 "Profit outlook: Earnings growth to be tepid")
There are two ways stock prices move up. Either there is a valuation re-rating and investors agree to pay a higher price-earnings (P/E) multiple for reasons such as benign liquidity flows or corporate earnings grow resulting in higher stock price for the same level of valuation ratio.
In the last three years, the rally on Dalal was driven by higher P/E multiples. The benchmark BSE Sensex underlying P/E multiple rose to average of 20.8x in calendar year 2015 from 18.3x in 2014 and 17.4x in 2013.
A valuation re-rating, however, loses steam sooner or later if not matched by earnings growth. And this is what happened in the latter half of 2015 and the first two months of 2016.
The underlying earnings per share for Sensex were down 7.5 per cent in 2015 providing fodder to the bears. At the broader level the profitability of the non-financial sector has been virtually stagnant since the 2008 financial crisis. For example, the combined net profit of BS 1000 companies grew less than 1 per cent a year since financial year 2007-08 and was down 17 per cent from the highs of FY11.
The biggest question facing investors now is whether the Union Budget changes the trajectory of corporate earnings. Experts say that government spending programme may provide some earnings boost to consumer goods and farm sector related companies but rule out a secular upturn in corporate earnings.
Historically, corporate earnings have tracked GDP growth but the link has weakened in recent years thanks to global economic turmoil. For the fourth consecutive year in FY16, corporate earnings (ex-financials) are likely to grow less than GDP growth.
"For the first time in many years corporate earnings and official GDP indicators are following different trajectories thanks to variety of factors. This will take a few more quarters to resolve and corporate earnings could remain flat in the interim," says Dhananjay Sinha, head institutional equity, Emkay Global Financial Services.
Others say that the global trade cycle now plays a bigger role in corporate earnings than in the past. "If you look at Nifty 50 companies, nearly two-thirds of the corporate earnings now depend on global trade or companies that finance exporting companies. As such a secular upturn in corporate earnings requires support from global trade as it was during the pre-2008 boom," says Nitin Jain, president & CEO global asset and wealth management - Edelweiss Capital.
In the last three years, the rally on Dalal was driven by higher P/E multiples. The benchmark BSE Sensex underlying P/E multiple rose to average of 20.8x in calendar year 2015 from 18.3x in 2014 and 17.4x in 2013.
A valuation re-rating, however, loses steam sooner or later if not matched by earnings growth. And this is what happened in the latter half of 2015 and the first two months of 2016.
The underlying earnings per share for Sensex were down 7.5 per cent in 2015 providing fodder to the bears. At the broader level the profitability of the non-financial sector has been virtually stagnant since the 2008 financial crisis. For example, the combined net profit of BS 1000 companies grew less than 1 per cent a year since financial year 2007-08 and was down 17 per cent from the highs of FY11.
The biggest question facing investors now is whether the Union Budget changes the trajectory of corporate earnings. Experts say that government spending programme may provide some earnings boost to consumer goods and farm sector related companies but rule out a secular upturn in corporate earnings.
Historically, corporate earnings have tracked GDP growth but the link has weakened in recent years thanks to global economic turmoil. For the fourth consecutive year in FY16, corporate earnings (ex-financials) are likely to grow less than GDP growth.
"For the first time in many years corporate earnings and official GDP indicators are following different trajectories thanks to variety of factors. This will take a few more quarters to resolve and corporate earnings could remain flat in the interim," says Dhananjay Sinha, head institutional equity, Emkay Global Financial Services.
Others say that the global trade cycle now plays a bigger role in corporate earnings than in the past. "If you look at Nifty 50 companies, nearly two-thirds of the corporate earnings now depend on global trade or companies that finance exporting companies. As such a secular upturn in corporate earnings requires support from global trade as it was during the pre-2008 boom," says Nitin Jain, president & CEO global asset and wealth management - Edelweiss Capital.