Morgan Stanley’s Ridham Desai on what will drive 20% earnings growth over the next four years 

Earnings, he explains, is created by investments made in the economy. Hence, it is important to see where these investments are coming in.

Government dissaving:

Government deficit contributes to earnings. A decline in deficit, on the contrary, is a drag on earnings. Desai sees deficit declining over the next three years. “But it will only be a slight drag.”

Household saving:

If households save, it's a drag on earnings because there's less consumption, Desai explains. That (consumption) is a very positive contributor right now, while gross savings are still in line with history, because households are leveraging. The aspiration of the Indian middle class is high and they are willing to spend their future (income). “It will end badly in 20–30 years, but not today. And therefore, that brings forward the earnings,” he adds.

Also read: Nifty at all-time high: Earnings growth can overshoot on the upside, not fully priced in by market, says Ridham Desai

Trade and current deficit:

The third is the trade deficit or the current account deficit. A deficit means you're losing production to companies outside India. So that deficit is declining on a structural basis as we import less oil, and trading more with the world, and the trade is in our favour. Trade deficit therefore will be a positive contributor to earnings growth.

Dividends are paid by companies.

Dividends that companies pay go back into the economy as consumption. So when they are rising, Desai explains that it is good for profits, ironically. “When they're rising, it drags down the investment rate because that's less saving than the companies do. To compensate for that, companies can leverage. As leverage is low, there's room for all these things to grow,” he says.

All these five drivers, he adds, except for government dissaving, which Desai believes will reduce, are all very positive for earnings. Ultimately, this is where earnings come from, not revenues and margins.

When one fundamentally comprehends this fact—although people may have different views—and once intrinsically understands where earnings come from, Desai says that it is difficult to opine that earnings are going to lose share. “My base case is earnings will gain share. So, if you're in that cycle, then I think we're good for share prices until that peaks or the peak is getting apparent, because share prices will peak 12 months before that,” he adds.

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