BT MindRush 2021: FPI inflows, corporate earnings driving up market, says IIFL Chairman Nirmal Jain

The rebound being witnessed in the Indian economy and corporate earnings, along with fund inflows from foreign portfolio investors (FPIs), is driving the stock markets higher even as the economy is disrupted by the COVID-19 pandemic, IIFL Group Chairman and Founder Nirmal Jain said.

Speaking at a Business Today MindRush session -- 'Stock Markets: The Dichotomy', Jain said the stock market behaves independently in the short-term, but follows economic growth and corporate earnings in the long-term.

After being hit by the coronavirus pandemic and subsequent nationwide lockdown to curb the spread of infections in late-March last year, the Indian economy contracted by 23.9 per cent year-on-year in April-June quarter of FY21. However, the GDP contracted by a less-than-expected 7.5 per cent in July-September quarter, which showed that the economy was bouncing back quickly, Jain said.

Many of the jobs which were lost due to the lockdown started coming back in the second quarter. While the economy is likely to contract by 8 per cent in FY21, it is expected to grow by 10 per cent in FY22, which is being factored in by the markets.

The BSE Sensex crossed the historic 50,000 mark for the first time on Thursday.

Pumping of capital by foreign investors in the Indian market has also helped in the rally in the stock market. "Positive news flow on vaccination along with Joe Biden's victory in US elections has driven 'risk on' sentiment globally. When liquidity is benign and investors look to make risky bets, India is one of the favourites there," Jain said.

India received "disproportionately large" amount of foreign portfolio flow in 2020 and this has continued till now in 2021 as well. Besides, he said, most of the emerging markets, except China, reported outflow during the period.

"If there is a given amount of money to be invested in emerging markets and you want to have an alternative to China as well, India stands out as a key beneficiary and a large economy that can absorb investment," he added.

The corporate earnings also started showing better results from July-September quarter onwards, helped by cost-cutting and lower cost interest rates. Jain said the EBITDA (earnings before interest, tax, depreciation and amortisation) of BSE 500 companies rose 7 per cent year-on-year in July-September quarter as against a 27 per cent drop in the previous quarter. Similarly, aggregate profit after tax grew 13 per cent in September quarter as against a 30 per cent year-on-year decline in June quarter.

"Better than expected results are driving broad-based earnings upgrades and when you see the consensus estimates, they actually imply that the aggregate profit after tax for BSE 500 companies is expected  to grow by 9 per cent year-on-year in FY21 and 33 per cent in FY22. The market will always look at one-year forward earnings," Jain said.

Markets have also found comfort from the fact that India has managed to bring down COVID-19 infections even when some countries are seeing a resurgence in positive cases. Besides, the commentary from large lenders in India on non-performing assets has been better-than-expected and India's external account is in a very comfortable situation, Jain added.

On valuations, he said, "...stock market multiples are always function of interest rates...the lower the interest rate, higher will be the P/E multiples and stock market valuations..."

Summing up, Jain said, Indian stock markets will always reward investors in the medium- to long-term.

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