Credit Suisse Wealth Management sees mid-teen growth in Nifty earnings

Despite a likely 100 basis point (bps) cut in growth forecast going ahead, earnings for Nifty Index in 2020 could settle in mid-teens as compared to a consensus estimate of around 26 per cent for financial year 2020-21 (FY21), wrote Jitendra Gohil, Head of India Equity Research, Credit Suisse Wealth Management in a recent co-authored note with Premal Kamdar, their equity research analyst.

A large part of this growth, they feel, will come from lower provisioning needs of the financials, which we estimate could contribute over 80 per cent to the incremental growth in Nifty Index earnings.

“With the current tariff hike – and potentially next year as well – the telecom sector is well set to accelerate its earnings momentum. On the other hand, volatility in earnings can come from metals and mining companies and energy. Consumer companies have already benefited this year with tax cuts and hopefully they will be able to cut cost and protect margins to withstand slower consumer spending environment in 2020,” the Credit Suisse note says.

Gohil and Kamdar expect the information technology (IT) sector to clock in see moderate growth of single-digit, while industrials and capital goods companies could see sharp cuts in earnings if growth fails to pick up materially.

"While we acknowledge that earnings growth expectations are elevated and do not completely price in India’s deteriorating growth outlook, the equity market tends to bottom-out well ahead of the bottoming of GDP (gross domestic product) growth and earnings," the co-authored note said.

Credit Suisse believes the recent reform measures – cut in corporation tax, likely privatisation of public sector companies, improving ease of doing business, strengthening of the insolvency and bankruptcy code, and introduction of Real Estate Regulatory Authority (RERA) have increased confidence in the formalisation of the economy – is positive for markets.

Within the markets segments, they do not forecast a major underperformance by the mid-caps in 2020 given the valuation comfort.

“Currently, the Nifty Midcap 50 Index is trading at a 12-month forward P/E of 14.8, which is a 20 per cent discount to the large caps; in line with the discounts that the mid-caps commanded before mid-2016, post which the mid-caps started trading at an exorbitant valuation premium of up to 50 per cent reached in December 2017,” the Credit Suisse note said.

That said, they see moderate returns from the markets as they rule out a broad-based recovery in economy and acknowledge that the government does not have much room to stimulate growth.

“In 2020, we are likely to see pockets of growth rather than broad-based growth, hence we recommend concentrating portfolios across large caps and quality mid-caps, where growth visibility is high. We continue to like private banks, chemical companies, IT and NBFCs. Consumption is a structural growth theme in India and we continue to like stocks that are impacted by urbanisation, though growth has been slower than anticipated,” the Credit Suisse Wealth Management note says.