Lofty earnings growth estimates, liquidity boom keep stocks afloat

Analysts are forecasting Nifty EPS to grow 60% by FY23

Predicting the future is never easy. Ask any analyst on the Street. They have been consistently wrong at predicting what Nifty earnings per share (EPS) will be over the next two financial years.

Since FY11, the consensus estimates have always overshot actual earnings (see table). For instance, in FY17, the estimated two-year forward earnings growth was 63 per cent. This was way off the mark as the actual number came in at 19 per cent.

However, this has not deterred sell-side analysts from scaling back expectations. They are forecasting Nifty earnings to grow by more than 60 per cent by FY23 to Rs 730. Achieving the high growth forecasts is key as even at this elevated level, the Nifty is valued at 20 times—above historically averages. The index is likely to end the current financial year with EPS of between Rs 450 to Rs 490. So is the Street once again being over bullish?

“Consensus earnings growth estimates for the next two financial years are high but has to be seen in context. Between FY17 and FY20—and even now FY21—there has been hardly any growth in Nifty EPS. So the base is low. Also, there is a case for mean revision in growth rates. We may still miss the 60 per cent kind of growth estimates in FY21-FY23 but the extent of underachievement may not be very large,” says Deepak Jasani, Head of Retail Research, HDFC Securities.

 

When it comes to forecasting earnings of the Nifty or top 100 companies, banking and energy sectors hold the key. Most analysts have revised upwards earnings estimates for FY22 and FY23 in November after results posted by banks surprises positively.

“In the past five financial years, the growth has been low single digit. So a big upside is possible. But still is remains to be seen if 60 per cent kind of growth is achievable. Maybe some very large companies might. But the market as whole and mid and small-caps in particular may see 25-40 per cent kind of a growth,” says AK Prabhakar, head of research IDBI Capital.

Analysts say given the current market levels and growth projection, stocks are fully priced. However, this may not matter in the near-term given the liquidity boom.

A note by IDFC Mutual Fund says over a shorter time frame (between one and three year), earnings growth and market have a low correlation. Factors like news flow or liquidity –as it is seen now—hold a greater sway. But “over the medium to long term earnings growth has the highest correlation to stock and market returns” it says.