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Threat of further earning downgrades looms

Poor show in December quarter, worries over high interest rates, policy issues & spending on investments raise fresh concerns

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Hopes of an earnings revival, built in over the past two months, are again sinking. There were 569 downgrades as against 379 upgrades among the 100 companies in February, after the results season got over. S&P Capital says the earnings revision ratio, of upgrades divided by downgrades, was 0.67 in February compared to 1.08 in January. The intensity of the downgrades has increased in recent days, as December quarter results came in below Street expectations, as well as due to recent events like the fall in metal prices, etc.

On a broader level, too, there were disappointments. “Aggregate adjusted third quarter earnings growth for companies, at three per cent compared to a year-ago period, was lower than our estimate of six per cent. Excluding the energy sector, growth was also disappointing at four per cent, compared to our estimate of eight per cent,” said Bharat Iyer, analyst at J P Morgan. The consensus estimates suggest analysts have lowered their Sensex EPS (earnings per share) growth estimate for FY13 from around seven per cent to five per cent currently.

More important, the Street highlights a further risk of downgrades to FY14 earnings. “We see another eight to 10 per cent downside (in earnings estimates),” said Neelkanth Mishra of Credit Suisse in a strategy note. Overall, analysts are now expecting the FY14 earnings of the Sensex to grow about 14 per cent as against the 16-17 per cent they were expecting about two months earlier.

 
 
The majority of pressure on earnings downgrades has come in the case of companies in metals, cement, banking, pharmaceuticals, automobile and industrial sectors. At this point, lower industrial growth, falling metal prices, uncertainty about global economy growth and revival of the domestic investment cycle, policy uncertainty and higher interest rates are concerns. The worry over revival of the investment cycle also stems from the elections due in 2014, with possible regime and policy changes; during election times, companies tend to defer investment decisions.

Among the Sensex companies, Bharti Airtel, Tata Steel, Tata Power, JSPL, Tata Motors and Hero MotoCorp put together have seen 26-28 per cent earnings downgrades. Bharti Airtel leads with a 40 per cent cut in earning estimate over recent months, on account of lower revenue per minute and pressure on the Africa business, which witnessed lower margins. Tata Steel has also seen major downgrades, as analysts expect the company to report losses in FY13 as against the earlier expectations of profit. The company reported higher than expected losses in the December quarter. Also, lower realisation, fall in volumes and higher cost, especially in its European operations, have led to more worries. Somewhat similar is the case of Tata Motors. Its domestic business reported higher than estimated loss and analysts fear further pressure in the domestic business due to slowdown in demand and rising competitive pressures.

Hero MotoCorp has also seen a cut in estimates, as it reported its lowest-ever adjusted operating profit margins. Among non-Sensex companies, JSW Steel, Adani Power, Idea Cellular, SAIL, Bank of Baroda, Colgate, Exide Industries, Crompton Greaves, Ashok Leyland and Bharat Forge are prominent names which have seen significant downgrades in earnings estimates in January and February.

 

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