Profit Growth May See Further Cuts as India Slows, Credit Suisse Says

  • Nifty FY18 EPS estimates too high, FY19 may see ‘harsher cuts’
  • Sees ‘pockets of growth’ even in an otherwise weak economy

For Indian equity investors looking for earnings growth to catch up with pricey valuations, the wait is getting longer.

Profit expectations for companies in Asia’s second-best performing stock market this year may see further cuts as a likely slowdown in government spending, falling farm incomes and a new tax raise near-term uncertainty, according to Credit Suisse Securities India Ltd.

Earnings per share growth at NSE Nifty 50 Index members will settle at “mid-single digits” in the year to March, versus consensus expectations of 11 percent, India equity strategist Neelkanth Mishra said in Mumbai. Projections of a 23 percent rise for the next fiscal year may see “harsher cuts,” he said.

Indian equities are trading near record levels, bolstered by a global rally and a gush of local liquidity amid falling returns from property and gold. While bulls argue the slowdown in economic expansion in the June quarter was triggered by one-time events like November’s cash ban and the disruption caused by the goods and services tax, the bears say the deteriorating outlook for company profits doesn’t justify the run up in valuations to the highest since 2008.

“We’re going through a period of dense fog, and I have often used the phrase that we are a house under renovation,” Mishra said.

Growth in government spending, which as a percentage of the budgeted target reached a record in the April-June period, is set to slow, Mishra said. Rural demand is likely to remain tepid as lower food prices have curbed farm incomes, while businesses are grappling with frequent tweaks to the GST regime introduced on July 1, he said.

Citigroup Inc. and UBS Group AG are among global banks that have lowered their estimates for India’s growth after the latest data showed gross domestic product rose at the slowest pace since 2014. For Credit Suisse, the reading has increased the downside risk to its fiscal 2018 forecast of 7.4 percent.

“We are in a period of uncertainty and maybe for the next 3-4 months, I don’t think we will get clarity,” Mishra said, adding the central bank may ease policy to support growth. “What the monetary policy committee chooses to do is their decision but given the way data points will play out, in my view, we will see meaningfully lower rates.”  

That said, Credit Suisse is bullish on discretionary consumer and financial-services companies, and on global growth proxies like metals and energy.

“The markets and the economy are weakly linked, and there are pockets of growth even in this otherwise weak economy,” he said.

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