Now, brace for Sensex earnings downgrades

After being hit by scams and political uncertainty, the markets now face the prospect of earnings downgrades.

Increasing pressure on margins and rising rates are already affecting select sectors, leading to a slew of companies announcing below-par results.

Jyotivardhan Jaipuria and Anand Kumar, analysts with Merrill Lynch, in a note last week said ‘more than half the companies’ disappointed analysts.

“After the third-quarter results, our Sensex EPS (earnings per share) estimates have come down for the current fiscal from Rs1,050 to Rs1,035 and for the next fiscal from Rs1,300 to Rs1,265. We expect our next fiscal Sensex EPS growth to see further downgrades to 15-16% EPS growth versus 22% currently,” they said.

Others concur. “There could be some downgrades in Sensex earnings following a decline in growth rates by around 200 basis points to 18% from 20% levels expected currently,” said Mahesh Patil, head of equity (domestic assets) at Birla Sun Life Mutual Fund.

Saurabh Mukherjea, head of equities at Ambit Capital also expects next fiscal’s earnings growth to fall to 15-16%.

“There is a fair bit of margin pressure as well as pressure for financing which could see investors remain shy barring further correction of up to 2,000 points on the Sensex,” he said.

Bharat Iyer, Bijay Kumar, Gunjan Prithyani and Adrian Mowat of JP Morgan, in a nmote last week, said aggregate earnings growth for the Sensex at 23% year on year in the December quarter was largely in-line with expectations.

What, however, was disappointing was the breadth.

“Also, growth was driven primarily by the energy sector. If you take that out, earnings growth was a more sedate 15%,” the quartet said, referring to oil and power sector. They predict a higher base effect (particularly over the fourth quarter), sticky inflation, tight liquidity and the weak trend in industrial production pose risks to current street estimates. Next fiscal, they think telecom and financials are vulnerable.

Brokerage Motilal Oswal has downgraded EPS estimates for 16 out of 30 Sensex companies compared with 8 that were upgraded after the December quarter results.

But it has kept its overall Sensex EPS for the next fiscal unchanged at Rs1,262.

Rising input costs are expected to impact margins for auto companies, while rising interest rates are a negative for banks.

“Liquidity pressure and high cost of funds are likely to weigh on companies in capital-intensive sectors such as power, cement, infrastructure and capital goods over the next 2-3 quarters,” said Pankaj Pandey, head of research at ICICI Securities.

But Aneesh Srivastava, chief investment officer at IDBI Federal Life Insurance Company, doesn’t expect a full market downgrade because sectors such as information technology, refining and diversified companies with a global presence would do well.

“The auto sector may face pressures due to the high base in terms of the volume growth over the previous year and inflation. Banks are expected to see some pressure on net interest margins (NIMs). Domestic consumption themes such as fast moving consumer goods could also be adversely impacted by inflation,” he said.    

ICICI Securities’ Pandey agrees IT and pharma will continue to do well.

“We do not see much of a damage to next fiscal’s earnings for large companies as yet, because the current issues of high inflation and interest rates are likely to get sorted out by first half of next fiscal,” said Pandey.