Earnings growth to play larger role in determining portfolio returns than valuation re-rating: Nilesh Shah
In an exclusive conversation with ANI, Shah said the first-quarter earnings season has been broadly positive, with companies reporting results that were either ahead of expectations or broadly in line with them.
“So the first quarter numbers came reasonably ahead of expectations or in line with expectations. There were very few disappointments,” Shah said.
He noted that the overall earnings growth figure was affected by the performance of oil marketing companies. However, excluding these companies, he said the broader economy delivered fairly good results.
“The aggregate earnings growth was obviously impacted by oil marketing companies’ results, but excluding them, the entire economy delivered fairly good numbers,” Shah said.
According to Shah, the market’s future performance will depend increasingly on whether companies can deliver sustained earnings growth. He said investors should not expect valuation expansion to be the main source of returns at the current stage.
“We still believe that despite a strong set of numbers, market returns will still be linked with earnings growth,” he said.Shah described current market valuations as balanced, saying they are not at levels that can be considered particularly cheap, but neither are they excessively expensive.
“Valuations are fair, not cheap, not expensive,” he said.
Against this backdrop, Shah expects earnings growth to contribute more to portfolio returns than a further increase in valuation multiples.
“At this point of time, it looks like that earnings growth will be a bigger contributor to portfolio returns than valuation re-rating, and earnings growth looks like it is coming in low double-digit numbers,” he said.
His comments come amid continued activity by both domestic and foreign investors in Indian equities. Shah said foreign portfolio investors (FPIs) have turned buyers in July, with August also broadly moving in a similar direction. However, he cautioned investors against looking only at aggregate FPI flow figures.
He said FPIs have been selling large-cap stocks, particularly banks and IT companies, while buying small and mid-cap stocks. More than 100 small and mid-cap companies, according to Shah, have recorded all-time-high FPI holdings.
He also pointed to continued foreign investor participation in the primary market. While FPIs have been sellers in the secondary market, they have been buyers in IPOs.
“They have been sellers in the secondary market, but they are buyers in the primary market. Every single IPO in which we wanted to invest, we had to compete with the FPI for anchor allotment,” Shah said.
Shah said this shows why investors need to look beyond headline market-flow numbers and understand the underlying movement of money.
“Don’t look at just the headline number; focus on the nuances because underlying currents many times are very different,” he said.
Overall, Shah’s assessment suggests that with valuations at fair levels, the ability of Indian companies to deliver low-double-digit earnings growth could become a more important driver of investor returns than further valuation re-rating.
