Whenever there has been double-digit growth in earnings, the Sensex has rallied 20 to 77% in four out of six times, data collated by ETMarkets.com showed.
ET Online
NEW DELHI: When analysts put so much emphasis on earnings growth for the market to show strength, they have a point.
Data collated by ETMarkets.com showed that whenever there has been double-digit growth in earnings, the Sensex has rallied nearly 20 to 77 per cent in four out of six times.
A bull market is defined as a scenario in which stock prices head higher amid upbeat market sentiments. Technically, a bull market is said to have set in when there is at least a 20 per cent rise in the benchmark indices from their previous lows.
The S&P BSE Sensex registered double-digit growth in earnings per share (EPS) in the financial years (FY) 2008, 2010, 2011, 2013, 2014 and 2015. The Sensex gave around 26 per cent returns in FY08, FY10, FY14 and FY15.
India Inc failed to surprise the market in the last financial year and this is reflected in the earnings per share, which saw a contraction of about 10 per cent. The PE multiple for Sensex rose by just about 1 per cent.
Experts are of the view that earnings growth has bottomed out and it should register double-digit growth this financial year. Does that mean investors can look forward to a bull market ahead?
If history is something to go by, the answer should be yes. For, whenever earnings growth has been in double digits, the Sensex has generally given double-digit returns while it has given negative returns when earnings have faltered.
In financial years ending 2009 and 2016 when earnings growth has been negative, the S&P BSE Sensex has seen a bigger cut of up to 38 per cent.
"The market is still looking good from a long-term perspective. We are missing a big trigger unveiling in the Indian market, which is earnings growth. If you look at the quarterly numbers for March quarter, they were far better than the expectations,” Sanjay Dongre, Fund Manager, UTI AMC, said in an interview with ETMarkets.com.
"If it is the inflexion point in terms of earnings growth, and the companies start reporting better earnings growth in the coming quarters, it should give a fillip to the market and stock returns should rise exponentially in the coming 6 to 12 months,” he said.
One-third of the Nifty50 stocks, or 15 firms, witnessed earnings upgrades after their March quarter earnings compared with six at the end of December quarter.
On the other hand, 35 firms have witnessed downgrades in earnings per share (EPS) estimates for FY17 compared with 42 at the end of December quarter.
Most global brokerages project double-digit earnings growth for India Inc in financial year 2017.
As many as 47 BSE100 companies beat Street expectations, while 41 missed them in March quarter. This ratio is decent compared with what we have witnessed in the past two years.
"Going forward, we have earnings growth expectations of around 14 per cent for Sensex companies in financial year 2017. We are overweight on private banks, four-wheelers, cement and utilities,” Surendra Goyal , director at Citi India, said in an interview with ET.
After the recent correction, the market continues to trade at reasonable valuations of around 15-16 times one-year forward earnings and, therefore, most analysts believe there was enough upside in the market from a 12-month to 18-month perspective.
"Earnings so far have been more or less in line with expectations. For FY17, we think earnings growth should be in the order of 12-15 per cent if the rain gods do not disappoint," Varun Goel, VP & Fund manager, PMS, Motilal Oswal AMC, said in an interview with ET Now.
ET Online
Get Unlimited Access to The Economic Times
