That explains why analysts have downgraded many companies; in fact, experts point out that they haven't seen so many downgrades after a quarter in the recent past. Merrill Lynch downgraded 16 stocks, although it did upgrade another 17. According to Kotak Securities, 80-85 per cent of the firms did as expected, 5 per cent were upgraded and 10 per cent were downgraded. "Our concern is that we are seeing some downgrades now. As most of the stocks look fairly valued or even overvalued, the scope for upgrades is less," says one analyst. "I think what we are really seeing is a rationalisation or a toning down of expectations," says Mukadam.
Finally, there's another fact to contend with. Most analysts have already factored in the expected results over the next several quarters in the existing values of the stocks. And they are now looking at expectations in fiscal 2007-08. "People are now talking about the numbers which will come out two years later. This leaves little for investors in the shorter term," says Sinha. It also implies that there will be little opportunity for any upgrades next fiscal. What's worse is that any adverse numbers in the next few quarters could disrupt the bull run, and result in another correction.
On the positive side, the liquidity factor in the Indian bourses is still buoyant. Although there has been an outflow ofFII (foreign institutional investor) money in the last few weeks, chances are that this may turn out to be a record year for foreign investment. However, theFIIs are likely to book profits at regular intervals and also seek opportunities in other emerging markets. Indian markets, for instance, have been outperformed by South Korea, where the bullish trend has been led more by domestic flows rather than foreign inflows. Sooner than later, theFIIs will flock such markets. "In India, we are seeing more interest from domestic mutual funds now led by strong flows from retail investors," says Holland.
Couple that with the fact that analysts are sure that India Inc can easily clock a 20 per cent growth in profits over the next few quarters. And that's good news for investors and the Sensex. However, it must be added that most analysts are now looking at quarter results cautiously and with a little bit of sceptism. As one of them says, "Post-Q2, it's time for a reality check."
