India Inc about to kick off earnings super-cycle, may double India’s m-cap by 2030


MUMBAI: Analysts from ICICI Securities to Morgan Stanley are sounding increasingly certain that the Indian Inc has entered an ‘era of earnings growth’ not seen over the past decade. The confidence stems from the hope that the Indian and global economies may soon exit the Covid-19 pandemic and enter the ‘roaring 20s’ of economic prosperity.

“Governments, globally, are driving counter-cyclical fiscal policies, which are being augmented by QE (quantitative easing) from major central banks, thereby, increasing the likelihood of a global revival in demand,” Vinod Karki and Siddharth Gupta of ICICI Securities said in a recent note.

Karki and Gupta believe the cycle of gloom in terms of earnings growth that the Indian corporate sector was caught in over the past seven years is coming to an end. Analysts have upgraded earnings expectations from the September quarter onwards for the first time in years.

Earnings mirage

Forecasting earnings growth in India has been an excruciating exercise since 2014, as analysts would begin the financial year projecting strong earnings growth only to taper them down in the later months when corporate earnings disappoint.

While the earnings disappointment over the past seven years has hardly affected Nifty, which has more than doubled during this time, it has led to a strange disconnect between the ground reality and the stock market as well as concentration of market returns.

“As time rolled forward, the trailing (previous 12-months) and the forward earnings stagnated while actual earnings kept on disappointing due to volatile earnings from the cyclical sectors and a few defensives such as telecom and pharma, resulting in downgrades,” Karki and Gupta said.

Aligning stars

Morgan Stanley believes “the stars are aligned for a new profit growth cycle.” According to the brokerage, if the share of corporate profits in the GDP were to revert to its mean of 3.5 per cent from its historical lows currently, “it can give an annual compounded growth in earnings of 23% for the broader market.”

Karki and Gupta believe earnings of the 61 per cent of Nifty50 companies that are cyclical in nature are showing traction again and it may bring forth the importance of ‘time value of money’ as each incremental quarter will accumulate 5-6% to the earnings base.”

Such strong earnings growth in the coming years is likely to set up Indian equities for the best returns runway in years. Morgan Stanley says India’s market capitalisation could more than double by 2030 at $6.4 trillion.

“With accelerating earnings and reasonable relative valuations, trailing underperformance in the past five years and strong policy traction, India seems set to beat emerging markets equity returns in the coming years,” the brokerage said.

Roaring 20s with asterisk

A lot of the bullishness displayed by analysts on earnings is contingent on the global economy emerging out of the pandemic like a race horse out of the starting barrier as well as the execution of the government’s recent measures on boosting the export economy.

The government’s focus on providing stimulus to the economy through larger capital spending, and its recent reforms in the labour and agriculture markets are expected to help reverse the downward trending long-term GDP growth of the economy.

“We see risks to our base case from the global growth environment, and delivery and execution of policy reforms required to support the medium-term growth trajectory,” Morgan Stanley said.

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