Earnings upgrades likely to fire up stocks, soothe investor fears
MUMBAI: Significant earnings upgrades are likely to provide respite to cagey investors, as stock valuations hover near historic highs.
A sustained economic recovery is taking hold as demand improves and supply-side bottlenecks ease, prompting analysts to upgrade their estimates about what the future holds for corporate bottom lines.
Widening vaccination coverage, a decline in new Covid cases, improving consumer demand and a potential V-shaped economic recovery are adding to the earnings optimism, analysts said.
Analysts’ earnings per share (EPS) estimates for members of the 50-stock Nifty index have increased by 11.42% from April 1. For Sensex companies, analysts have raised their EPS targets by 9.87% for the year ended March 31.
Consumer demand is likely to be the key driving factor for valuations, even as rising exports and increased goods and services tax (GST) collections point to an improvement in company performance, said Deepak Jasani, retail research head at HDFC Securities.
“As the economy picks up, and we witness a sharp drop in Covid-19 cases, stability in industrial indicators and ramping up of vaccination coverage, corporate earnings are estimated to improve,” Jasani said.
However, the earnings recovery is likely to be uneven as parts of the economy appear to be lagging behind.
As a result, the upside in valuations may be limited in sectors such as metals, oil and gas, cement, capital goods, IT and infrastructure, but telecom and chemicals may perform well, Jasani said.he added that automobiles, packaged consumer goods, drugmakers, banks and non-bank lenders may not see much earnings upgrades.
“IT companies, however, continued to report strong growth on the back of higher adoption of digital transformation and rising offshoring by large customers,” Jasani added.
Mitul Shah, head of research for institutional equities at Reliance Securities, said that earnings of pharma and auto may lag behind other sectors. He expects IT, construction, real estate, hospitality segments to see noticeable earning upgrades.
‘Second half of FY22 seems to be more promising’
“Much faster-than-expected recovery post-second wave, lower deterioration and monsoon recovery have supported the economy in the fourth quarter of FY22. Moreover, the second half of FY22 seems to be more promising, with strong GST collections, higher industrial production and inflation under control. Improvements in all these economic indicators led to upgrades in earnings for Sensex and Nifty,” Shah said.
Pankaj Panday, head of research, ICICIDIRECT, said India is on the cusp of a high double-digit growth trajectory with annual average earnings growth over FY21-23 at 26%.
“Corporate earnings have been nearly stagnant in the recent past, with FY19-21 Nifty earnings CAGR (compound annual growth rate) at 5%. Keeping earnings estimates unchanged and tweaking the price-to-earnings (PE) multiple, we assign a fair value of 20,000 to Nifty, valuing it at 24.5 times PE on FY23 versus 22 times earlier. Sensex is seen at 66,600,” Panday said.
Valuations of Indian markets have been rising continuously. Nifty is trading at 22.12 times its one-year forward price-toearnings ratio, while MSCI World is trading at 18.49 times and MSCI Emerging Markets is at 12.62 times. Nifty’s one-year forward PE is at a premium of 13% versus its long-term average of 17.9 times.
“At three times, Nifty 12-month forward price-tobook is at a 15% premium to its historical average of 2.6 times,” said Motilal Oswal Financial Services in a report in September. Analysts at Credit Suisse Wealth Management, India, expect the PE premium for Indian equities to continue, given the market’s improved fundamentals.
In terms of equity flows, India is showing remarkable resilience despite high valuations, analysts said.
“However, concerns are emerging on the cost side and, hence, there is a possibility that in the upcoming quarter, we may continue to see margin pressures. Nevertheless, announcements by the government on the telecom, banking and auto sectors are favourable and will likely boost investor sentiments.,” Credit Suisse Wealth Management said.