More earnings downgrades coming

Slowing demand, tighter liquidity a drag on profits, agree analysts; earnings growth this year might not exceed 5%, feel many

Brokerages are likely to cut their expectation of growth in earnings per share (EPS) for large companies to the mid-single digits, due to factors such as higher interest rates, lower domestic demand and higher cost of imported raw material.

The Sensex EPS estimates, based on analyst expectations of the total earnings of 30 large-cap stocks, are already said to have been downgraded by around nine per cent. These are now likely to see another round of cuts once the current quarter results are in, suggest analysts.

Religare Capital Markets suggested, in a report titled ‘Earnings predictability in the downturn’, growth in earnings at no more then five per cent for the current financial year (FY14).

CORPORATE INDIA’S EARNINGS WOES

• Higher interest rates make it more expensive to borrow capital
• Fall in rupee pushes up imported raw material costs
• Other indicators like steel consumption and tax figures suggest more pain ahead
• Sensex EPS growth might be cut to five per cent, according to analysts
• Financials and automobile sectors amongst those likely to be hit

“Sensex EPS estimates have been downgraded by nine per cent since the start of FY14, with the Street currently expecting 10 per cent (lower) earnings growth. Amid a weak economic outlook and falling demand, we expect downgrades to continue, with our top-down earnings growth estimate at five per cent for FY14,” said the report dated this Tuesday, authored by Tirthankar Patnaik, Prerna Singhvi and Saloni Agarwal.

The trio added a look at the previous years suggest analysts are more positive at the beginning of the period, suggesting the positive sentiment might soon wane.

Nischal Maheshwari, head of research at Edelweiss Financial Services, suggested he would be soon downgrading his current Sensex EPS estimate of Rs 1,340. “There would be more earnings downgrades. Our current numbers project a growth of eight-nine per cent. New estimates will only be ready by next week,” he said.

G Chokkalingam, executive director and chief investment officer, Centrum Wealth Management, suggested the tightening of the interest rate cycle, along with factors such as a weakening rupee leading to higher cost of raw materials, will contribute to the slowdown, which will make itself felt when the September quarter results are declared. “The growth in Sensex EPS will likely be only four-six per cent for FY14. We could see the next round of downgrades after the results season in October,” he said.

Indicators of a slowdown in corporate growth can already be seen, according to him. “Steel consumption has dropped and tax collection for the top 100 companies is showing a growth of seven per cent for the second quarter, compared to 14 per cent for the previous one. Construction, real estate, cement, automobile and shipping companies could all see some pain,” he said.

Goldman Sachs, in its portfolio strategy research report, also put the estimate for earnings growth at five per cent. Goldman tracked the MSCI India index instead of the Sensex and had earnings estimates for the calendar rather than the financial year.

“EPS estimates for FY14 and FY15 have been cut 4.5 per cent and four per cent, respectively, in FY14 so far, and six per cent and five per cent since the peak in January. Earnings sentiment (breadth of revisions) also remains mired in negative territory,” said the report dated September 17 and authored by Sunil Koul, Timothy Moe, Ketaki Garg, Kinger Lau and Richard Tang.

Religare added a defensive stance was best in this environment.

“We maintain our overweight stance on…(information technology and pharmaceutical companies), despite the recent..(rupee stability). We also remain negative on banks, especially after the recent run-up, as rates are expected to remain high in the system and we don’t see the central bank’s stance changing in a hurry, especially amid rising inflationary concerns, as also indicated by the Reserve Bank in the last monetary policy meet,” said the report.