A recent report by market daily Business Standard pointed out that the sharp rally in the markets this year has come on the back of price-to-earnings (P/E) expansion even as analysts have scaled back the growth projections. “Sample this: In June 2022, the aggregate profit pool for the top 600 companies was projected to touch ₹13.2 lakh crore for the ongoing financial year 2023-24 (FY24),” informed the report.
It further noted that a year ago, the combined market capitalisation (m-cap) of these companies was ₹216 lakh crore, which has now grown to ₹275 lakh crore.
However, the report observed that the earnings estimates have been downgraded by 4 percent due to the lowering of earnings estimates for Reliance and companies in the metals, telecom, healthcare and IT sector. As a result, the domestic market has become 33 percent more expensive on a P/E basis compared to the year-ago level, it added.
“The rapid expansion in m-cap over the past three months is likely due to a sharp decline in ‘equity risk premium’ and benign ‘risk-free rate’ environment,” said ICICI Securities’ equity strategists Vinod Karki and Niraj Karnani in a note, added the report. They add that the earnings downgrade “appears reasonable, given the shocks such as the massive quantitative tightening cycle, Russia-Ukraine war and banking crisis in the developed world,” it said.
Analysts also told the market daily that further downgrades can’t be ruled out if the June 2023 quarter (Q1FY24) earnings growth fails to meet expectations and that this could put the red-hot Indian markets under pressure.