Farm rollback, inflation scares stock markets

While Nifty-50’s second quarter (Q2 FY22) earnings came in above expectations, led primarily by commodities, with metals, oil and gas, logistics, retail, pharmaceuticals and real estate doing well. Of the Nifty-50, 21 companies beat analysts’ estimates, while eight companies did not. Going forward, analysts expect corporate earnings to double from the FY20-24 levels of 464 in FY20 and 518 in FY21; to 706 in FY22; 839 in FY23; and 958 in FY24. This expectation of earnings doubling in just four years (compared to previous low single-digit EPS growth) is likely to keep valuations high despite the likely rate hike in 2022, a report from Antique Stock Broking notes. As a result, the brokerage expects the Nifty 50 to hit 20,100 in March 2023, based on 21x FY24 EPS of 958.

Management’s second quarter earnings commentary shows that despite price increases, the demand outlook remains intact. However, the ability of companies to fully pass on inflation costs is a concern, especially in the auto and FMCG sectors. However, foreign brokerage Jefferies believes corporate earnings growth, which was weak in the FY11-FY20 period and grew at a paltry 0.4% CAGR, will improve with earnings growth in FY20-FY22 of 51% CAGR.