Ripples Advisory, India’s disappointed stock bulls find comfort in profit revival
Net income among NSE Nifty 50 Index companies is set to rise 25% in 2018, catching up with a rally that added $822 billion to prices last year, say analysts
In India, it’s becoming a ritual. Each year investors are assured that earnings are about to recover. Each year, they don’t.
Anything that suggested that might change would be welcome news to stock bulls, who’ve watched last year’s rally hit a wall. Now there’s evidence it may, though you have to look pretty hard to see it.
As usual, analysts are predicting a profit bounty for Indian firms. Net income among NSE Nifty 50 Index companies is set to rise 25% in 2018, they say, catching up with a rally that added $822 billion to prices last year. What’s cheering bulls today is that analysts have gotten a little better at their jobs.
Not a lot better: after overestimating profits by an average of 18% over the last four years, the gap has narrowed in the last few quarters to roughly half that rate. Still, for Indian investors who have waited years for earnings to justify the market’s advance, this is what passes for good news.
Earnings have recovered steadily over the past two quarters as businesses rebound from the disruptions caused by the government’s shock cash ban in late 2016 and the roll out of the new sales tax last July. Bulls hope the strengthening will cushion India’s $2.2 trillion market from a trade war that has rattled equities from US to Japan.
“Economic momentum is picking up as the side effects of the goods-and-services tax and demonetisation have faded,” said Nilesh Shah, who oversees $19 billion as chief executive officer at Kotak Mahindra Asset Management Co. Improving results “will provide downside protection,” he said.
Earnings growth has been the missing piece of the rally that sent Indian stocks to multiple records before the tumult in early February. In the past four years, Nifty earnings growth has increased at a measly 3% compounded annual growth rate, data compiled by Bloomberg shows. And at one point in 2015, actual earnings were 30% below consensus profit estimates, prompting fund managers to warn that valuations were too high.
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