Earnings growth hopes look frothy, says JP Morgan

MUMBAI: JP Morgan, a US-based investment house, said the current earnings growth expectations of 11% for FY16, and 20% for FY17, appear frothy in relation to the macro backdrop. The broad market currently trades at 17 times one-year forward earnings–one standard deviation higher than historic mean.

“We expect 6% earnings growth for FY16 and 15% for FY17,” said Bharat Iyer, managing director, head of equity research at JPMorgan India.

Earnings have been flat over first half of this fiscal year, the brokerage expect the earnings downgrade cycle to continue from another quarter or two. Consumer discretionary, industrials and materials sectors appear particularly vulnerable.

JP Morgan said it prefer to participate in the potential economic recovery story through high quality financials with a solid capital and liability franchise such as HDFC Bank and Kotak. The Government’s early cycle investment priorities should aid the Cement sector. Lower global energy prices should benefit both the cement and downstream energy sectors. Ultratech and BPCL should be key beneficiaries. Infosys is likely to benefit from the revival in the US growth momentum and a strengthening US dollar, while the new management’s strategy and initial delivery have been encouraging.

The investment house said policy environment remains mixed. The Government has done a fair bit to improve the investment environment. But remains constrained on reforms requiring legislative action, as they lack numbers in the Upper House of Parliament. Progress herein will be a pre-requisite for market valuations to expand further.