What the EPS? India Earnings Outlook

Here’s the fourth installment of the new “What the EPS?” series, where I look at earnings trends across sectors, countries, regions…. taking my usual top-down approach. This week we look at how India stacks up on its earnings growth outlook relative to emerging markets as a whole and developed market equities. This one comes at the request of a reader at India Avenue Investment Management. (of course I will note that the views and analysis here are completely the opinion of me). On that note, if you’d like me to cover a particular topic or issue here in the future be sure to get in touch!

The key takeaways on the outlook for Indian corporate earnings are:

-Forward earnings growth is running at a healthy pace, and historically has been less volatile than EM/DM.

-Consensus long term growth estimates are higher vs EM and DM.

-The relatively high consensus long term growth figures speaks to the classification of Indian equities as a growth play (particularly given the valuation backdrop).

  1. Forward Earnings Growth – India vs EM & DM: Looking first at the year over year change in consensus next-12-months earnings (from the Thomson Reuters IBES data), the upturn in earnings growth has been more or less synchronized across the globe. Interestingly though Indian forward earnings growth looks to have fallen later and recovered slightly earlier vs broader EM. On that note, if you look at the average growth rate across this period, India saw average forward earnings growth of 10.1% (vs EM at 8.8% and DM at 6.1%), with volatility (standard deviation) of earnings growth at 11.7% (vs EM at 21.9% and DM at 13.8%). So there seems to be a pattern of Indian earnings growth being slightly higher on average and less volatile.

  1. Consensus Estimates – Long Term Growth – India vs EM & DM:

The IBES long term consensus earnings growth outlook for India has been steadily rising. I talked about how this can sometimes be more of a sentiment indicator, and that extreme measures may signal market froth and an imminent top in the article on US earnings growth, but the current growth estimate remains below the peaks seen in 2000 and pre-GFC. In terms of sectors, financials and consumer discretionaries are the key drivers of the buoyant earnings growth outlook. The fact that this metric is materially higher than the EM and DM aggregates speaks to the classification of Indian equities as more of a growth play (particularly given the elevated valuations there).