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‘Expect single-digit returns from Indian equities in FY19’

Return expectations are more moderate this year compared with last year, says Surendra Goyal.

, ET Bureau|
Updated: Feb 28, 2018, 08.43 AM IST
Surendra Goyal - bccl
As for oil prices, India is one of the EMs, which is more impacted so that is also a concern.
Corporate earnings are likely to grow at 20% in the upcoming financial year after disappointing earnings growth over the past few years, said Surendra Goyal, Head-India Research at Citi. In an interview with Sanam Mirchandani on the sidelines of the Citi Investor Conference, Goyal said the valuation premium of Indian markets would be justified if expectations on earnings growth are met.

Edited excepts:

What’s your outlook on the Indian market after the recent correction?
This year, we expect a single-digit return from Indian equities. Our December target for the Sensex is 36,900. It will be interesting to see how the domestic flows behave because we have seen some volatility — that was a big driver last year. Return expectations are more moderate this year compared with last year and to that extent, people will need to be more selective. We are trying to stick to stocks or sectors where we see good earnings growth and good visibility on earnings growth as well. We prefer private sector banks and autos.

FIIs have been selling almost continuously this month. What are the main concerns?
Around February-March of last year, FIIs had a 220 bps overweight approximately on India and today that number is close to 100 bps. FIIs trimming their overweight was a relative call because they saw more value in some of the other emerging markets. A section of them are also concerned that the market valuations are high but the earnings’ growth has not come through over the past few years.

On LTCG tax, there was a section of investors who had concerns and then there was this whole thing around exchanges and what impact it has on MSCI weightage on India. In India, earnings growth has been below expectations in the past few years and valuations are around 35-40% premium to the emerging market basket.

As for oil prices, India is one of the EMs, which is more impacted so that is also a concern. But most investors are working with a view that over the longer term, oil should settle at lower levels. It is a concern in the near term but not necessarily a medium-tolonger term concern.

Do you expect earnings growth to finally come through in FY19?
There have been earnings disappointments in India over the past few years. Now, there is an expectation that there will be a bit of a recovery. In the December quarter, we actually saw earnings coming more or less in line and there were no downgrades.

Consensus today is building in 20% plus earnings growth for next year (FY19). Our expectation for next year is that there will be a decent recovery in financials. Retail banks have actually been doing well, but the corporate heavy bank — that is where the stress has been. In FY19 we will see a little bit of easing on the credit costs side, which will give you a better earnings growth. We expect around 20% earnings growth in FY19. If you actually get that kind of earnings growth coming through, then that premium can be justified.

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