Corporate earnings growth to drive the next leg of market rally: Analysts

The Indian markets have seen a good run in the last three months with the S&P BSE Sensex rising around 7 per cent and the Nifty50 moving up 7.5 per cent.

The next leg of the market rally from here on, analysts suggest, will be driven by a growth in corporate earnings over the next few quarters.

That said, they do not expect material / sharp downgrades to India Inc’s earnings estimates despite headwinds for the economy.

“We believe that after a weak start to the year, the market is now in a two-step forward phase.

"A good fourth quarter of fiscal 2022-23 (Q4-FY23) earnings season lends support to our conviction.

"While market could still see some earnings downgrade as we move deeper into the current year, chances of any sharp downgrade to earnings are limited,” wrote Herald van der Linde, head of equity strategy for Asia Pacific at HSBC in a recent coauthored note with Amit Sachdeva and Anurag Dayal.

While consensus earnings growth expectations for Nifty50 at 8.6 per cent for financial year 2022-23 (FY23) have come down from over 11 per cent at the start of the year, FY24 expectations at 19.2 per cent year-on-year (YOY) remain broadly stable, HSBC said.

That said, as per Bloomberg consensus estimates, Nifty50 earnings per share (EPS) for fiscal 2022-23 (FY23) stood at Rs 827.9, which is expected to rise to Rs 947.81 in FY24, translating into a growth of around 14.5 per cent YoY.

This is likely to rise to Rs 1,101.11 in FY25 and Rs 1,156.48 in FY26, Bloomberg data suggests.

The Q4-FY23 earnings season, according to analysts at Ambit, has been strong, with the number of NSE 500 companies delivering positive earnings surprises (51 per cent) exceeding the companies delivering a negative surprise (49 per cent) for the first time since September 2021 quarter (51 per cent).

With March 2024 EPS estimate at Rs 940, 10-year yield at 7.1 per cent, the implied Nifty50 sustainable level, according to Ambit, is 20,889 levels, which is around 12 per cent higher from the current level.

"The Nifty50 is currently trading at 18.2x one-year forward PE, which is 12.1 per cent discount to 10-year average of 20.7.

"As a base case, we value Nifty at 12 per cent discount to last 10-year average PE at 18.2x (19.2 earlier) on March25 EPS of Rs 1128, and arrive at April 2024 NIFTY target of 20551.

"In a bull-case scenario, we assign a target of 23,354 to the 50-share index," wrote Amnish Aggarwal, director - research at Prabhudas Lilladher in a recent note.

Key risks

Meanwhile, the possibility of less than optimal rainfall due to El Nino this year poses an immediate risk, which analysts believe is not yet fully priced into earnings growth estimates and also by the markets.

Any sharp deficiency in the actual rainfall, they believe, will again stoke inflation, which will not only impact how the Reserve Bank of India’s (RBI’s) monetary policy plays out, but will also dent corporate earnings growth and keep the overall market sentiment in check.

The markets, according to G Chokkalingam, founder and head of research at Equinomics Research Private Limited, can tolerate up to 10 per cent deficiency from long period average (LPA) in the rainfall/monsoon, and will, at best, give a knee-jerk reaction in such a situation.

“A deficient monsoon is not yet fully priced in by the markets yet.

"I expect FY24 growth in corporate earnings to be around 12 – 15 per cent led by the BFSI sector that is likely to see a growth of around 18 – 20 per cent at an aggregate level, followed by telecom, fast moving consumer goods (FMCG) and capital goods sectors.

"On the other hand, earnings of pharma and the information technology (IT) sectors will remain subdued in FY24,” Chokkalingam said.