Earnings upgrade could lead to uptrend in stocks, further increase in valuations

Continuing economic recovery is taking hold as demand improves and easing supply-side barriers prompt analysts to upgrade their projections of what the future holds for corporate bottom lines.

Analysts said expanding vaccination coverage, a drop in new Covid cases, improving consumer demand and a possible V-shaped economic recovery are adding to the optimism of earnings.

Analysts’ earnings per share (EPS) estimate for members of the 50-stock Nifty index is up 11.42% since April 1. Analysts for Sensex companies have increased their EPS target by 9.87 per cent for the year ended March 31.

HDFC Securities Head Retail Research Deepak Jasani said consumer demand is likely to be the key driving factor for the valuations despite rising exports and increased Goods and Services Tax (GST) collections.

“As the economy picks up, and we see a sharp decline in COVID-19 cases, stabilization in industrial indicators and accelerating vaccination coverage, corporate earnings are expected to improve,” Jasani said.

However, income recovery is likely to be uneven as some parts of the economy lag behind.

As a result, valuations may be limited in sectors such as metals, oil and gas, cement, capital goods, IT and infrastructure, but telecom and chemicals may do well, Jasani said.

He said that the earnings of automobiles, packaged consumer goods, drugmakers, banks and non-bank lenders may not see much growth.

“However, IT companies continue to report strong growth on the back of greater adoption of digital transformation and increased offshoring by large customers,” Jasani said.

Mitul Shah, Head of Research, Institutional Equity, Reliance Securities said pharma and auto earnings may lag behind other sectors.

He expects significant improvement in earnings in IT, construction, real estate, hospitality segments.

“A faster-than-expected recovery after the second wave, lower fall and recovery of monsoon supported the economy in Q4 of FY12. Moreover, the second half of FY22 looks more promising, with strong GST collections, higher industrial output and inflation under control. Improvement in all these economic indicators has led to improvement in the earnings of Sensex and Nifty.

Pankaj Pandey, Head of Research, ICICIDirect said that India is on a high double-digit growth trajectory with annual average earnings growth at 26% in FY21-23.

“Corporate earnings have been almost stagnant in the recent past, with FY19-21 Nifty earnings CAGR (Compound Annual Growth Rate) at 5%. Keeping earnings estimates unchanged and changing the price-to-earnings (PE) multiplier, we assign a fair value of 20,000 to Nifty, which is valued at 24.5 times PE on FY23, from 22 times earlier . Sensex is seen at 66,600,” Pandey said.

The valuations of the Indian markets are continuously increasing. Nifty is trading at 22.12x its one-year forward price-to-earnings ratio, while MSCI World is trading at 18.49x and MSCI Emerging Markets at 12.62x. The one-year forward PE of Nifty is at a premium of 13%, while the long term average is 17.9 times.

“At three times, the Nifty 12-month forward price-to-book is at a 15% premium to its historical average of 2.6 times,” Motilal Oswal Financial Services said in a report in September.

Analysts at Credit Suisse Wealth Management, India, believe that the PE premium for Indian stocks will continue to rise, given the better market infrastructure.

Analysts said that in terms of equity inflows, India is showing remarkable resilience despite high valuations. “However, concerns are emerging on the cost side and hence, there is a possibility that in the coming quarter, we may continue to see margin pressure. Nevertheless, the recent announcements by the government on telecom, banking and auto sectors are favorable and are likely to boost investor sentiments. Credit Suisse Wealth Management said in a report, “We continue to recommend that investors continue to invest in Indian equities commensurate with their strategic weighting in the portfolio, albeit with lower risk.”

To be sure, the Reserve Bank of India and the government have introduced several liquidity boosting measures following the COVID-19 outbreak, which, too, has added to rising valuations, consistently sending benchmark indices to record highs at short intervals. Is. past year.