India’s earnings growth prospects more promising than peers

The consensus earnings per share (EPS) growth estimates for the benchmark Nifty50 for FY23-FY25 are higher than most emerging market and developed market economies. The chart alongside has details.

“Close competitor China struggled with zero covid and uncertain policy environment (crack down on tech and real estate sector, etc), this along with Ukraine war led to distorted supply chains,” said Bhawana Chhabra, vice president, equity strategy, Elara Capital. She pointed out that lingering policy concerns would continue to weigh on earnings outlook and multiples commanded by Chinese companies.

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Steep depreciation in many Asian currencies against the US dollar also hurt trade balances and fiscal positions of emerging economies. The rupee was no exception to this. It was among the worst performing currencies in 2022, falling by around 11% against the dollar. Many Indian companies are importers of raw materials, so an unfavourable currency movement has an adverse impact on their operating profit margins. While the rupee is still on a weak footing, another round of such steep depreciation seems unlikely. The fall seen in rupee so far has largely been factored into earnings estimates, said analysts.

However, all is not hunky-dory. “Persistently high global inflation, which if doesn’t come off, could lead to subdued global growth and further weakening of rural growth, are two big risks for India’s earnings outlook,” cautioned Chhabra.

India’s earnings growth seems more promising, but its valuation multiple is expensive. At one-year forward price-to-earnings multiple, MSCI India trades at 17.5x, showed Bloomberg data. This is a premium to the MSCI Emerging Markets index and MSCI Asia Ex-Japan index. India’s valuation has moderated from its recent peak, but is still discomforting considering that the global economy is not out of the woods. “India’s valuations could come under pressure if global interest rates remain higher for longer and Indian companies fail to meet elevated earnings growth expectations,“ said Deepak Jasani, head of retail research at HDFC Securities Ltd. But for now, India’s premium to emerging and developed markets is likely to continue. This is because global investors are increasing exposure to emerging markets and India could benefit from it due to better growth prospects, he said.