)
Sensex consensus earnings estimates have dropped from Rs 1,430 about a month before to Rs 1,360 currently. And, there is more downside from these levels as analysts believe corporate profits remain under pressure. The key reasons for earnings' downgrades are a falling rupee, subdued June quarter results, lowering of GDP estimates for FY14 and an extended rate cut cycle.
"I think, there is scope for a further four-five per cent downgrade in the earnings because demand slowdown is only getting worse and a large part of this is yet to be factored in the earnings. Also, if you look at the monetary tightening, which is both in terms of interest rates and measures to tackle the rupee weakness, it is going to have its impact on the earnings in the coming months. We expect, this year, the Sensex earnings should grow in the region of about six-seven per cent," said Rajat Rajgarhia, managing director - institutional equities, Motilal Oswal Securities.
In FY13, the Sensex companies reported earnings per share of Rs 1,192. Assuming six-seven per cent growth, FY14 earnings for Sensex should be in the region of Rs 1,263-1,275 per share, which is about seven per cent lower from the current consensus estimates. (MORE DOWNGRADES THAN UPGRADES)
If this comes true, it will also have an impact on the market's valuations. Currently, the Sensex is trading at 14.3 times its consensus earnings estimates. But, if one adjusts for the expected downgrades, the PE of the market will rise to 15.3 times, slightly higher than its long period average of 15 times. If the same is compared with the valuations of 2009 (PE of 10.7 times) post the economic crisis in 2008 when growth rates had decelerated, these are 40 per cent higher. (Sector-wise quarter results review)
Source of weakness
The falling rupee could have some positive for the exporters but on a net basis, this will hurt the earnings estimates of Sensex firms.
"Most companies from industries such as power relying on imported fuel (coal), aviation (a significant share of the expenses denominated in dollars), public sector oil companies (higher under-recoveries and subsidies) and autos should be negatively impacted by this currency volatility," said Jitendra Sriram, equity strategist and head of research at HSBC Securities in a note. He says firms with large dollar-denominated debt should also become vulnerable to rupee weakness. He sees the greatest vulnerability in telecom (equipment imports and dollar debt), metals (overseas acquisitions financed by dollar debt) and parts of infrastructure (power and ports).
Results for the June quarter also suggest some weakness at the broader level, leading to possible downgrades. "My sense is that if we look at the results, telecom, power and are good but because of industrials, banks and consumers we could see marginal downward impact on earnings," says Rahul Singh, head of equity research of Standard Chartered Securities.
The bigger worry, though, is on the demand side, which has weakened further in the June quarter. With interest rates ruling high, investment cycle slowing significantly, the demand from the corporate as well as consumer side is only expected to weaken further and hurt earnings growth.
