INSUBCONTINENT EXCLUSIVE:
By Pankaj MurarkaIndia has witnessed a prolonged earnings recession over the past decade
The end of FY2018-19 marked 10 years since the recovery began from the aftermath of the global financial crisis
While aggregate GDP growth on reported basis has been healthy over the past 10 years at ~7% CAGR, the trend across industrial growth,
corporate profitability and earnings growth has been disappointing.
As a result, we have witnessed one of the weakest phase of industrial
prior decade 1998-2008, Nifty earnings had a CAGR growth of 13% and corporate profit-to-GDP expanded from 2.3 per cent to 7.8 per cent at
Thus, Nifty EPS increased from 84 in FY98 to 281 in FY08 (Chart 1).
Compared with that, we have witnessed weak industrial growth at 4.2 per
cent during the last decade, i.e
from FY09 to FY19, significant compression in corporate profitability (chart 2) and Nifty earnings have grown at a CAGR of 7 per cent.
Due
to the sharp compression in profit margins, earnings growth for corporate India has significantly trailed nominal GDP growth over the past
It has taken us 10 years to double Nifty EPS from Rs 247 in FY09 to Rs 496 (E) in FY19.
There were multiple reasons for the below-potential
growth and sluggish earnings growth over the past decade, including fiscal profligacy and high inflation for five years (2009-13), stalled
projects, twin balance sheet issues and fiscal consolidation, etc.
But there is light at the end of the tunnel
The good thing is we are likely to exit the earnings recession and Nifty earnings are expected to see a sharp rebound, recording over 20 per
cent growth in FY20 after a gap of nine years
Last time we had Nifty earnings growing at over 20 per cent was in FY11, when it expanded 27 per cent.
As the headwinds to growth recede,
India will experience significant tailwinds from the structural reforms executed in the last few years and we expect Nifty earnings to grow
at 15 per cent CAGR over next five years from FY19 through FY24; which would effectively mean doubling of Nifty earnings over the next five
years to Rs 1,000 as opposed to the 10 years taken to double Nifty earnings from Rs 251 (2009) to Rs 496 (2019).
Thus, I believe, after a
gap of 10 years, Indian economy is at an inflection point and we are poised for a sharp recovery in earnings
investment hypotheses has been large corporate banks
The performance of leading corporate banks has been significantly impaired over the past few years due to high provisioning cost and
But, as is evident, we are near the end of the provisioning cycle for corporate banks and as their provisioning normalizes in FY20, we shall
witness sharp rebound in their profits.
We remain sanguine on the prospects of recovery in the investment cycle over the medium term
Resolution of stressed assets through the Insolvency and Bankruptcy Code and improvement in capacity utilisation across industries will spur
the next investment cycle in India.
Capacity utilisation has inched up to 75-80 per cent levels for various industries, implying the need
RBI in its March 2019 bulletin highlighted that there has been some recovery in the capex cycle in FY18-19 and investment activity is likely
to improve given the pipeline of projects lined up by private companies.
The healthcare sector in India has been in a downturn for over the
Profits of top four companies in the sector have declined 23 per cent CAGR during the three-year period between FY15 and FY18
This was driven by multiple factors, including significant erosion in pricing in the US generic market and regulatory issues, among others
We believe, after such a sharp decline, industry profits are near a trough and profits of top four companies have stabilised in FY19 and
would get back to the growth trajectory from here on over the next five years.
India has always been a bottoms-up market for stock selection
Even in the midcap carnage of 2018, led by the NBFC crisis and massive exodus of FII money, there were several stocks that stood up and
delivered handsome returns.
Over the next few months, there will be noise around elections, but we continue to remain focused on investing
in quality businesses that can deliver sustainable growth over the medium to long term.
(Pankaj Murarka is Founder Fund Manager,
Renaissance Investment Managers)