‘I wish corporate profit growth surpasses the long period average’

“If wishes were horses, beggars would ride. If turnips were bayonets, I would wear one by my side”, so goes a popular nursery rhyme. Nevertheless, I wish for 20 per cent plus returns from the stock market in 2013, following the 20 per cent plus returns in 2012. I wish FIIs continue to pour money into Indian equities and bring in over USD25 billion in 2013. If the DIIs too turned bullish and retail investors flock back into the stock markets, it would add the much desired icing on the cake. The cherry atop the icing would be allowing pension and gratuity funds to invest in equities.

The stock market performance during 2012 was in stark contrast to the prevailing economic realities — slowing industrial production, spiralling inflation and widening current account deficit. The mid-year economic analysis tabled in Parliament earlier this month lowered the GDP growth projection for the current financial year to 5.7-5.9 per cent. As experts often say, stock market performance is the reflection of expectations relating to the future. Perhaps, the market foresees an improvement in economic and business conditions. I wish for a return to the 8 per cent plus GDP growth rate, for inflation to decline below 6 per cent and for a 3 per cent drop in interest rates.

Looking back to about six months ago, markets were languishing largely due to policy paralysis. Market sentiment improved after the Government made a slew of announcements such as fuel price hike/reforms, opening/ relaxing FDI in multi-brand Retail, Aviation and Broadcasting, Cabinet approval to raise FDI in Insurance and Pension, easing of fund-raising abroad, and the proposed GAAR deferral. The government’s victory on the issue of 51 per cent FDI in multi-brand Retail has increased confidence in its ability to push economic reforms even in the face of stiff opposition. I wish for the continuance of the aggressive reforms that the government has kick-started. I would like to see further rationalisation of subsidies, full decontrol of auto fuel prices, and renewed thrust on infrastructure.

In the long term, the market is a slave to earnings growth. For the five years ending FY13, Sensex EPS CAGR has been muted at 8 per cent. However, FY14 might mark the beginning of a new earnings cycle. Our bottom-up earnings estimates for Sensex companies suggest FY14 Sensex EPS growth of 14 per cent, close to the long period average earnings growth of 15 per cent.

I wish corporate profit growth surpasses the long period average and comes closer to 20 per cent. Now, with that kind of earnings growth, would market returns be a far cry? It is oft said, “Be careful what you wish for; you just might get it.” Well, let’s hope we do!

(The author is CMD, Motilal Oswal Financial Services Ltd. The views are personal)

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