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SENSEX @ 60000: The Role of Earnings Growth

11 December, 2021 0 Comments

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SENSEX @ 60000: The Role of Earnings Growth

'Don’t try to predict the future, Prepare for it. Predicting rains doesn’t count, Building the ark does'

Warren Buffett wrote this in Berkshire’s Year 2001 Annual report, and he admitted that he had expected certain risks but he hadn’t acted to mitigate them

If we remember year 2001, it was one of the most euphoric equity markets globally led by Tech stocks. In India, Infosys and Wipro were traded at 200, 300 PE and Interestingly. It took 20 years for Wipro to reach the peak which it did in 2001.

In this context, now SENSEX is hovering around 60000 levels and whether we are in such a euphoric stage right now and everyone is trying to understand and trying to prepare in case of any major correction from here onwards.

While trying to find the answer for this puzzle, first let us understand what caused this massive rally in Indian equities for past 19 months.

Earnings Growth

Low Interest Rate

Massive Liquidity

Broadly, these three aspects drove the equities to the record high and let us try to understand how Earnings Growth impacted the market.

Earnings Growth in India

From Q2FY21 – We are witnessing one of the most consistent earnings every quarter till now.
Earnings of NIFTY index was tepid in previous decade especially between FY15 to FY20 and there were pockets of earnings in this period i.e Private Banks, Large NBFCs, FMCG, Autos until FY18 etc.
In this period of FY15 to FY20 – Our banking sector went through the cleaning of accumulated NPAs and the largest bank in India - SBI reported loss of ₹4500 Cr in FY18 while ICICI bank posted its lowest net profit of ₹4500 in FY18. These were the lowest in previous 7-year period.
Similarly, Tata Motors reported massive net loss of ₹31000 Cr in FY2019 & ₹10000 Cr each in FY20 & FY21.
Now, banking sector have come out of their NPA cycle and SBI & ICICI bank are posting around ₹30000 Cr net profit per FY. This is a huge boost for aggregate earnings of NIFTY.

From Q2FY21 – We are witnessing one of the most consistent earnings every quarter till now.
Earnings of NIFTY index was tepid in previous decade especially between FY15 to FY20 and there were pockets of earnings in this period i.e Private Banks, Large NBFCs, FMCG, Autos until FY18 etc.
In this period of FY15 to FY20 – Our banking sector went through the cleaning of accumulated NPAs and the largest bank in India - SBI reported loss of ₹4500 Cr in FY18 while ICICI bank posted its lowest net profit of ₹4500 in FY18. These were the lowest in previous 7-year period.

Similarly, Tata Motors reported massive net loss of ₹31000 Cr in FY2019 & ₹10000 Cr each in FY20 & FY21.
Now, banking sector have come out of their NPA cycle and SBI & ICICI bank are posting around ₹30000 Cr net profit per FY. This is a huge boost for aggregate earnings of NIFTY.

Apart from this, rise in commodity prices supported metal companies very well. For instance, Tata steel’s Q1FY22 net-profit of ₹8900 Cr is higher than its full FY21 net-profit of ₹7500 Cr and it is equivalent to Asian paints’ cumulative net-profit of past three FYs. (It may not be appropriate to compare Asian Paints with Tata steel however, the massive profits of Metal sector improves the aggregate earnings of NIFTY).
Now, there is no doubt about the performance of IT Sector as a whole and entire IT pack is posting healthy earnings since the beginning of pandemic. In 2017 – most people had written off IT and the IT stocks were trading like value stocks with Infosys, HCL Tech etc at 14-15PE.
As per the consensus analysts forecast, NIFTY is expected to post ₹700 EPS for FY22 and ₹800 EPS for FY23.
Overall, the earnings growth momentum is now broad based and not polarised like in previous decade.

Broadly, Indian corporates are expected to post minimum ₹1.50 Lakh Cr net profit every quarter cumulatively going forward for minimum two FYs.
After witnessing almost zero growth in NIFTY EPS, now it is heartening to see the consistent earnings upgradation of NIFTY by analysts.
Our take is that this massive earnings cycle has triggered the strong uptrend in markets. It is one of the most important reasons for current bull market.
We also need to be mindful that now pricing power has shifted to commodity companies and they are posting healthy earnings while “consumption” based companies are posting contraction in margins. There is rotation of pricing power happening right now in economy.

Apart from this, rise in commodity prices supported metal companies very well. For instance, Tata steel’s Q1FY22 net-profit of ₹8900 Cr is higher than its full FY21 net-profit of ₹7500 Cr and it is equivalent to Asian paints’ cumulative net-profit of past three FYs. (It may not be appropriate to compare Asian Paints with Tata steel however, the massive profits of Metal sector improves the aggregate earnings of NIFTY).
Now, there is no doubt about the performance of IT Sector as a whole and entire IT pack is posting healthy earnings since the beginning of pandemic. In 2017 – most people had written off IT and the IT stocks were trading like value stocks with Infosys, HCL Tech etc at 14-15PE.
As per the consensus analysts forecast, NIFTY is expected to post ₹700 EPS for FY22 and ₹800 EPS for FY23.
Overall, the earnings growth momentum is now broad based and not polarised like in previous decade.
Broadly, Indian corporates are expected to post minimum ₹1.50 Lakh Cr net profit every quarter cumulatively going forward for minimum two FYs.
After witnessing almost zero growth in NIFTY EPS, now it is heartening to see the consistent earnings upgradation of NIFTY by analysts.
Our take is that this massive earnings cycle has triggered the strong uptrend in markets. It is one of the most important reasons for current bull market.
We also need to be mindful that now pricing power has shifted to commodity companies and they are posting healthy earnings while “consumption” based companies are posting contraction in margins. There is rotation of pricing power happening right now in economy.

Now that we have seen another cause for current uptrends and now, let us understand the concerns around the sustainability of current levels of markets and further uptrend.

We urge you to have conversations with financial advisors who have seen and navigated these cyclical rises and falls. They are in the best objective position to help you understand and mitigate the risks of letting emotion get the better of you.