By Gaurav Kulshreshtha | 21 MAY 2018
For the 45 companies out of BSE 100 that have reported their Q4 earnings till early last week, Citi analysts believe that ex of corporate banks, earnings are off to a decent start. While the aggregate earnings are down 2% YoY against an expected growth of 2% due to the drag from corporate banks, however ex of corporate banks, earnings are up 7% YoY.
Revenue growth is at 13.5% YoY and EBITDA growth is at 11% YoY largely in-line with expectations.
Indian equity markets, after falling by ~10%, peak to trough between January and March, have recovered from their lows and are now up ~3% YTD. Market performance over the past year has been aided by resilient domestic equity flows despite the earnings disappointments and more recently, rising macro risks (Trifecta of rising Oil + rising rates + appreciating dollar).
Citi economist note that Indian equities valuations (1 yr forward P/E) appear to be moving in sync with EM/global equities (refer figure below), however they do highlight that while EM/Global markets are experiencing “synchronized EPS growth”, India is still ensnared in an earnings downgrade cycle.
They believe that with FY18 likely to be another tepid year with sub 10% earnings growth and FY19 earnings expectations still elevated (~20% YoY), downgrades could very well continue for some more time.
While abundant domestic liquidity (due to lack of alternatives and transition of household savings from physical to financial assets) has continued to support the market, Citi economists believe that in the medium term, fundamentals will prevail. Hence they highlight that any change in domestic flows could be a significant risk in the absence of earnings rebound. Their proprietary Citi India Sentiment Indicator is also suggesting a ~5-7% return over 12 months. Their Dec-18 target for Sensex is 35,700.
As per Citi analysts, crude and dollar rally remains a key concern, however GST collections and lead demand indicators are showing an improvement. Policy impact of the political outcome (Karnataka) will be keenly watched along with the earnings trajectory as FY19 expectations still remain high. Domestic equity flows have remained strong & sticky so far while YTD foreign flows have been tepid and need to be tracked closely. In light of the above factors, Investors should continue to maintain asset allocation in their investment portfolios and use a staggered approach to any incremental equity allocations.
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