Half of top 100 cos see cut in target price over concerns of tepid earnings

Adani Green, Nykaa, APSEZ among firms with maximum cut in TPs in Jan-March 2023, shows Bloomberg data. Canara Bank, JSW Steel and Bank of Baroda have seen highest increase in TPs

Half the stocks in the Nifty 100 index have seen a reduction in their target price by analysts this year due to fears of lacklustre earnings growth and uncertain economic environment.

Adani Green Energy, FSN E-Commerce (Nykaa), Adani Ports & SEZ and Indus Towers are among the companies that have seen the maximum cut in TPs during the first three months of calendar 2023, shows Bloomberg data. On the other hand, Canara Bank, JSW Steel and Bank of Baroda have seen the highest increase in TPs.

During the second half of 2022, around 40 per cent of the top 100 stocks had seen a reduction in TPs. Experts said analysts had pencilled in aggressive growth targets and valuations amid buoyancy in the market last year. Now, they are scaling back on both these parameters.

“Initially, there were a lot of sanguine expectations and now analysts have realised things are probably not as good. There was a huge revenge buying post covid, which boosted topline and profits. Now we are back to the real normal and it warrants some adjustment to the target price based on the new growth rates” said U R Bhat, co-founder, Alphaniti Fintech.

In a recent note, BofA Securities said it expects consensus earnings growth estimates for FY24 and FY25 to be cut by half.

It sees risks to earnings mainly on account of "Fed's stance to fight inflation, or 'higher (rates) for longer', b) likely hot summer affecting rural recovery, c) peaking urban demand and d) higher deposit rates/debt returns impacting 'active' flows into domestic mutual funds"

The 12-month forward price-to-earnings (P/E) multiple for Nifty 50 index has seen a de-rating from 25 times in October 2021 to below 20 times at present. Analysts say companies in the small-cap universe have seen even sharper P/E de-rating amid several headwinds.

"We have not seen the last of rate hikes and the narrative is that rate hikes are not peaking immediately. And geopolitical tensions in Europe are taking a new dimension altogether. There are enough factors internationally to warrant some correction in the market. Even, the December quarter results or expectation for the March quarter, except for some sectors, is subdued,” said Bhat.

Going forward market experts felt that more stocks could face earnings cuts as the recent oil price hikes could eat into the margins of the companies.

"Most important factor will be oil prices as that will feed into inflation in India. The language of the RBI in the next monetary policy will be very important. Corporate India does not have the kind of pricing power that in case inflation or interest rates go up can pass on all the cost increases to the ultimate consumer. If there is a price increase on account of inflation the corporates will have to absorb a significant portion,” Bhat added.