Indian equity outlook
OUTLOOK 2016 Indian equity outlook - The pessimism seems overdone, bull market should resume in 2016 After a big rally in 2014, Indian markets struggled in 2015. The nifty was down marginally from the beginning of the year and close to 15% from its intra-year highs. It was notable that the rally which started in late-2013 did not see any meaningful correction till Mar-2015. Hence the subsequent correction should be seen as a healthy part of the bull market which is allowing for a reset of expectations to a more reasonable level. In fact all historical bull markets have seen multiple corrections over their cycle. As an example the 2003-07 bull market had at least 2 significant corrections of well over 20% and multiple smaller corrections of over 10%.
1997 2010 1994
-20% and below
-20% to 0%
0% to 20%
20% to 50%
50% and above
S&P BSE Sensex: Yearly Performance
Indian equity markets struggled in 2015 on account of three significant headwinds. Firstly global investors have been pulling out money from emerging markets and India has got caught up in that. Within India there has been a resetting of reform and policy expectations from the government even as the government has faced political challenges in passing reform legislation. Finally and most significantly, the ongoing economic recovery has been weaker than expected so far and consequently demand has not picked up sufficiently. This has led to disappointments in topline growth across sectors leading to earning downgrades.
Nifty 50 Index EPS - Consensus Estimates
700 650 1 YR Ago
600 550 500 450 400 FY15
OUTLOOK 2016 th
Current refers to 30 Nov 2015. Source of data: Bloomberg Consensus Estimates, IIFL Research
Corporate profits have trailed nominal GDP growth over the last few years. The pressure on profitability has come from a number of factors – weak demand, large capex projects in progress (many of which have got stuck or delayed), high interest rates and high input cost inflation. As these issues start getting resolved over time, we should be entering a period where earnings growth can outpace nominal GDP growth over the next few years.
Corporate Profit to GDP (%)
Corporate profits to GDP
9 8 7 6 5 4 3 2 1 0
Source: Motilal Oswal
2015 saw a sharp improvement in corporate margins. The fall in commodity prices (especially crude oil) has helped bring down input costs. The fall in commodity prices is also supporting the process of disinflation in the economy. This fall in inflation is creating the headroom for lower interest rates which should further bring down finance costs for companies.
Change in EBITDA Margins for domestic companies*
400 300 200 100