While 2015 was somewhat gloomy for the markets, 2016 promises better days. In an interview to Bloomberg TV India, CLSA’s Executive Director and India strategist Mahesh Nandurkar forecast India Inc’s FY17 earnings growth at 12-15 per cent. While the RBI may lower rates by 25-50 bps, banks may lower rates by 75-100 bps, he said.
2015 has been a somewhat tough one for the markets. Do you believe 2016 can be better?
Yes, 2015 has turned out to be a bit of a disappointing year with negative market returns. I, however, believe that 2016 is going to be much better than 2015, especially because of two reasons. First, we are seeing the signs of economic recovery already setting in. There are quite a few high-frequency monthly economic indicators, which are trending up.
Secondly, I believe the investors’ expectations have also come down to a much more moderate level, especially from the foreign investor side.
So, if you remember, we started last year with very high overweight from the FIIs and I think the ascent of overweight has now come down over the past 12 months. What are some of the key changes one can expect in 2016 that can probably take the markets higher from here?
I clearly believe that in 2016 or FY17 the corporate earnings growth is likely to be much better because ultimately whatever we talk about — whether the GDP growth or reforms — ultimately everything has to translate into corporate earnings growth.
For the last five years, we have seen India’s corporate earnings growth at just about 5-7 per cent on an average — a single-digit earnings growth. I believe that 2016 or FY17 will see earnings growth in the range of 12-15 per cent, although the current expectations are higher, at about 20 per cent.
So, ultimately this is what will matter and this is what will take the markets upwards. All the key factors driving earnings growth improvement will be the base effect itself. Several large companies have had some sort of one-off or some other items, which have kept 2015 at a subdued level. So, on that subdued base, we will get much better earnings growth. A part of this earnings growth improvement will be optical and not real.
But ultimately when the headlines improve, things improve along with it.
What is needed for that real earnings growth to get reflected? What kind of changes should one expect? How does one start moving towards 20 per cent earnings growth?
I think 20 per cent earnings growth is still far away. FY17 is unlikely to be that year. Maybe FY18 is what we will have to wait for. What is really critical now for the earnings growth to improve is that the corporate revenue growth has to improve.
We have seen a big delta last year coming in the form of marginal improvement because of the commodity prices being weak. Now, I would say, the bulk of that impact is there in the numbers and, going forward, the earnings growth improvement has to come by way of revenue growth, which in turn will drive operating leverage.
A lot of us tend to ignore the fact that while the real GDP growth has remained in the 7-7.5 per cent in range, which anyway a lot people question, the nominal GDP growth deceleration is there for everyone to see. About 12-15 months ago we were growing at 13-14 per cent in nominal GDP terms. Now we are down to 7-8 per cent. So the corporate revenue growth has to get impacted because of that. While all of us really celebrate that the inflation has come down, which is obviously good news, there is a downside of that as well. I think the base is catching up on the inflation side.
On the wholesale inflation side, which is more critical for the corporate revenue and earnings growth, what we ultimately need to see is the revenue growth improving, which I think should happen. We are seeing various indicators like tax collection growth, air traffic passenger, IIP and power generation that are showing better revenue growth and that is what it will ultimately lead to.
What’s your expectation on interest rates from RBI?
As far as RBI action is concerned, I would say that about 25-50 bps is what we expect. But as far as the rate cut by the banks is concerned, there we will be a combination of transmission of RBI rate cuts and more that can happen in 2016. Cumulatively, bank lending rate should be 75-100 bps.