A security officer stands guard next to a bronze bull statue at the entrance to the Bombay Stock Exchange (BSE) in Mumbai. (Photographer: Adeel Halim/Bloomberg)

Disgruntled Stock Bulls Find Comfort in India Profit Revival

(Bloomberg) -- In India, it’s becoming a ritual. Each year investors are assured that earnings are about to recover. Each year, they don’t.

Anything that suggested that might change would be welcome news to stock bulls, who’ve watched last year’s rally hit a wall. Now there’s evidence it may, though you have to look pretty hard to see it.

As usual, analysts are predicting a profit bounty for Indian firms. Net income among NSE Nifty 50 Index companies is set to rise 25 percent in 2018, they say, catching up with a rally that added $822 billion to prices last year. What’s cheering bulls today is that analysts have gotten a little better at their jobs.

Not a lot better: after overestimating profits by an average of 18 percent over the last four years, the gap has narrowed in the last few quarters to roughly half that rate. Still, for Indian investors who have waited years for earnings to justify the market’s advance, this is what passes for good news.

Earnings have recovered steadily over the past two quarters as businesses rebound from the disruptions caused by the government’s shock cash ban in late 2016 and the roll out of the new sales tax last July. Bulls hope the strengthening will cushion India’s $2.2 trillion market from a trade war that has rattled equities from U.S. to Japan.

“Economic momentum is picking up as the side effects of the goods-and-services tax and demonetization have faded,” said Nilesh Shah, who oversees $19 billion as Chief Executive Officer at Kotak Mahindra Asset Management Co. Improving results “will provide downside protection,” he said.

Earnings growth has been the missing piece of the rally that sent Indian stocks to multiple records before the tumult in early February. In the past four years, Nifty earnings growth has increased at a measly 3 percent compounded annual growth rate, data compiled by Bloomberg show. And at one point in 2015, actual earnings were 30 percent below consensus profit estimates.

“There was massive re-rating of price-earnings ratios globally in the past four-to-five years because of lower oil prices, and India benefited, though there was hardly any growth in earnings -- may be 4-5 percent CAGR,” Manish Sonthalia, chief investment officer of portfolio management services at Motilal Oswal Asset Management Co., told Bloomberg Quint on Wednesday. “Today, there’s greater conviction in believing that the earnings growth is underway because the consumption story is in tact.”

Demand Pick-Up

India’s economy grew at 7.2 percent in October-December, the fastest pace in five quarters. Gross domestic product is estimated to grow 6.6 percent in the year ending March, indicating an improvement in industrial activity. There’s optimism that the gap between actual profits and estimates will narrow further as a pick-up in demand filters through to bottom lines.

“We’ve seen consumption improve for two-wheelers, passenger cars and even capital goods companies are saying that they’re seeing a pick up,” Rajat Jain, chief investment officer at Mumbai-based Principal PNB Asset Management Co., said by phone.

The S&P BSE Sensex entered its first correction in 15 months on Friday after the risk-off mood triggered by concerns over trade skirmishes dented sentiment already weakened by a bank fraud, widening fiscal deficit and the prospects of higher interest rates. The gauge slid 0.6 percent at the close in Mumbai after two days of gains.

Bank Clean Up

While India remains relatively insulated to trade risks, even the most ardent bulls say credit losses at lenders -- the biggest group in the market indexes -- could keep the profit revival momentum from accelerating rapidly.

“Banks will need three quarters to clean up their books, and you will see the effect after the December quarter,” said Manish Kumar, who oversees $22 billion at ICICI Prudential Life Insurance Co. “The banking sector is pulling earnings down.”

For instance, net incomes for Nifty members rose an average 7 percent in the three months ended December from a year earlier, Motilal Oswal Securities Ltd. said in a note last month. Exclude State Bank of India, which posted a surprise loss, growth gets bumped up to 17 percent, the brokerage wrote.

For now, bulls are taking heart from the improving results -- the proportion of Nifty firms that reported a profit drop in the latest season was the lowest in 12 quarters, according to Motilal Oswal. Companies will begin reporting March-quarter results in about two weeks.

“There are good chances of India Inc. earnings doubling in the next four to five years, and a lot of company managements will tell you that those are realistic numbers,” Prateek Agrawal, chief investment officer at Mumbai-based ASK Investment Managers Ltd., which manages money for wealthy individuals, told Bloomberg Quint on Monday. “The story in India going forward is that of earnings growth.”

©2018 Bloomberg L.P.

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