Earnings Growth Supports India's Outperformance, Says Macquarie's Aditya Suresh

Indian stocks have gone from underperforming emerging market peers to growing at a faster pace, driven by earnings growth, according to Aditya Suresh of Macquarie Capital.

There has been a sharp reversal from lagging by 10 percentage points at the beginning of 2023 to outperforming now by 2-3 points in the April-June quarter, the head of research and strategy at the research firm told BQ Prime.

The consensus today is pricing 17% two year forward earnings per share growth, which is in line with the expectations, he said. "If we contrast this with the other emerging markets, the expectation is about 10% and for world it is about 8%."

The EPS growth outperformance is the key support factor for India, according to him. "This earnings season (Q1) and the next one will be very important for India."

India's Nifty has risen more than 7% so far this year, hitting fresh records, defying global concerns. That compares with a under 3 rise in MSCI Emerging Markets as of Tuesday afternoon.

The domestic benchmark trades at 19 times its two-year forward earnings compared to 14.5 times for MSCI index. "We are still at a meaningful premium to emerging markets to world," he said. "Yes, the valuations are rich and expensive, but this will not be a derating catalyst."

The reason is that domestic liquidity remains strong and foreign investors have also resumed pumping money into Indian equities in the last couple of months despite high valuations, Suresh said.

Foreign investors bought Indian equities for the fourth straight month in June, the highest in 10 months. They have been net buyers of Rs 99,222 crore worth of Indian stocks to date in 2023.

Despite pricey valuations, many sector bets that stand out, according to Suresh. He is betting on financials and industrials citing earnings growth.

"Financials is the area where expectations are high and we are comfortable about those expectations," he said.

Nifty Financial Services has tracked the benchmark Nifty 50, growing nearly 6% so far this fiscal.

With government capex and good order book, there is visibility on the growth of industrial sectors, Suresh said. The public sector capex is "well known" and the ability of the government to spend is an upside, according to him.

Earnings per share growth estimates have been toned down from teens to about 10% for the information technology sector, Suresh said. Nifty IT has risen over 2.39% so far this year.