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GDP figure hints at more downgrades

According to Bloomberg consensus estimates, revenue growth is projected to be 22.09 per cent for 2019, which is significantly higher than the nominal GDP growth.

, ET Bureau|
Sep 04, 2019, 08.19 AM IST
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ET Intelligence Group: The link between nominal GDP and revenue growth is the most relevant barometer to ascertain the impact and extent of the current downturn. An analysis of estimates for both nominal GDP growth and revenue expansion shows that the Street is factoring in significantly higher revenue growth than nominal GDP. That leaves room for more downgrades.

Nominal GDP growth – or GDP expansion with inflation impact – has a direct bearing on corporate revenue growth. Nominal GDP growth dropped to 7.9 per cent in the June quarter, the lowest in 16 years. This is the key reason analysts have turned rather circumspect.

For 2019, consensus earnings growth for the Nifty and BSE 500 index are 19 per cent and 12 per cent, respectively.

Credit Suisse has flagged the risk of earnings downgrades. Neelkanth Mishra, India equity strategy for Credit Suisse, said in a note that there is significant downside risk to consensus FY20 growth projections and rate forecasts. Similarly, Prithviraj Srinivas, economist at Axis Capital, said that the Street is building the case for a U-shaped recovery against a V-shaped rebound after the June quarter GDP data.

“Given that the nominal GDP slipped to 7.9 per cent, the risk of earnings downgrade has increased for large companies where consensus earnings are still in high double digits,” Srinivas added.

According to Bloomberg consensus estimates, revenue growth is projected to be 22.09 per cent for 2019, which is significantly higher than the nominal GDP growth. In the past five years, nominal GDP growth has outperformed the revenue growth of BSE 500 companies by about 5 per cent. The BSE 500 accounts for 94 per cent of India’s market capitalisation.

The downward GDP revision will have a pronounced impact on companies where demand forecast is linked to the GDP multiplier – such as cement, construction, real estate and consumer discretionary. For instance, cement volumes typically increase 1.2-1.3 times of GDP growth and vehicle sales expand about 1.3 times.

Therefore, any reduction in GDP growth assumptions would lower the top-line and alter the PE multiples. Typically, higher earnings growth companies are accorded premium P/E compared with their average. Indian equities currently trade at a 45 per cent premium to emerging market equities.

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