Stagnating Corporate Earnings Make Indian Stock Markets More Expensive

The general slow-down in the economy had its impact on the profitability of the Indian corporate sector’s profit growth has stagnated in the financial year 2019 (FY’19) due to various reasons. Slow down in the economy is one of them. Top 500 companies housed in the Bombay Stock Exchange (BSE)’s broader index BSE-500 have collectively posted a marginal rise of Rs 9,000 crore in their annual profit.

According to data compiled by ACE Equity for Outlook Money, the combined net profit of these top 500 companies has risen to Rs 4.87 trillion in FY’19 from Rs 4.78 trillion in FY’18. This indicates the slow-down or stagnating profit and as a result making Indian markets more expensive compared to other emerging markets.

Arun Kejriwal, director, KRIS, said, “In the not so encouraging economic environment, it is to be seen that whether the growth in the corporate profits has been adequate or not. If we expect the corporate earnings to be excellent and in that backdrop we compared what they have posted, we may suffer from despair”.

“However, the lack of adequate growth in the corporate earnings indicates that the current valuations of Indian stocks are not cheap but quite expensive. If going ahead, if we don’t see earning growth picking up in next two-three quarters, it will make Indian markets more expensive vis-à-vis others”.

Why is valuation important for any market and particularly for the emerging markets like India. The buoyancy seen in the Indian equity markets and other emerging markets in last so many years has been because of ample liquidity provided by the foreign portfolio investors (FPIs). They found valuation cheap in the respective local markets and flooded it with ample of funds they had raised from the developed world.

According to market observers, if Indian corporate earnings growth takes a hit, making valuations dearer to these set of investors, they will flee to other markets where valuations are relatively cheaper. In that case, going ahead, the robustness witnessed in the share prices in the recent past, may result in weaker trend setting in stock valuations.