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Nifty's earnings revision ratio is a bearer of bad news

After a long streak of selling, foreign institutional investors have started to make a comeback into the Indian equity market. (File Photo: Reuters)Premium
After a long streak of selling, foreign institutional investors have started to make a comeback into the Indian equity market. (File Photo: Reuters)

  • MSCI India is trading at a one-year price-to-earnings multiple of around 17 times, higher than the PE of MSCI Asia Ex-Japan and MSCI Emerging Markets Index. To justify these valuations, it is crucial that corporate earnings gain further momentum

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India Inc's latest earnings have not instilled a lot of confidence among equity investors, consequently, earnings downgrades continue.

An analysis by BofA Securities Ltd. shows that as of July 2022, the Street has revised Nifty's FY23/24 earnings down by -2.4%/-1.8% month-on-month and -2.5%/-2.2% year-to-date. Concerns about subdued global growth due to the looming threat of a recession does not paint a very encouraging picture of earnings outlook.

According to the foreign research house, the earnings revision ratio for both Nifty and NSE500 which stands at 33% and 37%, respectively, could fall further as an earnings cut could emerge in key front-facing sectors due to ripple effects of a slowing global growth.

The earnings revisions ratio is also known as the ratio of earning upgrades to downgrades. A higher reading indicates a positive surprise on the upside and vice versa.

"Industrials (+3.7%), Discretionary (+3.6%, led by Autos) and Energy (+2.6%) saw FY23 MoM earnings upgrades, while Materials (-13.4%) & IT (-4.1%) saw MoM earnings downgrades. All other sectors saw flattish revisions. For FY24, Discretionary (+4%) and Industrials (+2%) saw upgrades, while Materials (-11%) witnessed downgrade on MoM basis," said the BofA report dated 8 August.

In a positive, softening of commodity prices does provide some breather, however, its impact on margins may take some time to reflect, say analysts. Apart from that, the trajectory of price hikes and demand momentum, especially for export-oriented companies, are the other crucial parameters that will decide the fate of corporate earnings.

Meanwhile, the Indian market continues to trade at premium to its emerging market peers. Bloomberg data shows that MSCI India is trading at a one-year price-to-earnings multiple of around 17 times, higher than the PE of MSCI Asia Ex-Japan and MSCI Emerging Markets Index. To justify these valuations, it is important that corporate earnings gain further momentum.

What’s more, after a long streak of selling, foreign institutional investors have started to make a comeback into the Indian equity market. And of the factors that would decide the sustenance of foreign fund flows, is a meaningful earnings revival.

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