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Earnings estimates for the Nifty50 in FY23 have been left more or less unchanged post the Q4FY22 earnings season. For FY24, earnings estimates have been downgraded very slightly as most sectors are expected to fare well.

As such, net profit for Nifty50 is now estimated to grow 23% in FY23 and 15% in FY24. In both years, financials will contribute a chunky 37% to the incremental earnings.

Analysts said the recovery in the economy, which seems to be picking up pace, is expected to boost demand for sectors such as automobiles. Economists expect India’s GDP to grow at anywhere between 6.8%-7.4% in the current year. The PMI services index grew at its highest in eleven years in May. The energy and metals sectors are also expected to do reasonably well this year though the export curbs and the higher cost of inputs could hurt steelmakers.

Analysts at Jefferies noted that margins had declined at a reduced pace but cautioned that the worst of commodity price impact may lie ahead.

For FY23, earnings cuts had been seen for industrials, auto ancillaries, pharma, IT and cement, which have been compensated by upgrades in banks, property, & commodities.

“Consumer driven sectors like automobiles and & staples saw only small cuts, due to price hikes, which is a positive,” they wrote.

The big kicker to the earnings will come from lower provisions at banks. In Q4FY22, the sharp fall in provisions by 38% year-on-year boosted the combined bottom line of 31 lenders by 87.5% to Rs 48,233 crore, data from Capitaline shows. Moreover, advances are expected to grow at a faster pace this year and demand for both working capital and long-term funds picks up. “Banks balance sheets are now well-capitalised and can support long growth,” an analyst said.

Given the correction in stock prices and the robust earnings outlook, analysts believe valuations are now a lot more reasonable. At 16,584, the Nifty now trades at a price-earnings (P/E) multiples of 18.4 times one year forward earnings estimates, compared with the peak valuation multiple of 22.8 times. At the same time, there are concerns of a prolonged period of high inflation could drive up yields to higher levels. “Even now, the yield gap is high given the jump in bond yields offsetting the increase in earnings yield, through both price and time correction over the past few months,” analysts at Kotak Institutional equities observed.

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Author: Howard Caldwell