In its recent report authored by Ridham Desai and Sheela Rathi, Morgan Stanley expects the earnings to grow at a compounded annual growth rate (CAGR) of 16% over FY16 - 18. Till now, the earnings, it believes, were burdened by weak growth, high and rising interest costs, with excessive private sector debt and overcapitalised balance sheets.
"Our 16% earnings CAGR forecast over F16-18 for the Sensex and the broad market puts our F18 Sensex EPS estimate 300 basis points (bps) ahead of consensus. We expect upward earnings revisions, a factor that drives stock prices up. Our Sensex target for June 2017 offers double - digit relative US dollar upside versus emerging markets (EM). India is currently +200 bps overweight in our EM portfolio, second only to Taiwan," the report says.
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Corporate India is sending positive signals via higher dividends, Morgan Stanley says, and while the market expects higher growth for 2016-17, a multiyear earnings cycle may not be priced in - so there may be upside potential for three - five year investors. The market, according to the research house, is pricing in about a 10% profit CAGR, 2016-20, which they think is conservative.
The optimism doesn't seem to be unfounded. Morgan Stanley believes there are four key factors that could lead to an improvement in earnings - include bottoming out of India's real and nominal gross domestic product (GDP); the government and the RBI have fixed saving; household and government saving are up. Corporate saving (read: profits) is likely next; corporate debt cycle seems to have peaked and public investments are rising; and India's terms of trade have improved, which feeds into earnings.
A study by Business Standard earlier in August 2016 also suggested an improvement in earnings for the quarter ended June 2016. Combined net sales for around 1,600 companies, excluding financial and oil & gas sectors, was up 6.4% year-on-year (y-o-y), during the first quarter of FY17, while the combined net profit during this period was up 11.7 per cent y-o-y.
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Analysts at HSBC, too, believe that In India, most of the results (17%) have been in-line with consensus forecasts.
"While the technology sector's net income was largely in-line, uncertainties surrounding the UK's Brexit vote have weakened the outlook. Industrial companies reported better-than-expected earnings, led by volume growth and margin improvement; despite a strong Q1FY16, management guidance in the sector is cautious on the demand outlook, as growth is still not consistent," says Herald van der Linde, head of equity strategy for Asia Pacific at HSBC in a recent co-authored report with Devendra Joshi and Anurag Dayal.
On the other hand, Morgan Stanley believes cyclicals may outpace defensives going ahead. They now like discretionary, private banks and industrials over staples and healthcare in terms of sectors. In its 'Focus List', Morgan Stanley is replacing Cafe Coffee Day with LIC Housing.
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Analysts at Kotak Institutional Equities expect the net profit of the Nifty-50 Index to grow 14.4% in FY2017 and 20.7% in FY2018. A large portion of the incremental profits of the Nifty-50 index between FY2016 and FY2018E is likely to come from the banking and metals & mining sectors, they say.
"Our strong expected growth in earnings of the market over the two next two years reflects higher profits in PSU banks due to lower credit costs, sharp improvement in profitability of the metals & mining sector; domestic economic recovery, led by consumption due to normal monsoons and 7th Pay Commission recommendation implementation; and normalisation of profits in pharma, technology, media and telecom (TMT) companies, which suffered from weak performance for various reasons in FY2016," point out Sanjeev Prasad and Sunita Baldawa of Kotak Institutional Equities in a report.