For the sixth year in a row, earnings growth for most of the Nifty companies are in single digits. This even as government and economists expect gross domestic product (GDP) growth to come in at a strong 7.4 percent this year compared to 6.7 percent last year. The earnings growth are not in sync with the growth in GDP.

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Data from global asset management company Schroders suggests that this asynchronous growth is a global phenomenon. Both developed and emerging markets (EMs) are reporting a major disconnect in earnings growth and in GDP growth over the last 10 years. While the Indian economy grew at an average rate of 7 percent, earnings per share saw a contraction of half a percent in the last ten years.

Leading brokerage firm CLSA in a note said it had cut its earnings estimates by 5.5 percent for the year to just 10.5 percent, though it maintained robust expectations of 26 percent for the next fiscal (ending March, 2020).

Soumya Kanti Ghosh, group CEA, SBI; Dhananjay Sinha, HD - economist and strategist at Emkay Global Financial Services and Saurabh Mukherjea, founder of Marcellus Investment Managers discussed the disconnect between growth in the real economy and corporate earnings.

Gosh said not only there is disconnect between earning and GDP growth there is also a difference in GDP growth and the employment/unemployment numbers also.

"The countries which are showing higher GDP growth are actually showing an increase in the unemployment numbers. So in the last couple of years, a lot of these changes have broken down,” said Ghosh.

Sinha said there are two aspects to this indifference. "I think there is a sort of a cyclical relationship between GDP growth and the earnings growth of companies. If you look at the average during a slowdown, the profit growth is much lesser than the GDP growth and the elasticity - if you look at it over the last 8-10 years - is roughly about 0.3," Sinha said.

Mukherjee said the chances are high that the GDP growth will slowdown over the next three-five quarters for two reasons.

"One is that the cost of capital clearly is heading north globally whether it is because of Fed rate hike or because of the non-banking financial companies (NBFCs) challenges in our country. Second is the fiscal deficit," Mukherjee said.

First Published:Nov 12, 2018 10:10 PM IST