Earnings increases can boost stocks and further boost valuations

A sustained economic recovery is taking hold as demand improves and supply-side bottlenecks subside, leading analysts to revise their estimates of future corporate results.

An increase in vaccination coverage, a decrease in new Covid cases, an improvement in consumer demand and a potential V-shaped economic recovery all add to earnings optimism, analysts said.

Analysts’ earnings per share (EPS) estimates for members of the 50-share Nifty Index are up 11.42% since April 1. For Sensex companies, analysts have raised their EPS targets for the year ended March 31st by 9.87%.

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Growth expectations

Consumer demand is likely to be the main driving force behind valuations, even if rising exports and higher taxes on goods and services (GST) point to improving corporate performance, said Deepak Jasani, retail research head at HDFC Securities.

“If the economy picks up and we see a sharp drop in Covid-19 cases, the stability of industry indicators and the surge in vaccination rates, corporate earnings are expected to improve,” said Jasani.

However, earnings recovery is likely to be mixed, as parts of the economy are lagging behind.

As a result, valuations upside could be limited in sectors like metals, oil & gas, cement, capital goods, IT and infrastructure, but telecommunications and chemicals could do well, Jasani said.

He added that automobiles, packaged consumer goods, drug manufacturers, banks, and non-bank lenders may not see large increases in profits.

“However, IT companies continued to experience strong growth due to the increased acceptance of digital transformation and the increasing offshoring from large customers,” added Jasani.

Mitul Shah, director of institutional stocks research at Reliance Securities, said pharmaceutical and automotive earnings could lag other sectors.

He expects that noticeable increases in earnings will be achieved in the IT, construction, real estate and hospitality segments.

“A much faster than expected recovery after the second wave, less deterioration, and a rebound in the monsoons supported the economy in the fourth quarter of FY22. Additionally, the second half of FY22 appears to be more promising, with strong GST surveys, higher industrial production and under control of inflation. Improvements in all of these economic indicators resulted in higher profits at Sensex and Nifty, “said Shah.

Pankaj Panday, head of research at ICICIDirect, said India is on the cusp of high double digit growth, with average annual earnings growth of 26% for FY21-23.

“Corporate earnings have been near stagnant in the recent past, with Nifty Earnings CAGR (compound annual growth rate) being 5% for FY19-21. With unchanged earnings estimates and adjustment of the price-earnings ratio (PE), we assign Nifty a fair value of 20,000 and evaluate it in FY23 at 24.5 times the P / E ratio compared to 22 times previously. Sensex is spotted at 66,600, “said Panday.

The valuations of the Indian markets have risen continuously. Nifty is trading at 22.12 times its year-long forward price-earnings ratio, while MSCI World is trading at 18.49 times and MSCI Emerging Markets is trading at 12.62 times. Nifty’s annual forward PE has a premium of 13% versus its long-term average of 17.9.

“The Nifty 12-month forward price-to-book value is three times a premium of 15% from its historical average of 2.6,” Motilal Oswal Financial Services said in a September report.

Analysts at Credit Suisse Wealth Management, India, expect the P / E premium for Indian equities to continue amid improving market fundamentals.

In terms of capital flows, India is showing remarkable resilience despite high valuations, analysts said. “However, on the cost side, there are concerns and so there is a possibility that we will continue to be under margin pressure in the coming quarter. Still, recent government announcements on the telecommunications, banking and automotive sectors are cheap and likely to boost investor sentiment. We continue to encourage investors to invest in Indian stocks in line with their strategic weighting in their portfolios, albeit with lower risk, “said a report by Credit Suisse Wealth Management.

Of course, the Reserve Bank of India and the government took several measures to increase liquidity in the wake of the Covid-19 outbreak, which have also contributed to the rising valuations and have pushed the benchmark indices consistently to record highs at short intervals over the past year.

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