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Correction may not be very deep, positive corporate earnings surprise provides fillip to equity markets

Even though the equity market rally in the last one and half years is driven by strong liquidity and expansion in valuation multiples, earnings growth have also contributed to the rally.

October 09, 2021 / 08:11 IST
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It was quite a positive surprise that corporate earnings registered a healthy growth amidst the COVID-19 pandemic in FY21 when the Indian economy witnessed one of its most severe post-Independence recessions. Nifty EPS growth came in at a healthy 18 percent in FY21, despite a record GDP contraction of 7.3 percent contrary to many expectations of a decline in earnings of upto about 10 percent.

Even though FY21 earnings growth was supported by a weaker base of FY20 due to the COVID-19 impact in the last quarter, the extent of rebound was spectacular and has aided strong stock market performance. This surprise in earnings was driven by stringent cost controls across sectors. Despite the second wave, the earnings for FY22 and FY23 have not seen any significant downgrades and are anticipated to grow by around 25 percent and around 20 percent respectively.

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Sectors driving earnings growth

It is counter-intuitive to have seen earnings grow at such a strong pace during the pandemic phase. However, deeper analysis reveals that some of the key sectors having large contributions to the aggregate earnings have demonstrated resilience. Banking and Financial Services which accounts for over 25 percent of the earnings have recovered from the corporate loan stress and are were further supported by moratorium and liquidity measures like TLRTRO (Targeted Long-Term Repo Operations), ECLGS (Emergency Credit Line Guarantee Scheme) etc. during the pandemic phase, thus helping the sector post good earnings growth. With this, the largest corporate sector (banking) in terms of earnings is adding to the stable growth in current and next year.