Earnings growth to play larger role in determining portfolio returns than valuation re-rating: Nilesh Shah
Mumbai, August 13
Earnings growth is likely to play a larger role in determining portfolio returns than valuation re-rating in the near term, as valuations of Indian equities remain neither cheap nor expensive, according to Nilesh Shah, Managing Director, Kotak Mahindra Asset Management Company.
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.
— ANI
Reader Comments
Finally someone telling the truth without sugar-coating! The whole 'India growth story' narrative often ignores that actual earnings haven't matched the hype. I appreciate Shah's candid assessment about valuations being 'fair, not cheap, not expensive' - that's a balanced view that we need more of in the financial media.
Very useful perspective from one of India's most respected fund managers! The insight about FPIs buying IPOs while selling in secondary market is fascinating - shows where institutional money sees real value today. He's absolutely right that we need to look beyond headline numbers. Quality analysis like this gives confidence to retail investors.
With all respect to Nilesh Shah ji, this all sounds logical, but how does this help the small investor on ground? We've seen 'low double-digit earnings growth' predicted before, yet markets corrected sharply when situations changed. Good analysis, but retail investors need more actionable advice on how to navigate these times, especially with so much global uncertainty around.
Great to see Nilesh Shah highlighting the importance of earnings over just valuations - this is core value investing wisdom that most people forget in bull markets! The point about OMC distortions affecting aggregate numbers is crucial - unless you dig deeper, you'll misinterpret the whole earnings season. This is why experienced fund managers add so much value. 📈
Appreciate the balanced, research-backed analysis from Nilesh Shah. His observation about FPIs competing for anchor allotments in India IPOs while selling in the secondary market is particularly interesting. It suggests the initial public offering route offers better value
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