Earnings downgrades not over; demand yet to pick up
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Mumbai: Earnings recovery for most Indian companies is still elusive after being subdued for more than three years, say many research analysts, and downgrades may not be over just as yet, as channel checks suggest that demand is yet to see any meaningful pick up.
While usually companies have a deadline of reporting earnings within 45 days of the end of a quarter, they are given an additional month to comply with the new accounting standards applicable from 1 April 2016. The last date for companies to report their June quarter earnings is set at 14 September.
Many brokerages still expect Nifty index to post a double-digit earnings growth in the fiscal year 2017, after a flattish growth in recent years, but the expectation seems to be coming off.
Kotak Institutional Equities, an arm of Kotak Securities Ltd, said in a note on 17 August that the June quarter results season has not seen any meaningful reduction in net profits, although operating results were somewhat weaker than our expectations. The brokerage firm expects net profits of the Nifty 50 Index to grow 14.4% in FY2017, down from 16.8% as it expected in a 31 May note, led by general economic recovery and normalization of profits and profitability in several sectors.
For the fiscal years 2016, 2015 and 2014, the Nifty Index posted flat profit growth, data from Capitaline shows.
Kotak analysts Sanjeev Prasad and Sunita Baldawa raised concerns over the quality of earnings growth, and it was “a bit underwhelming”. They pointed out that about 37% of the incremental earnings came from the banking sector partly due to lower credit costs of state-run banks and another 11% from metals and mining sectors whose profits are bolstered by anti-dumping duties.
“Our analysis of the usual operating parameters for 1QFY17 results show continued weak trends in credit, consumption, investment and NPLs (non-performing loans). Net profits are slightly ahead of our expectations but largely due to non-operating factors in the case of several companies,” Kotak analysts said in the note.
The earnings downgrade cycle has been around for a while now, and it doesn’t seem like the end is near.
“Consensus did cut down estimates for Q4FY16 after a bad Q3FY16 , which led to more hits in the quarters later. Also, we need to remember that the current earnings growth is on a lower base,” said Varun Lohchab, managing director and head of research at Religare Capital Markets Ltd.
“Earnings downgrades are likely to continue. We think consensus is way too optimistic even now. Our channel checks suggest that consumption demand has not yet seen a notable pick up, and investment demand is not around, with companies having excess capacities,” added Lohchab.
There were concerns that while profits of top companies showed some improvement, the core businesses were not the contributors in all cases.
In a note on 17 August, Kotak Institutional Equities said that the June quarter net profits of the BSE 30 and Nifty 50 Indices show modest improvement in net profits of companies that reported earnings until that date, but raised concerns that a portion of the improvement came in from non-operating factors.
A few were very optimistic though.
In a note on 23 August, Morgan Stanley analysts Ridham Desai and Sheela Rathi said that their 16% earnings CAGR (compounded annual growth rate) forecast over FY16-FY18 for the Sensex and the broad market puts their FY18 Sensex EPS (earnings per share) estimate 300 basis points ahead of consensus. One basis point is 0.01%.
Morgan Stanley analysts argued that the earnings trough has passed, and earnings were set for mean revision. According to them, India’s real and nominal GDP growth appear to have bottomed, household and government savings are rising, and corporate profits may follow too.
Desai and Rathi believe the corporate debt cycle seems to have peaked, and public investments are rising. They also pointed that India’s terms of trade have improved, which feeds into earnings.
“Corporate India is sending positive signals via higher dividends and, while the market expects higher growth for 2016-17, a multi-year earnings cycle may not be priced in—so there may be upside potential for three- to five-year investors,” Morgan Stanley analysts said.