Low leverage, battered earnings and emerging signs of an improving investment cycle are bolstering confidence in sustainable corporate earnings growth, ICICI Securities said.
The main positives of the current uptrend of the profit cycle is that it is not yet inflated by the effects of “operating and financial leverage”, as capacity utilization is still in the 60 range. at 70% on a 12-month basis and industry credit is showing just signs of recovering from a 10-year low, he said.
“The outlook for the investment cycle is improving in terms of ‘animal spirits’ on the upside seen in the two major growth drivers of the investment spending cycle (private industrials and real estate – link). »
Also, high earnings optimism is lacking if the trend of higher beats vs. misses is any indication, as high operating and financial leverage combined with high optimism usually results in huge earnings disappointment should the stock fall. request.
On an aggregate basis, corporate earnings are expected to grow in the 15-30% range in FY22 through FY24E, with the NIFTY50 likely to grow at the lower end of the range, while higher growth comes from medium and small businesses. -cap stocks.
The stronger growth is attributable to the much greater impact of Covid on the small and mid cap space and the rapid opening of the economy, which is likely to show higher growth on a depressed basis, he added.
Mid and small caps take the lion’s share of the sectors most severely affected by Covid, such as hotels, resorts, restaurants, cinema, travel agents, travel bags, airlines , real estate, retail stores, capital goods, small banks and NBFCs.
Additionally, REIT flows continue to be negative although the pace of sales has slowed in April 2022 compared to March 2022, which was a month of record releases.
Sector flows from April 1-15 indicate that REITs continued to be net sellers in banks, financials, consumer discretionary and industrials.
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