UBS turns bullish on earnings growth after 5 years

Mumbai: UBS Securities on Wednesday said it sees a 20 per cent upside in Nifty by December 2021 in its base case scenario, driven by strong foreign fund inflows. The broking firm has also turned bullish on earnings growth after five years on the basis of its four parameters -- exports, policy, capex and credit growth.

“We expect an inflection point in growth after seven disappointing years. India is the second-largest populated country in the world, but over the past seven years it has underperformed its growth potential,” UBS analysts said in a note.

From an average 6 per cent earnings growth over FY15-19, UBS estimates Nifty earnings could grow around 15 per cent in FY21-23 in its base case and around 20 per cent in its upside scenario.

“This growth acceleration, not discounted by broader market, will have profound implications not only for local, but also for global companies,” UBS said.

UBS believes India's golden opportunity lies in exports. Capex, private and public capex may underwhelm, but property cycle will likely revive, with any policy support a bonus. The credit cycle will be supportive as a repaired and recapitalised banking system emerges. Policy (fiscal and monetary) will likely be neutral but at least not a drag on growth, unlike the past five years.

The four factors could drive GDP growth recovery to 6.4 per cent average in FY21-23. The rupee and interest rates could be well supported too, also by capital flows. UBS’ top-down model for foreign portfolio inflows suggests $20-25 billion equity inflows annually, three times the five-year historical average. AUM for equity mutual funds in India could go up two times to $280 billion in its base case and three times in its upside case.

The policy bias is changing from repair over the past few years to growth.

“Unlike earlier near-term growth disruptive reforms (GST, anti-corruption agenda, banking system clean-up), current ones (corporate rate cut, labour reforms and a privatisation push) are supportive,” UBS said.

“There remains material risks too, with tail risks in the banking sector not yet resolved, apart from global risks,” it added.

In its downside scenario, UBS assumes earnings growth could continue to languish at around 7 per cent, real GDP growth remains sub-5 per cent till FY23, and Nifty could drop by 20 per cent from current levels by March 2022 and there could be foreign portfolio outflows.