Is Lack Of Corporate Earnings Growth Making Market Valuations Worrisome?    Oct 30, 2017


As soon as schools open after Diwali vacation, children will begin to feel the jitters.

Why?

Students are given their half-yearly scorecard.

It's a similar story with the corporate Inc.

Throughout October and in the first two weeks of November is the time when listed companies announce their Q2 (second quarter) earnings for the financial year. In the Indian context, Q2FY18 earnings data hold an insight to projecting the momentum of these numbers for rest of the year. Approximately 272 companies have announced their Q2FY18 results so far. According to Business Standard, their revenues collectively have risen about 11.3% while the operating profit growth has jumped a little over 9.5%.

Rally isn't backed by earnings…
Rally isn't backed by earnings…
Data as on October 28, 2017
(Source: NSE, PersonalFN Research)

While Nifty 50 has rallied nearly 20% over the last one year, P/E multiple on a trail earnings basis has peaked over 26 from approximately 22 about a year ago. In other words, the 20% rally isn't backed by growth in earnings which is why the P/E multiple has moved upwards rather than downwards.

Going by the Q2FY18 results declared so far, it seems there're more hits than misses. Earnings of three in every five Nifty companies, which have reported their numbers so far, have been in line with the expectations. Consumer-focused companies and quality financial names have done well. As compared to previous two quarters, the number of companies missing the estimates has fallen considerably, which is an encouraging sign. Nonetheless, a sharp rise in the Nifty over last one year has nullified its impact at least partially.

India's Q1 FY 2017-18 GDP growth sharply fell to 5.7% from 7.9% during the same time last fiscal. This gave the impression that the market was even more expensive.

Mr Dhananjay Sinha, head of research at Emkay Global Financial Services, stated. "There is a close correlation between economic growth and corporate earnings. The continued slowdown in the economy is likely to pull down corporate earnings, making it tough for bulls to maintain the current high valuations."

Mr Jan Dehn, London-based head of research at Ashmore Group, recently expressed his concerns about the future of Indian markets saying, "I do not think India will move to the top again. India's big reform efforts are behind us and the outlook is increasingly going to be dominated by politic."

In complete contrast, Mr Arbind Maheswari, head of India equities sales trading at Bank of America Merrill Lynch said, "The noise around slipping of macro fundamentals and lack of growth is bound to diffuse in some time. India has great long-term potential and there is tremendous investor comfort around Indian companies sustaining growth higher RoE for a longer period. While recent narrative has focused on some short-term trends, we are pretty confident that the secular story for India remains intact."

How to Assess the Present Situation?

The current market rally seems to be ignoring the valuations and lack of earnings growth. Primarily because there's high hopes of recovery.

Now that the Government has announced its plans to recapitalise the Public Sector Banks (PSBs), the market has resumed its upward journey after the pause over the last couple of months. Moreover, the Government aims to build 83,000 Kms of roads spending Rs 7 lakh crore. These two decisions are expected to create a massive impetus for economic growth in the future.

Until recently, the markets weren't factoring in these reforms, as unlike this time, measures taken to resolve the asset quality issues of the banks were inadequate. At present, the quantum of capital infusion isn't high enough to completely erase the impact of Non-Performing Assets (NPAs); but, it's good enough to improve the bank balance sheets considerably. Since improving the health of banks is considered the panacea for rapid growth, recent Government announcements are likely to create a buzz.

The Government has also indicated its readiness to tweak the provisions of GST to make it more taxpayers' friendly regime, as and when macroeconomic conditions permit. Whether or not these steps will lead to higher growth in corporate earnings, remains to be seen. For now, the markets look expensive. We are yet to see a sharp rise in the revenues and operating profits of the India Inc.

What mutual fund investors should do?

  • Never try to time the market
  • Invest as per customised asset allocation plan that considers personal financial goals and the risk appetite of the investor
  • Never speculate on the macroeconomic or corporate events such as industrial growth, GDP growth, and corporate earnings, etc.
  • Prefer the Systematic Investment Plan (SIP) route to invest in equity-oriented schemes

For superlative research-backed guidance to select best mutual funds, count on PersonalFN's unbiased mutual fund research services. FundSelect Plus, PersonalFN's model mutual fund portfolio service has a decade-long market-beating track record. You get access to 7 high-performing, time-tested readymade portfolios. Apart from four equity-oriented portfolios, you get access to three readymade debt mutual portfolios. The debt portfolios have been formulated with the investment tenure as the cornerstone. Depending on your investment horizon — less than 3 months, 3-12 months, or more than 12 months, you can choose the portfolio of your choice.

PersonalFN's track record speaks for itself. The three portfolio have comfortably raised their respective benchmarks. Don't miss the Special Anniversary Discount. Subscribe now!



Add Comments