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Corporate earnings growth in India is expected to recover this financial year and outpace its regional peers, but is likely to trail real economic growth in the near-term, Goldman said in a report today. According to the global brokerage firm, the flat BSE 200 corporate earnings amidst strong real GDP growth, should not be taken as evidence against a pick-up in growth, but as a function of "measurement and composition" differences. "Looking forward, we expect the macroeconomic recovery to continue, earnings to grow at a faster pace and Indian equities to outperform the rest of the region," Goldman Sachs said in the research note. That said, the under-representation of agriculture and elevated credit costs for public sector banks may continue to cause earnings growth to trail real economic growth in the near-term, Goldman Sachs noted. After five consecutive quarters of decline, profits for the past two quarters for MSCI India have grown 9 per cent and 7 per cent year-on-year respectively and are tracking roughly in line with 10 per cent full-year forecast. "Consequently, our strategists remain overweight on Indian equities as cyclical upturn and earnings recovery is on track.
They expect MSCI India to deliver 12 per cent EPS CAGR for 2016/17, highest among its regional peers," the report added. In Q2 2016, BSE 200 earnings remained flat while real GVA grew by 7.3 per cent year-over-year. One of the main reason behind this difference is that corporate earnings are reported in nominal terms while economists tend to look at economic growth in real terms," the report said. Moreover, the equity market has different sector weightings than the economy as a whole. While, agriculture is a significant part of India's economy it is essentially absent from the equity market. Further, commodity prices are more important to equity market than to the economy as a whole and another major difference is that while manufacturing companies (including pharmaceuticals and chemicals industry) constitute a relatively larger share of the equity market, services are somewhat 'under-represented'. According to Goldman Sachs' strategy team, the recent reporting season suggests signs of a gradual recovery in corporate earnings. In order to benefit from the swings in the underlying economic growth, investors should buy consumption beneficiaries (those stocks that are likely to benefit from improving agriculture growth and the civil service wage hike) and government capex beneficiaries (that are poised to benefit from government spending on public infrastructure projects), the report said.