Downside risk to earnings: Kotak Institutional Equities

Auto, cement, industrials could be hit if economic activity doesn't pick up

A fall of over 5% in the December quarter earnings over the same period last year for bluechip companies may be signalling a further downside ahead. 

Sensex companies showed a 5.8% decline in net profit, while it was 5.1% for the Nifty companies in the latest round of results. 

Interest rates, oil prices and a lack of pick up in overall economic activity may have an impact on earnings projections for the next financial year too, according to a Kotak Institutional Equities Strategy report dated February 17.

"We see downside risks to our current FY2016E net profits for the BSE-30 Index and Nifty-50 Index (+18.3% and +17.1%). Macro factors and especially the level of interest rates and oil prices will play a role undoubtedly for sectors such as banks and energy," said the report authored by Sanjeev Prasad, Akhilesh Tilotia and Sunita Baldawa. 

Companies whose business depends on local economic activity too could be impacted. 

"...our volume and profitability assumptions for certain domestic cyclical sectors such as automobiles, cement and industrials may be at risk without a meaningful pick-up in economic activity. Underlying trends in volume growth and NPLs were quite weak in 3QFY15 too," it said. 

The report added that the market is expensive and that the budget session will be an important trigger, especially since oil prices have risen again recently. Kotak has a target of 29136 for the Sensex.