Why Morgan Stanley’s Ridham Desai Expects 10-15% Earnings Growth

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Equity investors are underestimating earnings growth in India and asset prices still have a considerable upside even as the benchmarks are at a record high, according to Morgan Stanley’s Ridham Desai.

“Right now, the market is still not in that camp that we’re going to get a big positive growth on earnings over the next 12 months,” Desai, managing director at Morgan Stanley India, told BloombergQuint’s Niraj Shah in an interview. “The market is pricing in close to 0% growth in earnings going forward in the next 12 months. I think the number could be between 10% and 15%.”

Desai said corporate India has actually used the pandemic to resolve a lot of existing issues that were bogging their earnings down. And that’s where his optimism stems from.

“If you look at corporate data of the last four to five months—mergers and acquisitions, restructuring, capital raising a lot of these things are running at multi-year highs,” he said. “So what companies did was, they used the pandemic to consolidate, to revisit businesses that are not working out, to get more focused on core areas. And that lends itself to some sort of earnings upside which I don’t think is still in the estimates or in the market.”

The recent recovery in corporate earnings is encouraging, Desai said, but that is largely due to companies reacting to the pandemic and reducing costs. A more solid revival is yet to come. “We are yet to see a recovery in revenue growth but I think that’s in the pipeline and it will come in the next few quarters.”

That said, Desai also cautioned that he has often overestimated earnings growth. “I’ve been guilty of being too optimistic on earnings for the past four or five years and every time I’ve had to cut my earnings (estimates),” he said. “So, it’s not like I have made some great calls on the earnings cycle, but this time it does feel like we may get a more robust recovery.”

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