Markets too optimistic in its earnings estimates, suggests Kotak report

The markets, KIE said, may be too bullish on revenues of export-oriented sectors such as automobiles, IT services, potentially pharmaceuticals and specialty chemicals.

The markets are being too optimistic in their earnings estimates of India Inc., suggested Sanjeev Prasad, managing director and co-head of Kotak Institutional Equities in a recent note co-authored with Suvodeep Rakshit, Anindya Bhowmik and Sunita Baldawa.

 

“Consensus earnings estimates for fiscal 2025-26 (FY26) and FY27 have seen downgrades in a few sectors and companies. We assume there will be more, as global and domestic growth slowdowns hit revenues. For now, we model 12 per cent growth in the net profits of the Nifty-50 Index for FY26,” Prasad wrote. 

 

 

The market, Prasad believes, has become complacent and hence has staged a bounce back from tariff-related lows even as the issue has not been resolved and has just been pushed back by 90 days. 

EPS estimates from Kotak Institutional Equities

 

"The fact that the market is trading above “Liberation Day” levels would suggest that all issues have been fixed. In reality, global and domestic gross domestic product (GDP) growth will be likely lower; the reciprocal tariff and trade issues will take a long time to resolve; earnings have been cut further; and multiples continue to be rich across sectors and companies, including the large-caps," the note said.

 

Key assumptions

 

The markets, Prasad believes, may be too bullish on revenues of export-oriented sectors such as automobiles, IT services, potentially pharmaceuticals and specialty chemicals in light of high levels of uncertainty on global gross domestic product (GDP) growth and tariffs in the US.

 

High tariffs in the case of automobiles, KIE believes, will adversely affect the revenues of automobile companies such as Bharat Forge, Tata Motors, among others.  

Nifty earnings estimates

 

Very few Indian companies, the note said, have operations in the US and will be at a severe disadvantage versus automobile companies with manufacturing facilities in the US in case the US was to continue with the current tariffs on automobiles and components. 

 

A delayed decision-making of the clients of IT services companies may affect the revenues of the companies in this space. Valuations of IT stocks, Prasad cautioned, are well ahead of pre-pandemic levels, when growth rates were meaningfully higher. 

 

“They certainly do not factor in a deep slowdown or recession in the US. A deep slowdown or a recession in the US will affect both revenues and profitability negatively,” the note said.

 

That apart, the markets, he said, may also be overly optimistic on profitability of companies in the consumption sector by assuming that the companies will be able to retain the benefits of lower raw material prices.

 

"The Street is banking on companies being able to retain a meaningful portion of the assumed decline in raw material prices. Even assuming prices of agricultural products were to decline along the expected lines of the Street and prices of crude oil and related inputs were to stay at current low levels, it remains to be seen if the companies can retain the benefits of lower raw material prices," the note said.