India is likely emerging from its deepest earnings drawdown of the past 20 years, according to a research report published by Morgan Stanley. This earnings drawdown was a result of weak growth, high and rising interest costs, excessive private sector debt and overcapitalized balance sheets. “Our 16% earnings CAGR forecast over F16-18 for the Sensex and the broad market puts our F18 Sensex EPS estimate 300bps ahead of consensus,” the report stated.
According to the report, the market is pricing in about a 10% profit CAGR, 2016- 20. The various factors that are aligned for a new earnings cycle include the country’s real and nominal GDP growth which has appeared to have bottomed, rising public investments and improved terms of trades among others. However, the risks involves PPI deflation, a global recession as close to 40% of the Sensex earnings are global and nominal effective appreciation of the Indian rupee.
The target for the Sensex for June 2017 offers a double-digit relative US dollar upside versus the emerging markets. Currently India is +200bps in the EM portfolio, second only to Taiwan. Discretionary, private banks and industrials are favoured over staples and healthcare as Cafe Coffee Day has been replaced with LIC Housing.
The report provides a list of fastest-growing companies whose stocks trade at the most attractive valuations. The growth at a reasonable price (GARP) list is derived from a top-down quantitative mode. Some of the overweight-rated India GARP stocks include, BPCL, Tata Motors, Power Grid, Eicher Motors, UPL etc.