Nifty earnings see 17% cut in FY19 amid rising oil prices, bond yields

Rising oil prices and bond yields set off downgrades; banks worst affected

The recent spike in oil prices, depreciation in the rupee, and hardening of bond yields have begun to take a toll on India Inc.

Analysts say these can raise expenses for India Inc and lower margins.

Since the start of the fiscal year, brokerages have lowered their one-year forward earnings per share (EPS) estimates of Nifty companies by 17 per cent. The earnings of 28 of the Nifty 50 companies have been downgraded.

Such a sharp cut indicates broad-based weaknesses in the economy and a possible slowdown in fresh investment in infrastructure. It signals that the profitability of India Inc is under pressure after nearly two years of gains from low commodity prices and rock-bottom interest rates.

The current leg of downgrades in earnings has been led by banks, both private and state-run. The rising share of toxic assets has spoiled the books of all major corporate lenders. 

 

The earnings per share (EPS) estimates for several top banks are currently at a multi-year low. For State Bank of India (SBI) they have been cut by a massive 70 per cent in the past three months.

Axis Bank and Kotak Mahindra Bank have seen their one-year EPS estimates cut by 36 per cent and 30 per cent, respectively.

The current data also shows a 50 per cent cut in the earnings estimates of Larsen and Toubro (L&T), India’s largest engineering conglomerate.

The combined net profit of top-listed companies other than banks, financials and energy was down 0.5 per cent on a year-on-year basis in 2017-18, its worst showing in at least four years.

In comparison, earnings were up 10.2 per cent in 2016-17, driven largely by an improvement in operating margins on account of lower commodity and energy prices.

The core operating margins of companies other than banks and financials were up nearly 250 basis points between March 2014 and September 2017. “Rising crude oil prices and bond yields are a key risk to consumer demand and corporate profitability because they hit the consumer wallet and government revenue and subsidy numbers. This could translate into lower demand growth for companies and higher input cost,” says Dhananjay Sinha, head research, Emkay Global Financial Services.

A large part of demand growth in the past two years has been driven by government spending and complemented by a surge in retail credit. 

Retail lending by banks and non-banking finance companies was up 24 per cent in 2017-18, growing at the fastest pace in at least a decade. 

This positively affected demand for big-ticket consumer goods such as auto and consumer durables.

These two factors helped Indian companies, especially those serving consumers, to post double-digit growth in their top line despite a sub-par increase in exports, corporate investment and salary and wages in the private sector. 

Public administration, defence and other government services accounted for 38 per cent of incremental economic growth during the second half of 2017-18, more than twice the sector share in the economy during the April-September 2016 period (16.5 per cent).

Higher government expenditure translated into 11 per cent year-on-year growth in the combined revenues of companies other than financials and energy during the second half of 2017-18, the best in nearly four years.

“The rising crude oil prices are a key overhang for the Indian economy currently. It would have an immediate impact on several crucial sectors including energy and banking. If the crude oil prices continue to remain high for a longer duration, economic growth (GDP) and earnings growth will see downgrades. The biggest challenge for the government in such a scenario would be to transmit the price rise to end users,” said Tirthankar Patnaik, India strategist, Mizuho Bank.