Expect double-digit earnings growth from BSE 500 companies going ahead: Mukul Kochhar

Economic Times

2 days ago

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, Head of Institutional Equities,says despite global concerns, the Indian market exhibits underlying strength with expectations of double-digit earnings growth for BSE 500 in FY26 and FY27. Lower structural inflation supports valuations, coupled with responsible fiscal management leading to lower interest rates and high corporate profitability . The key challenge lies in securing trade treaties to integrate into global supply chains.There are some concerns, largely external, and I will first just talk about that. What has happened is because the Indian market on a relative basis has done very well, foreign investors have taken an opportunity to book gains. That was the story last year and we expect that story to continue for this year and maybe into the near future. What that has resulted in is that capital flows which used to provide a cushion to the currency of roughly $40 billion per year, turned neutral in FY25.Now, to balance that, if capital flows are neutral, you have to have a neutral trade balance. That is just basic economics. In order to have a neutral trade balance, we need to be part of the global supply chains and have some sort of an understanding on trade with the large trade blocks, US, Europe, etc, which are underway and that is why there is so much focus of the market on what is going to happen on the US trade deal.It is very critical to get that right and that could be a near-term catalyst for the market. If we look beyond the external, which is the capital flows and the counter balancing trade equations, the market is actually pretty okay. We are expecting double-digit earnings growth for BSE 500 in FY26 and FY27. Remember that inflation structurally in India is down. Inflation is down from higher than 5% or close to 6% in the average of the last 5 to 10 years to now 3%.Despite this lower inflation, our earnings growth has kept up and it is in double digits, in which case valuations are well supported. So we have reasonable earnings growth and the valuations are well supported given lower inflation and lower interest rates. Structurally we are looking pretty good. I can talk about a few more points about this which is responsible fiscal management by the government and which is leading to lower interest rates and high corporate profitability which is positive for upcoming capex. There are multiple positives brewing for the market. The only concern is whether we are able to sign some sort of a reasonable trade treaty to be part of global supply chains.Domestic cyclical is a theme we have been on for the last three-four years and that continues. It is now a more savings and investment-led economy. Those themes are largely domestic. In this environment, financials will do well. So, we are selectively positive on the banks. We have some picks in the largecap as well as the midcap space. We even like some PSU banks in this environment. Some NBFCs are attractive including lending and non- lending. On the non-lending side, some capital markets exposed companies, which are savings-related NBFCs, are very attractive.We are reasonably comfortable with industrial names. The leading industrial companies look attractive right now. We believe that the auto sector has some reasonable picks. On the domestic cyclical side, we do not have trouble finding reasonably priced stocks with decent growth momentum. We have a little bit of a concern when I said the economy is going to be savings and investment led. Domestic consumption is going to suffer there. We are negative on consumer staples. We are also negative on Indian IT services largely because valuations are not supportive. If currency dynamics are not favourable, largecap IT is not going to deliver good returns.There are two kinds of capital flows on the equity side that come into the country. One is a foreign direct investment (FDI) which is long-term capital expenditure related flows. Those are actually fairly stable, and we get $75 to $80 billion a year and that continues, that has trended over the last six-seven years and that has continued.The short-term flows, which are the FII flows, vary depending on how attractive opportunities are in the market, which literally could turn every few months. In March, the market had become very attractive in terms of valuation and foreign flows were good for the next two-three months. Now, the market is up from those levels. There is 10-15% appreciation and people are taking some profits. That is very normal and nothing to worry about.On the flow side, what has really changed in India in the last one-two years, is where on the capital flows, we need to think about the outgoing FDI investments. Outgoing FDI investment includes people having come in, made capex six-seven years ago, and now selling down and booking profits on those including Indian companies that are flushed with capital today and investing outside, has picked up on a structural basis and we need to think about it a little bit. But FII equity flows come and go and there's nothing to worry about there.