Nifty's earnings growth to take off from September quarter, says CLSA

In the past five years, Nifty earnings growth has increased at a measly 2% CAGR

Expect Nifty earnings growth to move to double digits from the September 2017 quarter onwards, foreign brokerage CLSA has said. The brokerage said the macroeconomic environment is improving as “disruptive forces” such as demonetisation, goods and services tax (GST) and bad loan recognition are fading. 

In the past five years, Nifty earnings growth has increased at just two per cent compounded annual growth rate (CAGR). The low base offers a good opportunity to “launch healthy” year-on-year (y-o-y) earnings growth, the CLSA said.

The Indian markets have rallied sharply close to 20 per cent this year. As earnings growth is yet to catch up, the rally in stocks have made valuations expensive compared to historic levels.

Market players say double-digit earnings growth is imperative to sustain the rich valuations in the market.

The CLSA said “strong, sustainable domestic equity inflows should continue to support rich valuations.” Mutual funds (MFs) have invested more than Rs 60,000 crore into domestic stocks so far this year. The strong flows have come on the back of consistent investor inflows into equity schemes to the tune of nearly Rs 10,000 crore a month.

CLSA expected the pace of inflows into investor MFs to continue.

“As against household savings of $630 billion per year, the current $15-18 billion annual equities inflow appears sustainable. This could underpin the market multiple, even though it is at the top end of its historical band,” said Mahesh Nandurkar, head of India strategy at CLSA, in a detailed report titled ‘Primed and Ready.’

The brokerage said investors should opt for stocks where high-valuation multiples are due to low-cycle earnings.

“As the capex-cycle recovery sets in, earnings growth can improve materially for corporate banks (such as ICICI Bank and SBI), giant engineering and construction players (L&T and Ambuja). The expected housing boom should augur well for housing-finance companies, building materials names (cement firms and Astral) and property developers (Godrej Properties). We also like IndusInd, Jubilant FoodWorks and metals players (Vedanta and JSW Steel),” the report said.

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