India large caps: separating earnings from flows

Three parts of a return

Over any period, an index return can be split into earnings growth, the change in the price-to-earnings multiple, and dividends. Flows from foreign portfolio investors (FPIs) and domestic institutions (DIIs) mostly show up in the multiple. Separating the three tells us which one has to improve for returns to recover.

• Earnings: are forward estimates being revised up or down, and how broad are the revisions across sectors?
• Valuation: where does the multiple sit against its own history and against other emerging markets, after adjusting for growth?
• Flows: are FPIs still selling, and can domestic systematic investment flows keep absorbing that supply?

Where the debate sits

A weak stretch for Indian large caps has raised the question of whether the problem is earnings or positioning. If earnings revisions are stabilising while foreign ownership is near the low end of its range, the setup favours a flow-led recovery. If revisions are still falling, a cheaper multiple alone is unlikely to be enough.

Valuation tells you how far a market can move. Earnings and flows tell you when.

Sectors we would study first

• Financials: credit growth versus deposit growth, net interest margin direction and asset quality.
• Consumption: the gap between urban and rural demand, and pricing power against input costs.
• Industrials and capex: order books, government spending versus private investment, and execution.
• IT services: the link to developed-market technology budgets and the rupee.

What the full note includes

Client versions include the return decomposition by sector, revision-breadth charts, FPI and DII flow analysis, and scenario ranges for index earnings. We do not publish price targets or buy and sell recommendations.