ET Intelligence Group: Is Dalal Street entering 2019 with too much optimism regarding earnings growthRs
The Bloomberg consensus estimate showed brokers baking in Nifty earnings growth of 22 per cent for 2019, which appears incredulously strong given that earnings growth between 2011 and 2018 is 7.8 per cent.
If earnings growth can achieve projected figure, it would be the best earnings growth of the decade since 2010. The consensus EPS for Niftys stood at Rs 559 and Rs 681 for 2018 and 2019, according to Bloomberg.
There are a couple of reasons why investors should remain cautious because earnings growth is directly linked to market performance for the next year.
First, a large amount of incremental earnings growth of the Nifty hinges on the financial performance of the corporate banks such as State Bank of India and ICICI Bank, the three state-owned oil marketing companies, Tata Motors, Vedanta and Bharti Airtel. The market is pencilling in a sizeable jump in the earnings of these eight companies in the next year.
These projections are predicated on expectations like the non-performing asset cycle peaking for banks, improving margins and volume of Jaguar Land Rover bringing stability to Tata Motors earnings growth and lower competitive intensity for telecom for Bharti Airtel.
Any disappointment from these eight companies on earnings front could result in a significant cut in earnings growth.
These eight companies have 12.66 per cent weight in the Nifty.
Secondly, the projected earnings growth of the Nifty has been continuously downgraded since 2010 and in the range 5-9 per cent.
For instance, Niftys FY18 earnings growth at the beginning of year was estimated to be 14 per cent, while actual growth was 5 per cent lower than expected. In a major reversal in FY16, when estimated growth was 20 per cent, the growth was a negative 4 per cent.
Earnings growth has a huge bearing on the Niftys valuation as a cut in earnings growth means price earnings multiples may look distended. The Nifty is currently trading at 17.1 times of its next one year projected earnings, a premium of 5 per cent compared with its fiveyear average.