Nifty’s five-year profit, market capitalisation growth move in sync | News on Markets
Nifty’s five-year profit, market capitalisation growth move in sync | News on Markets
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With markets recording new highs almost every second day, there is a heated debate on whether stocks have run ahead of their fundamentals and whether earnings will be able to keep pace with valuations. Only time will tell if the earnings growth potential justifies Nifty’s current valuation of almost 25 times its FY24 earnings.
However, over the past five years, the India Inc profit and stock price growth have moved lock and step—giving more credence to the theory that markets are slaves to earnings growth.
Sample this: the earnings for Nifty 50 companies have risen at a compounded annual growth rate (CAGR) of 18 per cent between FY19 and FY24—almost in sync with the market cap (mcap) growth during this period.
“This goes to show that the market is trading at a fair valuation. The 10-year average price to earnings (P/E) multiple is about 20.2x on a one-year forward basis. Similar to current valuations,” said Gautam Duggad, head of research of institutional equities at Motilal Oswal Financial Services.
He expects Nifty earnings growth to compound at 15 per cent CAGR over the two financial years—FY25 and FY26.
In FY24, Nifty logged earnings per share of Rs 989. If earnings compound at 15 per cent and valuations remain at current levels, the index could trade at 26,000 by March 2025.
However, both earnings growth and valuation projection differ from analyst to analyst. Some analysts are comfortable with the markets—or a stock’s—near-term valuations overshooting long-term averages if the potential for earnings growth is stronger.
“On the aggregate market level, the India story is still priced in about halfway through this earnings cycle. Earnings could continue to compound at a rate of 20 per cent over the next four or five years. Some stocks may be a bit ahead of their earnings outlook, others are lagging behind,” said Ridham Desai, chief equity strategist India, Morgan Stanley, in a recent interview.
Deepak Jasani, head of retail research, HDFC Securities, said both profits and earnings don’t grow in a linear manner.
“Nifty profits have grown well in FY23 and FY24, but in earlier years, the profit growth was not very sharp. Similarly, there is no linearity in the growth of the market cap. India’s GDP will grow at 6.5-7 per cent, the nominal GDP will grow at 10-11 per cent, and corporate profitability could grow at 13-16 per cent. On an overall basis, 13-14 per cent CAGR in the market cap in the indices in the next three to four years is possible. If GDP growth remains protected, then there won’t be much to worry about regarding corporate profitability growth,” he said.
At a more micro level, some sectors have lagged their earnings growth, while others, particularly financials, have clocked earnings growth far in excess of their mcap growth over the past five years.
Last week, Kotak Institutional Equities (KIE) said tracking index-level valuations is a mirage. “A superficial view of the Indian market is typically based on the valuations of the Nifty 50 Index. The index may be reasonably valued in the context of historical valuations and bond yields but most other parts of the market are trading at full-to-frothy valuations after a massive rerating in their multiples in the past 2-3 years,” it said.
The brokerage said the 50 companies that make up the Nifty have diverse valuations ranging between 7x and 100x.
Interestingly, stocks that currently trade below 20x valuation have accounted for 67 per cent of the incremental profit growth over the past five financial years, as per KIE.
First Published: Jul 08 2024 | 6:47 PM IST
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