Indian equities to get stronger; experts rule out near-term correction
Mumbai: The Indian equity markets are unlikely to see a major correction as India Inc’s earnings growth has shown some nascent signs of recovery with the number of earnings upgrades increasing sharply post Q1FY17 results.
Unlike the rally at the beginning of CY15, which was at odds with the continued downgrades in earnings, the current rally has the support of stable earnings so far in CY16.
“Nifty earnings expectations for FY17 and FY18 were pruned marginally by 0.85 per cent in Q1FY17 unlike the past several quarters where cuts were severe. Among BSE 100 companies, earning upgrades increased from 31 to 35 and downgrades reduced from 67 to 62. Likewise, among the top 250 mid-caps, upgrades rose from 73 to 113 and downgrades reduced from 161 to 122,” said Ravi Sundar Muthukrishnan, senior vice-president and co-head-research at ICICI Securities.
The earnings upgrade was primarily driven by the consumer discretionary segment including auto, cement, private retail banks and non-bank finance companies(NBFCs).
The Nifty free float earnings excluding companies with significant overseas profitability like IT, Pharma and Tata Motors grew by 8.1 per cent in Q1FY17. If we exclude financials and commodities within the domestic themes, then the Nifty free float earnings grew by 17.5 per cent.
According to ICICI Securities, the improving economic growth aided by sustained policy reforms, above normal monsoon and benign interest rates could result in an earnings upgrade cycle improving further in the coming days. “It is worth noting that financial sector stocks provided a major support to the market before undertaking an asset quality review (AQR) as directed by the Reserve Bank during the last three quarters.
“However, despite a 2.3 per cent drop in free float earnings of financials amidst a rise in non-performing assets, they remained the best market performers since the beginning of Q1FY17.
“This, according to the markets, suggests that the worst is over. If NPA pressures recede in future, financials could contribute significantly to Nifty earnings as they have a 32 per cent weightage in the Nifty,” he said
