Blue chips retrace post-poll gains on weak earnings momentum

As the Street discounts the reality of slow economic momentum and tepid earnings growth, nearly a quarter of the Nifty stocks now trade around their values of the middle of May 2014, before the outcome of the general elections was announced. For instance, on Monday, capital goods giant Larsen & Toubro traded as low as Rs 1,375 per share, below the value at which it had traded on a day ahead of the outcome of the general elections. The stock has lost more than 5% since Thursday, after the company announced below-expected earnings for Q2FY16 and cut its order inflow guidance for the year. Shares of L&T have lost nearly a quarter of their value since July, as the equity markets ran out of the upward momentum.

At least six brokerages, including HSBC, Citi, BofAML, Barclays and Deutsche Bank, downgraded the L&T stock on the back of dismal order outlook by the company. On Friday, L&T reported a 25% decline in its order inflow for the first half of FY16 and reduced its flow guidance to 5-7%, against 15% it had guided for at the beginning of the year.

HSBC has noted that despite the L&T management revising down their order outlook, given the sharp decline in new orders during the July-September period, the new guidance is also at risk. It said slower-than-expected recovery in investment cycle and the weakening outlook on the Middle East are also considered threat to the current outlook. Besides capital goods giant, metal producers such as Vedanta and Hindalco which witnessed a  sharp plunge in commodity prices affecting their earnings in the last two quarter now trade  40% to 50% below their prices as on May 15 last year. Both these stocks had ridden the rally in the markets after the BJP won simple majority in the polls.
Leading PSU stocks —GAIL, Bhel, Coal India — as well as Bank of Baroda now trade at a significant discount of 4% to 23% to their levels ahead of poll outcome. The clear majority at the Centre and the government’s campaign highlighting the need for economic reforms had raised buying interest in PSU stocks with the BSE PSU index rallying 24% within three weeks of the poll outcome. The index has now traced back this rally.