Markets bet on surge in earnings growth

India has the most aggressive earnings growth forecast among the world’s major stock markets, and that is probably why the Sensex and the Nifty are continuously scaling new heights.

The combined net profit of the BSE Sensex and NSE Nifty is expected to rise around by 45 per cent in the next two years in constant currency terms, beating most other markets by a wide margin.

Bulls have raised their earnings expectations despite India Inc’s poor earnings growth in the last few years. The combined earnings (in dollar terms) of Nifty companies were down 0.8 per cent cumulatively in the last three years, while the earnings of Sensex companies were 5.4 per cent lower during the period.


The UK’s FTSE 100 is expected to top the growth chart with its underlying earnings rising 74 per cent by the end of December 2018 from their current level. The FTSE 100 index is, however, not comparable with India’s benchmark indices because of a large presence of metal and mining companies that are witnessing a rebound after years of poor performance. Metal and mining companies have a small weight in Indian indices.

The analysis is based on the forward earnings estimates of the world’s major equity indices in dollar terms as compiled by Bloomberg.

Experts see a bull bias in the forward earnings estimates, given the strong performance of Indian stock indices during the year. “There has to be a justification for the recent rally on Dalal Street and the rich valuation for most frontline stocks. Analysts are justifying the rally by building in expectations of strong double-digit earnings growth over the next two years,” said G Chokkalingam, managing director, Equinomics Research & Advisory.

According to him, this is normal in a bull run, but investors should take it with a pinch of salt. Investors, however, seem to have taken the forward earnings estimates at face value, pushing the benchmark indices to new highs and making India one of the best-performing markets in dollar terms in 2017. (See chart)

The NSE Nifty 50 index is up 28.4 per cent in dollar terms this year, the second highest among the world’s top 13 markets. South Korea’s KOSPI tops the list with 30 per cent year-to-date (YTD) returns in dollar terms. Borsa Istanbul trails India with 23.9 per cent YTD returns in dollar terms.

graph Other experts are advising investors to discount the forward earnings estimates, given their poor history. “Actual earnings have repeatedly been significantly lower than forward estimates since the 2008 global financial crisis. Every financial year, analysts begin with expectations of double-digit growth in earnings but eventually settle for low single-digit growth. The pattern may repeat itself,” said Dhananjay Sinha, head of institutional research at Emkay Global Financial Services.

In the eight years since 2009, Nifty companies’ earnings are up 24 per cent in dollar terms, growing at a compound annual rate of 2.7 per cent. Sensex companies have done worse with a 2 per cent CAGR over the period.

India is among the bottom-ranked markets in actual earnings growth over the last three years. Nifty companies’ underlying earnings growth of 10 per cent in the last year ranked ninth among the world’s top 13 markets. Sensex companies fared even worse with 5.5 per cent earnings growth in the last 12 months. Only companies in South Africa, the US and Russia reported lower earnings growth in constant currency during the period.

In the last three years, earnings growth in India was ranked eighth, with companies in Russia, France, Japan, Indonesia, Germany, Brazil and the US ahead of Indian firms.


Markets bet on surge in earnings growth

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