The resilience of Indian shares to hold their ground at record-high levels, despite calls for caution by some foreign fund managers, indicates strong underlying faith among market participants on the outlook. Teething troubles from the launch of a new goods and services tax (GST) have affected economic activity this quarter, but consensus among pundits is for growth to bounce back by October.

The strong possibility of the central bank lowering its repo rate, by 25 basis points to 6 per cent when the Monetary Policy Committee meets on August 2, is also supporting the market. Good monsoon rains should improve the prospect for farm output and enable the central bank to ease policy, after June retail inflation dropped to 1.54 per cent, the lowest since the government started releasing the data more than 5-1/2 years ago.

“Shares are pricing in expectations for an earnings recovery,” said equity trader Manish Dalal. “Some of the results have reinforced those expectations and we seem to be on the right path.”

He said disruptions caused by the launch of GST on July 1 is bound to affect output and sales as companies grapple with the procedures, but the uniform tax that replaced multitude levies will ultimately boost manufacturing and movement of goods and services across the country.

Reliance shines

Shares in Reliance Industries Ltd, run by India’s richest man, Mukesh Ambani, soared to their highest in 9-1/2 years after the energy conglomerate’s stand-alone quarterly profit climbed a better-than-expected nine per cent to Rs81.96 billion in the June quarter, riding on strong refining margins. The company also announced a one-for-one bonus share issue, the first since 2009, cheering investors.

Reliance, whose shares have a market value of more than Rs5 trillion, rose 3.6 per cent on Friday, lifting benchmark indices to positive territory for the week. The top-30 Sensex closed at 32,028.89, notching modest weekly gains. The 50-share Nifty rose 0.3 per cent to 9,915.25.

The company’s sophisticated complex in Jamnagar in Gujarat is capable of refining 1.2 million tonnes a day of high-sulphur cheap crude oil, enabling it to pocket higher margins. Profit earned on each barrel of crude processed — a key profitability gauge for a refiner — was at a nine-year high of $11.9 per barrel for the June quarter, outperforming the benchmark Singapore complex margins by $5.5.

Addressing the company’s annual general meeting, Ambani said its telecom unit, Reliance Jio Infocomm, will offer a 4G-enabled phone on a refundable deposit of Rs1,500 starting August 15. The JioPhone will come with tariff plans as low as Rs23 for two days or Rs153 monthly. In less than a year of commercial launch the company has garnered 125 million subscribers and the cheap handsets should further boost the numbers.

The announcement of cheap handset and low tariff plans rocked rivals such Bharti Airtel and Idea Cellular, sending their shares sharply lower.

Earnings in focus

Expectations for earnings recovery, the prime mover behind the stocks rally, should get a shot in the arm from the robust April-June results of blue-chip companies. The outlook for companies that cater to consumers directly and rural-focused is particularly seen upbeat because of rising disposable incomes and higher living standards.

UltraTech Cement, the country’s largest cement maker, reported a 15 per cent rise in consolidated quarterly profit. Rival ACC Ltd, controlled by LarfargeHolcim Ltd, the world’s No. 1 cement maker, posted a 33 per cent jump in earnings. Demand for cement has risen on the back of heavy investments in infrastructure and housing projects. Other construction materials, including paints, tiles, bricks, electrical fittings and sanitary and piping items are also flying off shelves.

Consumer goods maker Hindustan Unilever Ltd reported a higher-than-expected 9 per cent rise in quarterly profit, helped by higher sales from its personal care segment.

Wipro Ltd, India’s No. 3 software services exporter, made up for a disappointing revenue forecast by announcing an up to Rs110 billion share buy-back. Bigger rivals Tata Consultancy Services earlier said it would buy back shares worth Rs160 billion and Infosys Ltd decided to return $2 billion to shareholders.

Maruti, ICICI

Several big companies are scheduled to release their quarterly numbers in the coming week. These include Maruti Suzuki India Ltd, which makes every second new car sold in India, leading private-sector lender ICICI Bank and diversified consumer goods and cigarette firm ITC on Thursday. State-controlled ONGC, the nation’s biggest oil producer, HCL Technologies, Idea Cellular, Biocon Ltd and IDFC also unveil their results on the same day.

The board of JustDial, which announces earnings on Monday, will also consider a share buy-back. HDFC Bank, Ambuja Cement, Bharti Infratel and HUDCO release results on the same day. The line-up on Tuesday include Asian Paints, Axis Bank, Bharti Airtel, Hero MotoCorp and ICICI Prudential, with Federal Bank, HDFC Ltd, L&T Finance Holdings and Yes Bank the following day.

Engineering and construction conglomerate Larsen & Toubro Ltd, which has major projects in the Middle East, is set to report results on Friday. Others include LIC Housing Finance and India Cements.

Caution call

For all the talk about earnings recovery, there are still many grey areas. With the market at record levels, there is every reason to watch your step.

Nilesh Shah, who runs Kotak Asset Management, believes investors should stay away from companies that have too little floating stock because prices of these shares tend to have high valuations.

“We are clearly staying out of those stocks and those sectors,” he told ET Now television channel. “Also, there are a couple of sectors where valuations are pricing in exponential growth and our feeling is that while the long-term growth is accurate, the expectation of exponential growth cannot be met every quarter. So, we are trimming our exposure in those sectors and those companies.”

“We are looking out constantly to figure out companies especially in some of the beaten down sectors where valuations are still reasonable to see if there is any trigger which will unlock the value or which will rerate these companies or sectors.”

He said the earnings recovery was only in some pockets such as consumer-related, but export-driven software services and generic drug makers, public sector banks and infrastructure companies need to also join in. “We need broad based earnings recoveries for markets to sustain at current level.”

The writer is a journalist based in India