Economic Growth Priced In, Earnings To Drive Indian Stocks, Says Credit Suisses Neelkanth Mishra

Indian stocks will be driven by earnings as domestic equities have already priced in strong medium-term prospects for the country’s economy, according to Credit Suisse.

The GDP forecasts need significant upgrades, and not just for the next fiscal starting April 2022, but for years to come, Neelkanth Mishra, co-head of equity strategy, Asia Pacific; and India equity strategist at Credit Suisse, said in an interview with BloombergQuint's Niraj Shah.

"When an economy bounces, it bounces much higher than is being currently forecasted. Mobility-based nowcast for GDP is already 9% higher than the second-quarter average," he said. "On top of that, FY23 growth momentum should build up with jobs in auto and construction sectors picking up, along with normalisation in people returning to office."

But even if GDP growth estimates are bumped up, it is not necessary they show up in Nifty, he said. "GDP and Nifty are quite unrelated ... mostly because there's a lot more global exposure in Nifty."

After a prolonged lull (4% annualised growth in FY12-19), Nifty EPS is forecast to grow 15% annually in FY19-24, a Dec. 9 Credit Suisse report said. The key to the earnings recovery remain financials, which contribute nearly half of Nifty, it said.

Mishra sees enough opportunity in domestic cyclicals. "Adjusted for earnings growth going forward, they are still quite reasonable. So we remain overweight on financials, industrials, cement and staples."

To factor in changes to global growth, Credit Suisse is underweight on global cyclicals including information technology, metals and global auto names listed in India, Mishra said.

Tough To Find PLI-Linked Bets In Markets

While the government's production-linked incentive schemes are a step in the right direction as a policy measure, it's tough to play that through the markets, according to Mishra.

"In the listed space, it is harder to find beneficiaries of government policies. Some schemes such as those on EVs and apparel are not that exciting."

Among those doing well, such as electronics, tablets, food processing, the number of listed companies investors can benefit from is small, he said. "Even where there is exposure, the percentage impact on earnings is insignificant."

Valuations, Attrition Warrant Caution For IT

Credit Suisse was one of the first to downgrade IT, and Mishra agrees that it might have been a little early.

It was expensive valuations and high attrition levels in the sector that drove them away, according to Mishra. "There's no denying that global growth in software is strong. But the top 10-15% people in these IT firms are going to be poached by companies whose potential revenue per individual is many times that of these firms."

He cited the example of software-as-a-service companies that, even though based in India, could earn better revenues than onsite Indian IT firms. These attrition levels, wage hikes and repricing will be difficult to offset without hurting project delivery, he said. "Then we see the current valuations, and we tend to get cautious."