 0.7 percent. Clearly, the market wasn’t willing to add a higher price for future consistent growth.

In many ways the market’s reaction to HUL’s results was an apt summary of its travails over the last six months. Increasingly, improved performance has not translated into higher multiples for future growth—a classic sign that signals the advent of a bear market. As investors become more cautious, it is important to remember that this comes at a time when on aggregate Indian companies are on track to post improved earnings over the next year. A 13 percent depreciation in the Indian rupee has not resulted in any repricing of the prospects of Indian exporters save for information technology companies. And spare a thought for those who’ve missed their earnings. They have been put in the doghouse with valuations cut by 40-60 percent.