Nifty earnings lag GDP growth and weighing on equities, shows data

In theory, GDP growth and Nifty earnings should mirror each other. India’s top companies ought to be outstripping national output, but data shows that is not the case. At 19.2 times trailing earnings, the Nifty 50 is pricing in profit growth of about 11 per cent a year — below the economy's nominal growth rate of 12.6 per cent, a Business Standard analysis shows.

 

Markets are now pricing in a lower earnings growth rate for Nifty 50 companies compared to gross domestic product growth, and that is getting reflected in stock prices. Over the last four years, Nifty 50 earnings are up only 10 per cent — effectively growing at par with GDP — and that reality is now playing out in the market.

 

India’s key equity indices ended lower in September, declining despite a GDP growth rate of 7.8 per cent at the end of August, as rising US Treasury yields and oil prices weighed on investor sentiment.

 

In September, the Nifty 50 and Sensex dropped 6.1 per cent and 5.8 per cent, respectively — marking their steepest single-month decline following GDP data release since March this year.

 

The indices fell nearly 0.9 per cent on Thursday. The Nifty Midcap 100 and Nifty Smallcap 100 indices were down 7.6 per cent and 3.4 per cent, respectively, in September.

 

A key reason markets were weak in September, despite strong GDP numbers, was the sharp rise in US Treasury yields, said Amit Khurana, group chief executive officer and head of institutional equities at Dolat Capital.

 

“Once foreign investors recognised that US paper was offering over 5 per cent returns, we saw significant selling across emerging markets, with India among the most impacted, also given its dependence on crude oil imports,” he said.

 

Khurana said that persistent outflows by foreign portfolio investors (FPIs), along with block deals by private equity players, added to the pressure and kept domestic markets subdued. FPIs sold shares worth Rs 39,660 crore in September, after buying equity worth Rs 22,847 crore in August.

 

Brent crude prices were up 7.8 per cent in September, with spot prices moving from about $90.57 a barrel at the beginning of the month and rising to $97.66 a barrel on Wednesday. Prices hit a high of $111.92 on September 17 as the West Asia conflict resumed.

 

Business Standard’s analysis examined the relationship between Nifty 50 earnings per share (EPS) growth and GDP growth. Historically, over the last 20 years, EPS growth has generally tracked at twice the rate of GDP growth. If nominal GDP grows at 8 per cent, EPS growth should ideally reach 16 per cent. Excluding the Covid-19 years, however, this relationship normalises, with EPS growth running at roughly 1x GDP growth. Since June 2023, both nominal GDP growth and EPS growth have matched each other at 10 per cent.

 

Markets see economic growth shifting away from largecaps towards mid and smallcaps. They are pricing earnings at 1x GDP growth; at a 19.2x price-to-earnings (PE) multiple, they are factoring in an EPS growth rate of 11 per cent — lower than the nominal GDP growth rate of 12.6 per cent. Over the last four years, largecap earnings are up 16 per cent, midcaps 20 per cent, and small caps 14 per cent.

 

“Since GDP data is released with a lag, the market’s reaction to the numbers was relatively muted, as they do not fully capture forward-looking economic expectations,” said Shrikant Chouhan, head of equity research, Kotak Securities.

 

“The latest data largely reflects a period when crude prices were in the $85-90 per barrel range for most of the quarter. In this quarter, Brent crude has mostly remained above $90-95 and has crossed the $100 mark in recent days,” he said.

 

Earlier in June, after GDP growth was announced at 8.6 per cent, the Nifty rose 3.87 per cent over the following month.

 

However, before that, in February, despite a 7.7 per cent growth figure, the market reacted differently. Coming on February 27 — just a day before the onset of the US-Israel war with Iran — the announcement was followed by a 9.37 per cent drop in the Nifty over the next month.