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FY21: Yet another earnings growth mirage?


Between FY14 and FY19, the Nifty is up 66 percent on an absolute basis. However, Nifty absolute EPS growth during this period is a mediocre 18 percent.

FY21: Yet another earnings growth mirage?
Over the past few years, the focus has been on market returns, however, the Nifty EPS growth has been elusive. In the past couple of years, analysts have expected the Nifty EPS to grow by 18 percent to 20 percent odd at the start of the year but gradually the expectations get tempered down. By the end of the year, Nifty EPS growth has been far from inspiring.
The Narendra Modi government has taken bold measures, which will boost long term prospects of the country, but that has slowed down the earnings growth story. Long-term positives like Demonetisation, goods and services tax and the Insolvency and Bankruptcy Code are likely to bear fruit in the coming years but has been a speed breaker for earnings so far. Between FY14 and FY19, the Nifty is up 66 percent on an absolute basis. However, Nifty absolute EPS growth during this period is a mediocre 18 percent.
FY20 earnings growth subdued but all eyes now on FY21!!
At the start of FY20, the expectation was for a 25 percent growth in the Nifty EPS but midway through the year expectations have been skimmed down to 10 percent to 12 percent. The Nifty FY20 EPS projection have got trimmed from near 600 to approximately 540 now.
In Q2FY20, the Nifty earnings growth was not inspiring on expected lines as sales declined for the first time in 13 quarters, while EBITDA growth was lowest in nine quarters though Nifty PAT growth was driven by recent tax cuts.
In FY21, earnings are likely to recover faster due to corporate tax cuts and lower loan-loss provisions for banks but analysts are sceptical about any V-shaped recovery in the economy given structural challenges.
Hence, the market is expected to remain in a vulnerable phase for the short term as the macro slowdown has been prolonged and risk aversion remains the dominant theme which explains why expensive stocks have got valuation wise more expensive.
Who will contribute to this FY21 EPS growth?
Analysts expect Nifty EPS growth of 25 percent in FY21 and brokerage firm Motilal Oswal said corporate banks are expected to contribute two-thirds of incremental FY20 PAT for the Nifty and financials are expected to contribute about 95 percent of incremental PAT in FY21.
Banking names such as State Bank of India, ICICI Bank, Axis Bank and HDFC Bank could contribute nearly 30 percent of the incremental PAT with SBI singlehandedly contributing to more than 10 percent of these gains. Motilal added that the Nifty at 17.4x FY21E earnings is not expensive but discounting the sharp earnings recovery.
The Midcap Index loses its sheen!
Over the last 12 months, the Nifty Midcap100 (-3 percent) has underperformed the Nifty (+13 percent) significantly as volatility levels have picked up, especially in mid- and small-cap indices, due to a slowdown in the economy, concerns around liquidity woes for NBFCs and the moderation in domestic consumption.
The Nifty Midcap100 P/E ratio has corrected from upwards of 25x fifteen months back to around 17x currently. Mid-cap PE premium to the Nifty was at near 18 percent in August 2018 but has now turned into a discount.
While the dynamics of the market keep changing from time to time, earnings recovery story needs a lot of attention as the Indian market is not necessarily cheap at these levels and earnings recovery has disappointed for the past few years.
That said, if the Nifty manages 20 percent EPS growth in FY21, it can fuel the Nifty higher. On FY20 earnings, Nifty trades at 22x which is expensive compared to its peers and also compared to its historical average. But assuming 25 percent growth for FY21, the Nifty looks reasonably placed at 17.5x. The big question remains if FY21 is the year when the Nifty EPS grows by 25 percent finally!!

Market Movers

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HUL2,482.90 65.20 2.70
Bharti Airtel538.75 10.10 1.91
Grasim1,480.75 22.55 1.55
HUL2,480.75 63.85 2.64
Bajaj Auto4,164.95 105.95 2.61
Bharti Airtel538.90 10.20 1.93
Bajaj Finserv11,998.00 179.95 1.52
IndusInd Bank994.90 10.65 1.08
Adani Ports694.35 47.45
Bajaj Auto4,167.10 113.20
HUL2,482.90 65.20
Bharti Airtel538.75 10.10
Grasim1,480.75 22.55
HUL2,480.75 63.85
Bajaj Auto4,164.95 105.95
Bharti Airtel538.90 10.20
Bajaj Finserv11,998.00 179.95
IndusInd Bank994.90 10.65


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