Consensus earnings estimates to slide further in FY14

Policy mishmash, falling rupee and weak economic environment to prevent pick-up in earnings

It seems earnings downgrades are here to stay, with economic growth continues to slip, aggravating the pain for companies. Since January 2012, consensus earnings estimates for Nifty companies in FY14 are down by 10 per cent. The cut in earnings estimates at the end of the first quarter was largely driven by materials, auto and industrials. Utilities and financials have seen the sharpest downgrades thereafter due to lack of clarity on the policy front. Credit Suisse expects another five-six per cent downside from here. Further cuts would largely be driven by financials, as slowing loan growth, falling margins and rising asset quality issues would impact growth.

At the start of the financial year, the market expected Nifty companies to fare well. However, with the rupee's capitulation, the sentiment has soured further and the Reserve Bank of India's flip-flop has wreaked havoc on earnings estimates of banks and non-banking finance companies. In a market, where betting on individual stocks seems to be working better than a sectoral approach, earnings upgrades and downgrades are important as they help pick winners. On an average, stocks with majority of negative surprises underperformed the broader markets by 21.3 per cent, explains ICICI Securities, while those that delivered positive surprises outperformed the benchmark by 1.5 per cent.

Despite the downgrades, the 'sell' rating on aggregate stocks is still less than the 'buy' rating. As of August 16, 2013, among the BSE 230 mid cap stocks, 131 stocks have 'buy' rating from analysts, 72 have 'hold' rating and 27 have a 'sell' call. Other than information technology, consumer staples and energy, analysts expect the weak earnings trend to continue in FY14. In fact, so far earnings estimates for FY15 had largely been untouched by analysts are also coming under the axe.

Analysis done by ICICI Securities on consensus downgrades suggests that major contributors to the FY14 Nifty EPS downgrades have been state-run and private banks. Even if one looks at the BSE 100, the downgrades have increased from 67 companies to 78 on a sequential basis. Even though operating profit has held up, net profit margin has come under pressure due to rising interest costs. Operating profitability of Nifty, on the other hand, has fallen to 14.7 per cent levels after improving in the fourth quarter, largely due to disappointing numbers from Coal India and BHEL. These operating margin levels are now at the crisis levels of 2009.