A year of good fortune

The last six years have seen earnings at about 35 per cent below normative levels. This low base will, of course, bring about a significantly higher earnings recovery over the years.
Nirmal Jain   Delhi     Print Edition: Nov 9, 2014
Nirmal Jain/ Founder and Chairman, IIFL Holdings
Nirmal Jain/ Founder and Chairman, IIFL Holdings

India Inc. is waking up to a year of good fortune ahead, founded on the hope that the new government at the Centre will usher in radical reforms. Inflation downtrend, narrowing twin deficits and supportive economic policies are likely to boost corporate earnings going ahead. The numbers from Infosys and Reliance have beaten street expectations, boosting the outlook further.

The last six years have seen earnings at about 35 per cent below normative levels. This low base will, of course, bring about a significantly higher earnings recovery over the years. Operating leverage kicker when the economy revives, falling interest rates and stringent cost controls will enhance profitability. The price-to-earnings ratio will be significantly lower than what most people expect it to be. Given the depressed scenario of recent years, a revival in the economy and improvement in profitability will impress market participants and take indices to a higher orbit.

The stock market has had a good run from March 2014 and the handsome gains so far are just the tip of the iceberg. Street expectations are that the Nifty earnings growth would be in the 13 to 14 per cent range next year. It shouldn't come as a surprise if the actual delivery is in excess of 16 per cent.

India's equity market capitalisation is higher than the likes of Mexico, Brazil, Russia and South Africa. Indian equities remain significantly better placed than most emerging markets today. A range of large-sized companies across verticals, and a host of exciting mid-cap companies is the judicious kind of mix that keeps FIIs excited in the India story.

A slowdown in China adds to India's comparative charm and value proposition. This is evident from the net FII inflows of as much as $13 billion in 2014 year-to-date. Yes, the last couple of weeks may have seen some selling, but that is nothing but transient. Another $10 billion to $12 billion of FII money flowing in the next six to eight months is quite a possibility.

The macro factors are also turning in India's favour. GDP growth has begun to pick up after bottoming out for many quarters, having revived to a nine-quarter high of 5.7 per cent in Q1 FY15. We expect it to be at a level of 6.5 per cent in a year's time. A real GDP between six to eight per cent with inflation pegged at six to seven per cent would imply a doubling of the nominal GDP within a five-year time frame. Quite obviously, equity market capitalisation will only rise from here on.

We believe that IIP will now pick up and not be a drag on GDP like in the past few years. Among other tailwinds is the significant control over fiscal and current account deficits achieved in recent times, so much so that these twin deficits are unlikely to impact the market in the foreseeable future. Forex reserves are slated to improve given the strong FII and FDI flows. No wonder, S&P has upgraded India's outlook to stable.

After the formative delay, the monsoon staged a recovery from mid-July; thereby sowing caught up. Food prices and the overall inflation have come down, albeit for some rise in vegetable prices. As I write this piece, retail inflation has fallen to 6.5 per cent in September, a multi-year low. Likewise, food inflation and fuel inflation too have fallen further.

The government action so far hasn't let down the market. While a long-term roadmap is awaited, measures taken to clear stalled projects, continued diesel deregulation, focus on inflation control, opening up of FDI in insurance and defence, support extended to Aadhaar and railway passenger fare hikes are encouraging moves. The Union Budget's attempt to correct expenditure by shifting focus on investment-related spending away from consumption-related expense is also laudable.

The budget-making process is set to kick off earlier than usual and expectations will build up in the run-up to the budget. Barring the near-term shocks, crude oil will remain soft with higher incremental production from non-OPEC next year compared to the incremental demand. The government has also effected lower hikes in minimum support price, which will help the inflation cause.

We are already beginning to see deposit rate cuts. While we strongly believe that interest rates should be cut, we expect the RBI to begin this exercise early next year. The collaborative handiwork of low inflation and low interest rates will make the bourses happy as also boost financial savings that in turn would act as a key catalyst to the investment cycle. 

Nirmal Jain is the founder and chairman of IIFL Holdings

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