rbi: Nifty earnings have so far weathered the global storm, but can RBI rate hikes derail the story?

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NEW DELHI: When it comes to earnings, Indian corporates have displayed their mettle in the previous quarter, notching up growth of around 14 per cent year-on-year despite the prolonged war in Ukraine, surging commodity prices and global supply disruptions.

Topline growth at the Nifty level excluding financials was at 9.8 per cent quarter-on-quarter and 24 per cent on a yearly basis,

said in a recent note. The bottom line grew at a healthy 14 per cent year-on-year, the brokerage said.

The firm performance amid the global headwinds came on the back of outperformance in metals and oil and gas on account of the rise in commodity prices as well as strong double-digit growth in the IT and power space.



Taking into account revised earnings following the fourth quarter of the previous financial year, ICICI Securities said that its forward estimates do not undergo major changes.

“Over a three-year horizon i.e. FY21-24E Nifty earnings are seen growing at 20%+ CAGR. Rolling over our valuations to FY24E & trimming our forward PE multiples amid rising rate hike scenario we now value Nifty at 18,700 i.e. 20x PE on FY24E.”

Agencies

Services’ Head of Research, Vinod Nair told ET Markets that while the monetary tightening cycle that the Reserve Bank of India has embarked on implies a rise in interest costs and would affect highly leveraged sectors, strong nominal GDP growth in India would help keep corporate earnings stable.

THE CONTRARIAN VIEW

While India Inc has so far displayed resilience, there are factors that may ensure that future corporate earnings do not yield the same degree of return, market experts said.

Key among the risks to corporate earnings growth is a worsening growth-inflation mix.

While the latter half of 2021 and the beginning of the current calendar year witnessed rapid renewal of economic activities, the period has also been marked by a steady rise in inflation.

The significant hardening of prices – which represents higher input costs – and the RBI’s efforts to tame those prices could rob companies of the growth momentum required to report sustained strong earnings growth.

The RBI, which has raised the repo rate by 90 basis points in the space of just about a month, is expected to tighten monetary policy much further in coming months, with analysts expecting at least 50 bps more in the current calendar year.

“We think there can be a considerable down graph as far as the earnings expectations are concerned. It is still very robust; if you look at the expectation, it is still about 17 per cent growth for FY23 and around 15-16 per cent for the following year,

Institutional Securities’ MD & Chief – Strategist, Dhananjay Sinha said to ET Markets.

“My sense is that we are looking at a scenario where, even if you look at the RBI’s projection of 7.2 per cent GDP growth which converts into 4 per cent in the fourth quarter, 4.1 per cent in the third quarter, with this kind of growth it is very unlikely that we will have a 16-17 per cent growth in earnings and say 16 per cent growth in the following year on top of an almost 40 per cent growth.”

Sinha believes that amid similar actions by major global institutions such as the IMF, the RBI may need to scale down GDP projections and as such, earnings estimates seem optimistic.

The veteran strategist said that the central bank’s decision to ramp up inflation projections while growth risks abound, actually translates into lower growth.

In a note released after the RBI’s monetary policy statement on Wednesday, global firm Nomura said that while it agrees with the central bank’s GDP growth projections for the current financial year, the growth for the next year could fall well short.

Growth vs Inflation_ GDP weakness next year (1)Agencies

The key reasons that Nomura ascribed for the weaker growth in the year ahead were high inflation weighing on real disposable incomes and corporate profits, the lagged effects of policy tightening, still dormant private capex growth and the global growth slowdown.

“The rate hike is a part of it. I think what has happened is that a lot of these companies benefited from stimulus and the fact that they gained market share from smaller companies. There was a certain pricing power, but going forward you will a) have margin pressure and b) a demand slowdown that will happen,” Sinha said.

According to him, the one-off benefit that companies had while increasing market share may have now peaked out.

Sinha therefore warned of risks to earnings as well as equity multiples, given a sharp rise in risk-free rates, represented by hardening bond yields.

Higher government bond yields threaten to erode equity valuations as the more the risk-free rate climbs, the greater is the discount rate based on which fair value of stocks is arrived at. Yield on the 10-year government bond has climbed more than 100 bps so far in 2022.

In a recent note, Axis Securities said that the BEER ratio (Bond Equity Earnings Yield Ratio) is now trading above its long-term average, which indicates a slightly expensive equity market at current levels vis-à-vis the bond market.

BEER Ratio (1)Agencies

“I think the biggest concern is about the crude prices, metal prices and hawkish policies, which can downgrade the valuations rather than the earnings growth,” Geojit’s Nair said.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

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