Strong pick-up in earnings is crucial

Samvat 2072 had its share of volatility for Indian equities where initial few months were marked by sharp selling while post budget bulls took charge, driving market all the way to within, touching distance of an all time high. Indian equities seem to be on a cusp of new growth trajectory enabled by several policy measures being taken and implemented, be it coal block allocation, spectrum auction for telecoms, deregulation of petrol and diesel prices, gas price reform, FDI in insurance & defense sectors, reduction in repo rate, 7th Pay Commission roll out, passage of GST Bill among few others. Monsoons have been near normal which is likely to boost agriculture dependent rural income. Better operating efficiencies, higher capacity utilization, slow pick up in pricing power as demand improves aided by higher disposable income, will translate to higher ROE’s of corporate India. Domestic cyclicals have turned from being earnings dragger to earnings driver while global cyclicals growth momentum is maintained. Based on aforementioned factors fructifying, we expect earnings growth to pick up momentum from 2QFY17 onwards. So far, financials led by NBFCs, housing finance and private banks have reported strong set of numbers. Automobiles, select companies from consumption space, agro-chemicals, IT stocks like Tech Mahindra and HCL Tech came out with stellar set of numbers. Traction in margins on account of lower input prices and operating leverage, continue to be underlying driver for profitability.

Though the market stands at a gain of over 25% from CY16 lows, yet the valuations are around 10-year average on 12-month forward earnings multiple. The Sensex trades at 16.8x one year forward earnings, at its long-period average of 16.9x. Sensex P/B is at 2.6x, near its 10-year average of 2.7x. Market-cap-to-GDP ratio of 75% (FY17E GDP) is below the long-period average of 78%. Valuations look attractive as we expect Sensex EPS to grow at 17% CAGR over FY16-18 as compared to 6% CAGR witnessed during FY08-16. Enablers being good monsoon, lower inflation, 7th pay commission roll out, GST bill passage and lower interest rates. Caution comes from continuous slowdown of the global economy, likely US rate hikes and geopolitical concerns particularly between India & Pakistan.

The week gone by was muted for ‘equity’ asset class which saw profit taking across the globe. Tentative participation by traders and investors was observed as take note of September quarter earnings update while gearing up for outcome of US Presidential election by middle of November. On sector front, most of them gained. Banking index led from the front gaining over 3.63% followed by financial services up 3.33%, IT 2.43%, infra 2.79%, metal 1.69%, pharmaceutical 1.01%, realty 2.07% while auto corrected (-1.19%).

Strong pick-up in earnings and return to double digit growth in revenue is crucial for markets to move up on a sustainable basis. We remain bullish on markets and advocate sticking to quality stocks having reasonable growth visibility for deploying money.

The writer is Head- Retail Research, MOSL.