Analysts off the mark on result estimates

Morgan Stanley India MD Ridham Desai was spot on when he said the stock markets’ collective wisdom appeared to be superior to analysts’. In a report to clients, he had questioned the effectiveness of analysts’ recommendations.

Results for the quarter ended December showed how the actual results for many large companies turned out to be worse than analysts’ estimates. The result was panic selling at many counters after the results.

While the extent of difference between actuals and estimates varied across brokerages, the list of Nifty50 firms that missed estimates was similar. Most of the 15-odd brokerages slipped on their estimates on Bharti Airtel, Tata Motors, DLF, Tata Power, Ambuja Cement and Hero MotoCorp, among others (see chart).

Analysts are aware of this. “We had built in the economic slowdown in our estimates, but actual numbers for some key firms turned out to be worse. Overall, there were more bad news than positive surprises,” says Dhananjay Sinha, co-head, institutional research, Emkay Global Financial Services.

Bharti Airtel, the country’s largest telecom operator, shocked analysts with a net profit 63 per cent below the Street’s consensus estimates. This wasn’t taken lightly by traders; the stock price corrected nearly 20 per cent from the high scaled in the run-up to the results. (LOSING THE PLOT)

Another big miss was in the case of realty giant DLF. Against an expected positive surprise, the firm reported decline in profits and revenues, leading to big selloff at the counter after results. DLF’s actual net profit was less than half the estimates, while net sales were 38 per cent lower. Tata Motors also disappointed investors, with its net profit and revenues much below estimates. The company’s actual net profit was 38 per cent below estimates, while revenues were six per cent lower. In this case, the share price didn’t react much, as the stock had already corrected by 15 per cent from its recent high after the management issued a profit warning late last month.

In terms of sheer size of variance between the actuals and estimates, Tata Power was the biggest miss. It surprised with a net loss, compared to analyst estimates of a profit. The variance was a negative 200 per cent.

At the aggregate level, however, the estimates were broadly in line, and the combined profits and revenues of Nifty50 companies turned out to be a bit higher than the Street estimates. This was because the negative outliers were more than offset by positive surprises like Bharat Petroleum, HDFC, GAIL, Sun Pharma and Reliance Infra. This might be the reason why the benchmark index Nifty reacted negatively to the last flush of results, but not very violently. The big action was in individual stocks.