Customers use a Union Bank of India automated teller machine (ATM), left, as security guards talk in front of a Bank of Baroda ATM in Mumbai, India (Photographer: Adeel Halim/Bloomberg)  

Deutsche Bank Sees Lenders Drag Back `Healthy' India Profit Gain

(Bloomberg) -- Corporate India is forecast to show a strong growth in profits in the January-to-March quarter, even as the banking sector weighs on projections with its continuing struggle to clear a build-up of stressed loans.

Fourth-quarter profits for NSE Nifty 50 Index companies will grow 10 percent from a year earlier, according to a research report by Deutsche Bank AG. Excluding financials, the increase should be a “healthy” 20 percent, Mumbai-based analysts Abhay Laijawala and Bijay Kumar wrote.

Earnings have recovered steadily over the past two quarters as businesses rebound from the disruptions caused by a shock ban on high-value currency notes in 2016 and the roll out of a new sales tax last July. Investors hope the pick-up will cushion India’s $2.2 trillion market from external risks including the potential for a trade war that’s rattled global equities.

Deutsche Bank Sees Lenders Drag Back `Healthy' India Profit Gain

“I don’t see a huge pause in the markets right now, unless and until there is increasing evidence that earnings growth is not coming,” said Ajay Tyagi, executive vice president at UTI Asset Management Co. Ltd. “I’m not in the camp that earnings growth won’t arrive.”

The government will probably resist launching any new reforms that could impact the current growth momentum, said Tyagi, who manages assets equivalent to $1.9 billion.

An uptick in earnings has been the missing piece of a rally that sent Indian stocks to multiple records before a decline that began in February and was triggered by concerns about the financial sector. In the past four years, Nifty earnings growth has increased at a measly 3 percent compounded annual growth rate, data compiled by Bloomberg show.

Indian lenders, the biggest group in the index, have been a drag as they struggle to resolve about $210 billion of stressed assets. New rules from the central bank that put a timeline on recasting bad loans, while scrapping previous methods, means the sector will continue to lag.

Click here to read about India’s rejig of debt resolution options

Higher provisioning may result in a 34 percent decline in earnings for lenders, according to Deutsche Bank. Materials, especially metals, consumer discretionary and energy should lead, according to the report.

“It looks to me that we are out of the woods now and inching towards the 15 percent earnings growth number,” UTI Asset Management’s Tyagi said. “The upcoming year could be the one where we see this happening.”

©2018 Bloomberg L.P.