After registering flat earnings growth for the last 3 years, most analysts are hoping for a double-digit growth in the next two financial years.
India Inc has started declaring earnings for Q1 FY19 and Tata Consultancy Services which kick-started the earnings seasons earlier this week has not disappointed investors. After delivering flat earnings growth over the last 3 years, most analysts are hoping for double-digit growth over the next 2 fiscals.
The Nifty, which gained nearly 4 percent in 2018, is slowly marching toward its lifetime high of 11,171. It recovered sharply from the lows helped by gains in the largecap stocks. Most experts feel the index could breach this level in the next 1-2 months if the momentum continues.
From the list of 50 index constituents, 15 companies could see over 40 percent growth in earnings per share (EPS) in the next 12 months, according to a Reuters estimate.
EPS is the portion of a company's distributable profit allocated to each outstanding share of common stock. To find out whether the earnings of a company have improved or deteriorated, experts suggest one should look at EPS calculated over a number of years.
EPS = (Net income - dividends on preferred stock)/average outstanding shares.
Companies that are likely to see a rise in their respective EPS, according to Reuters data, include: Axis Bank, Coal India, Tata Motors, Tata Steel, Dr Reddy’s Laboratories, ICICI Bank, Eicher Motors, Bajaj Finance, Titan Company and Bharti Airtel.
History suggests that earnings and stock prices move in tandem. If the company is growing, chances are the stock price will also reflect a similar momentum. Most stocks - Tata Motors, Tata Steel, Axis Bank, and ICICI Bank - in the list have already corrected substantially in 2018.
“EPS growth is one of the most important factors considered in bull markets while investing. There are some professional fund managers who only opt for growth or momentum investing,” Jimeet Modi, Founder & CEO, SAMCO Securities, said.
“Growth upwards of 50 percent in Nifty stocks generally happens due to low base effect or due to some extraordinary circumstances in the previous year. But investors should not be lured by such fancy percentages. However, some companies which are performing consistently can be considered for investments,” he stated.
Modi added that companies like Bajaj Finance and Yes Bank are consistent performers, but others can be avoided currently and bought into on corrections. “Axis Bank, Dr Reddy's and Tata Motors can be bought into as their normalised earnings multiple are reasonable at current levels.”What should investors do?Market pundits are turning optimistic about the price momentum. Once it picks up, price tends to remain in motion more or less in the same direction.
“Any company with more than 15 percent EPS is considered to be a great investment bet. Buying the mentioned stocks in the list at current market levels will be a great bet for investors,” Ritesh Ashar, Chief Strategy Officer at KIFS Trade Capital, said.“Investors generally look for companies which deliver steady increase in EPS. A steady growth in EPS indicates how eligible the company is in making money for its shareholders. It also showcases performance of a company's management,” he added.