Earnings Growth Set to Outshine Valuation Re-rating in Shaping Portfolio Returns, Says Nilesh Shah.

Nilesh Shah, Managing Director of Kotak Mahindra Asset Management Company, underscores that earnings growth is poised to play a more significant role than valuation re-rating in determining the returns on portfolios in the near term. He highlights a broadly positive first-quarter earnings season, with many companies exceeding or aligning with expectations. While he acknowledges that oil marketing companies have impacted overall earnings growth figures, a closer examination reveals robust performance across the broader economy when these firms are excluded.

Shah indicates that investors should not anticipate a significant expansion in valuation multiples, as current market valuations are balanced, falling neither into the cheap nor expensive category. He emphasizes that returns will correlate more closely with sustained earnings growth rather than with valuation adjustments. Expectations for earnings growth are now positioned in the low double-digit range, signaling that this metric will likely be a more substantial contributor to portfolio returns moving forward.

Despite a dynamic environment where foreign portfolio investors (FPIs) have initiated buying activity in July that has continued into August, Shah warns against interpreting aggregate FPI flow data without delving into specifics. He notes a trend of FPIs favoring small and mid-cap stocks while expressing caution regarding their selling of large-cap entities, particularly in sectors like banking and IT. Shah also points to active participation from foreign investors in the primary market, where competition for IPO allocations indicates notable interest, despite a mixed approach in the secondary market.

Shah’s insights advocate for a nuanced approach to market analysis, where investor focus should shift from overall flow numbers to the underlying movement of capital within specific sectors and company sizes. As valuations remain fair, the imperative now lies in companies’ capacity to achieve consistent earnings growth, which may ultimately dictate the trajectory of investor returns in the Indian equity market.

Source: The Economic Times

(Expert Note: This report was prepared by the Wealthova team.)