Mumbai: Indian companies’ earnings growth is recovering and they are all set to post a double-digit profit growth for the fiscal years to come, after seeing flattish to weak growth for a few years now, according to analysts. To be sure, this growth comes on a low base.
Kotak Insititutional Equities, an arm of Kotak Securities Ltd, currently expects fiscal year 2017 and fiscal year 2018 net profits from Nifty 50 Index to grow at 16.8% and 20.5%, respectively. For the fiscal years 2016, 2015 and 2014, the Nifty Index posted flat growth, data from Capitaline shows.
“We see moderate downside risks to our current FY2017E net profits of the Nifty 50 Index (+16.8%), with the strong growth reflecting the decimated base of FY2016,” Kotak analysts Sanjeev Prasad, Sunita Baldawa and Akhilesh Tilotia said in a note on Tuesday.
This ray of hope arose investors saw green shoots in the March quarter earnings, leading to strong expectations that the much awaited recovery may finally arrive in the current fiscal year. The hopes also gained traction after data released on Tuesday showed that India’s economic growth accelerated to 7.9% in the March quarter, making it the fastest growing major economy in the world.
Kotak analysts model a strong recovery in the profits of state-run banks, metals and mining companies and Tata Motors Ltd for fiscal year 2017, off a low base, and assume robust earnings growth in fiscal year 2018 on the back of an expected economic recovery, but added that neither the earnings bounce-back in fiscal year 2017 nor the economic recovery in fiscal year 2018 is a given, as the market would like to believe.
Kotak’s projected rebound in net profits of state-run banks accounts for 17% of its estimated increase in net profits of the Nifty 50 Index, and they model a decline in loan loss provisions for banks under its coverage in general.
However, they warned that provisions may still rise if further slippages were to take place in the current fiscal year and sub-standard assets were to slip into the doubtful category, which would require further provisioning.
According to Kotak Insititutional Equities, an arm of Kotak Securities Ltd, adjusted net profits of the BSE Sensex index increased 7.5% year-on-year (y-o-y), versus the brokerage firm’s expectations of 6.7% y-o-y increase. Excluding banking stocks, adjusted net income grew 18% y-o-y, 8% ahead of expectations, Kotak analysts added.
Raamdeo Agrawal, joint managing director of Motilal Oswal Financial Services Ltd, shared the optimism of Kotak analysts.
“I see the profit growth for index (Nifty) companies in high double digit. It should be around 15-20%,” Agrawal said in a phone interview
“Going ahead, the base is going to be low. Also, commodity prices, which were hurting sales, are now recovering, and look to go higher from here. So, these factors will reflect in the FY17 index. The collapse of earnings of commodity companies was hurting the index’s earnings. Economic growth is seen better. In FY17, PSU (public sector undertaking) banks would start faring better, as their reported numbers will start looking better,” said Agrawal.
The optimism was widely shared. There is a consensus among experts and they see the March quarter results as just the start of good times, and believe things are set to improve from here.
“Overall, the earnings cycle has troughed. I think this quarter is already telling us the story. If we axe out the corporate banks, this is the best quarter for earnings that we have seen since the Narendra Modi government came to power,” Ridham Desai, head of India equity research and India equity strategist at Morgan Stanley, said at a press conference on Wednesday.
“I think we are at the beginning of the new earnings cycle. We think earnings growth will be well into double digits over the next 12 months,” added Desai.