Business Head - Retail Broking
Factoring in the anticipation of healthy earnings recovery in Q4FY18, corporate earnings continued to remain depressed as Nifty 50 companies (barring PSB and high corporate exposure private banks) registered an annual growth of 12 percent. Similarly, BSE 500 (barring banks) registered a growth of 7 percent during the quarter as against expectation of over 15 percent growth.
Having seen dismal earnings environment for last four years (single digit growth), strong earnings improvement was important for the market to sustain premium valuations. The management commentary and underlying volume growth in most of industries has been impressive, thus going forward indicating towards a sustainable earnings growth.
While sectors like agrochemical, chemicals, hotels and metals have reported healthy improvement in earnings, banks with high corporate exposure in cement, capital goods, automobile and pharma have felt the pinch. Though volumes from cement, automobile and FMCG have witnessed decent recovery, cost pressures led by higher input and fuel prices took a toll on earnings.
As the transitory impact of GST implementation and demonetisation seem to be behind us, we believe volume growth is likely to remain healthy for most industries, which is also to be supported by increased government spending in the backdrop of general election in 2019.
India has been witnessing a contraction in the ratio of corporate earnings to GDP for last 8-9 years as excess supply and demand setback took a toll on earnings. India’s corporate earnings to GDP ratio currently hovers in the range of 3-4 percent as against 7 percent during FY09-10.
Hence, considering the likely pickup of rural consumption, corporate capex in the consequence of higher utilisation and recent reforms, we are hopeful that corporate earnings will witness double digit growth in coming quarters.
However saying that in the backdrop of higher fuel prices, higher interest rate and weakening rupee scenario, we are of the view that market may trade in a range and is unlikely to witness any strong appreciation in the next 6-8 months.
Our advice to investors is to invest in quality stocks, which are less vulnerable to macro concerns and have healthy cash flow visibility. We believe HDFC Bank, Kotak Mahindra Bank, Maruti, UltraTech Cement, Britannia and Titan appears to be decent bets at this point of time.