During the Quarter ended March-2017, broad market revenue and net profit growth gained pace at 10% YOY1
and 20% YOY, possibly owing to lower base effect but also due to some signs of business growth coming back (Source: Morgan Stanley). Earnings growth was the fastest
since June 2013 quarter. From the below chart, we may infer that earnings growth of companies have started to beat the consensus estimates even as EBITDA margins remains on the higher side.
An analysis of the Q4 FY2017 earnings of 2,348 companies (ex-financial and energy companies), for which comparable data was available for 12 quarters, showed that aggregate net sales increased 5.07% from a year ago in the three months to 31st March, one of the best performance in three quarters, and net profits after adjustment for extraordinary items dipped 3.7% (Source: Mint). Improving sales growth is important
and it’s a good sign. The current market environment of consistently reaching higher index levels often leads to investors comparing it to that of the market condition in 2007. While the comparison of Nifty’s current PE2
trading at 22.5 on a trailing basis with 2007’s Nifty PE of 22.5 is numerically correct, the inference does not necessarily hold true.
Thus, looking beyond the most widely used PE ratio, the other market centric metrics are below long-term averages and much below the euphoric period of 2007. A near term PE ratio doesn’t necessarily indicate whether an index/stock is expensive or cheap. A PE ratio is an assigned number based on certain hard factors (such as ROE3
, etc) and soft factors (such as Market share, Brand value, product acceptance, etc). PE ratio conveys a fraction of a valuation. There are other valuations matrices like P/B, EV5
, EV/Sales, Price to Sales, etc. Hence one must consider all the important valuation matrices as well before coming to a conclusion. The recent Q4 corporate results have given some signs of a likely turnaround in the earnings trajectory of companies.
It is a fact that earnings growth has been elusive for the last 3 years. However, this year has all the ingredients of earnings recovery.
As the economy turns, earnings may rebound and may bring down price to earnings ratio from the current levels and markets may deliver potential risk-adjusted returns for investors.
- Global growth is looking up. In such a scenario, India does well as exports grow.
- On the consumption side, normal monsoon leading to good crop production, rural economic revival, lower interest rates and 7th Pay commission payouts by States and PSUs could help
- On the investment side, interest rates transmission to corporate and increased government capex could help in uptick of earnings
Source: Internal researchMutual Fund investments are subject to market risks, read all scheme related documents carefully
- YOY: Year on year 2. PE Ratio: Price earnings ratio 3. ROE: Return on Equity 4. ROA: Return on Assets 5. EV: Enterprise Value 6. EBITDA: Earnings before Interest, Taxes, Depreciation & Amortization