Corporate earnings growth could improve to around 15 percent next year (FY 14) and thereafter to around 18- 20 percent, once private sector investment spending picks up momentum in FY 15 & FY 16, says S Nagnath, President & CIO, DSP BlackRock Investment Managers.
BSE Sensex has been a stellar performer in CY 2012, having risen around 28%. Portfolio flows have been robust as a result, with net Foreign Institutional Investors (FII) flows for the year at nearly Rs 1.3 lakh crore.
Although the Indian stock market got off to a good start in 2012 (up nearly 17% in the January -March quarter), the trend began to meander midyear as investors began to get concerned about the slowing pace of economic growth and the lack of significant policy initiatives. Meanwhile, inflation remained sticky at 7.6% and the rupee depreciated by nearly 5% to Rs. 55.63 to the dollar (as of June 30, 2012).
However, by mid-September, market sentiment turned around remarkably. The government initiated a series of reform measures that were aimed at accelerating economic growth and dispelling the negative investor sentiment clouding the market.
Since then, more reform measures have followed. One of the key measures is a mechanism to transfer subsidies directly to the intended beneficiaries, thereby improving the efficiency of distribution. This will be done using the unique identification card or “Aadhar”. This is a biometric identification card that can be obtained by every citizen. Since the program was rolled out in September 2010, nearly 22.5 crore Indians (~19% of the population) have been issued their Aadhar ID Cards. The intent is to expand coverage to nearly 60 crore Indians by 2013 and the rest of the population by mid-2014. This is a mammoth exercise and reportedly one of the largest initiatives of this kind, anywhere in the world.
We believe that this initiative, if implemented well, could result in huge efficiency gains. Subsidies today account for nearly 1.8% (Rs 1.7 lakh crore) of the annual budget. It is quite possible that the subsidy bill may well decline as efficiency in distribution improves significantly. We also think that this could contribute to an increase in consumption demand, especially from rural areas.
Looking ahead at FY 2014 (April 2013 – March 2014), we expect economic growth to accelerate to 6.5% (from 5.5% currently expected for FY13). Continued strength in domestic consumption demand, further bolstered by the direct transfer of subsidies, together with a revival of the investment spending cycle led by public sector enterprises, will likely contribute to this increase in economic growth. The Government is very focused on speedy approval [having recently set up a Cabinet Committee of Investments (CCI)] of various projects that are awaiting clearances so that investment spending gathers momentum and adds to the pace of growth in the economy. We anticipate private sector investment spending to gather momentum in FY 2015 and FY 2016. This we believe could accelerate growth to 7% - 8% in the medium term.
Corporate earnings growth currently expected at 10%- 11% for FY 13 (April 2012 – March 2013) could improve to around 15% next year (FY 14) and thereafter to around 18- 20%, once private sector investment spending picks up momentum in FY 15 & FY 16, as we anticipate. Consequently, with BSE Sensex now trading at 13.8 X FY 14 earnings, well below the long term (15 year) average P/E multiple of around 14.8x and with corporate earnings likely to improve significantly after two years of lackluster growth, we think Indian equities offer an attractive investment opportunity today for investors with a 12-24 month investment horizon.
