Brokerage Nomura India noted that there is a strong inverse correlation between earnings-to-GDP ratio and the earnings growth over the following five years.
NEW DELHI: For the past couple of years, India Inc's corporate earnings-to-GDP ratio has been languishing at around 3 per cent after hitting a high of 6-7 per cent in 2007-08.
Analysts find it disturbing that while equity benchmarks Sensex and Nifty50, now trading at record high levels, have climbed over three times in the past decade since 2008, earnings have not expanded in tandem with GDP growth.
But there is silver lining.
Brokerage Nomura India noted that there is a strong inverse correlation between earnings-to-GDP ratio and the earnings growth over the following five years.
The foreign brokerage said not only has this correlation held strong for S&P500 and FTSE100 over the years, it also holds true for the Nifty50.
"A low earnings-to-GDP ratio indicates a bottom for the corporate earnings cycle, and this is often followed by strong earnings recovery. In India, we have seen a typical business cycle play out. At the peak of the cycle (FY07), profitability was attractive, which led more players to enter the fray or incumbents to make aggressive investments," Nomura India said in a research note.
The brokerage said a lot of churning has happened across industries and a lot of the excesses got purged out of the system.
Post the cleanup, the stage is set for rapid recovery in earnings growth, it said, adding that earnings growth over the FY17-22F period could be well over 20 per cent.
"Since FY18F earnings growth is expected to be only 13.5 per cent, we expect acceleration in the following years," the brokerage said.
Anshul Saigal of Kotak Mahindra AMC told ET Now that investors, who did not invest in the market in 2004 due to high returns (83 per cent for Sensex) and absence of material earnings growth, missed out on the big rally that lasted till 2007, as earnings growth eventually did come about.
Liquidity does not come in just because a lot of capital is available. Liquidity comes in anticipation of growth. Over the next three to five years, in all likelihood earnings is going to surprise market participants. The market will look much higher than where it is today. "But if one were to ask me about next six months, it is a hard call because the market moves on sentiment in the near term while it is always about fundamentals in the long term," Saigal said.
