Nifty FY22 EPS set to surge despite economic shock

Nifty earnings are expected to grow anywhere between 10 per cent and 30 per cent in the 12-months ending March 2022 (FY22), even as the GDP growth rate is likely to nosedive. So, are equity analysts disjointed from the economic realities? Not actually. Analysis by Emkay Research shows there is a “tenuous link” between Nifty earnings growth and GDP. Hence, it is not far-fetched for the Nifty pack to post double-digit earnings growth in FY22 even as the economy would still be recovering from the pandemic shock. The brokerage is estimating Nifty earnings per share to be ~645 in FY22, implying growth of 25 per cent over its FY21 estimates.

“The relationship between Nifty earnings growth and India’s economic growth has been rather weak. There is a high correlation in direction

— when the economy is accelerating, Nifty growth accelerates (and vice versa); here, the correlation is 90 per cent plus. However, in terms of magnitude, the correlation is quite low (sub 25 per cent),” says Sunil Tirumalai, strategist, Emkay Securities in a note.

The brokerage highlights how the share of Nifty companies’ profit in GDP and GVA (gross added value) has been meagre and falling . From a share of 2.8 per cent of GDP, it is now at 2 per cent.

“Our argument is companies that represent just the top 2 per cent (and falling) share of the economy hardly represent the entire economy,” says Tirumalai.

Furthermore, the dependence of Nifty companies on domestic sales has gone up in the past decade, but it is still lower than the 2000 levels. During the start of the millennium, nearly 86 per cent of the sales for Nifty companies came from the domestic market. This is now down to 65 per cent (up from 57 per cent in 2010), the Emkay data shows.

“While there was high dependence on the domestic economy for the Nifty stocks in the 2000s, the link broke significantly in the 2010s with the onslaught of the IT services and pharma sectors (into the Nifty). The profits of these companies, of course, depend a lot on external factors than the domestic economy,” Tirmualai says.

The brokerage says one should not l ook at Nifty stocks to take cues on economic activities in the country.

“With doubts being raised on whether the Nifty stocks can show such a sharp rise in earnings in FY22 when the economy still be recovering from the pandemic shock… we conclude that it is pointless to establish a link between the economic activity levels and Nifty earnings growth. A bottom-up approach will be appropriate,” says Tirmualai.