Given the number of positive earnings surprises in the June quarter results of Indian companies, one would imagine that Sensex earnings per share (EPS) targets would be getting raised promptly by brokerages. Consider then the curious case of Kotak Institutional Equities’ research team, which has marginally downgraded its EPS estimate for the Sensex marginally for the year till March.
It’s not that the brokerage hasn’t taken into account the big margins surprise of the June quarter and upgraded earnings of many firms, like most brokerages have. It’s just that their downgrade of Reliance Industries Ltd’s earnings estimate for the year wiped away the cumulative effect of all other upgrades. Kotak downgraded its FY10 EPS estimate for Reliance by 8% to Rs103, owing to lower assumptions on refining margins and production of oil. Most analysts were negatively surprised by the reported refining margin for the company and its oil production levels, but very few have downgraded earnings estimates. It’s important to note here that earlier in the year, Reliance’s earnings were expected to drive aggregate earnings this year thanks to the commencement of its gas production.
Brokerages that have seen an increase in their Sensex EPS targets for the year have likely left their estimates for Reliance untouched, despite the evident negative surprise in the results. In any case, the upgrades aren’t material. Citigroup Research, for instance, had estimated Sensex earnings to be flat before the results season began, but now expects a growth of about 3%.
More importantly, as it points out in a recent note, “would be a little watchful of extrapolating too much too quickly; in large measure because sales are still slipping, and sustainable earnings leverage needs more sales (demand/pricing) momentum, rather than cost efficiencies, which tend to start capping out, and remain commodity-cycle influenced”. Sales growth for Sensex companies (excluding oil) fell for the first time in many quarters, and Citi’s study on BSE 500 companies that have reported results (412) shows that aggregate sales fell by 7% in the June quarter, again for the first time in many quarters. Even in the December quarter, when the economic downturn was at its worst, aggregate sales of these firms had risen on a year-on-year basis.
Ahmed Raza Khan / Mint
Most of the surprise in the June quarter earnings was on account of higher -than-expected margins, and the outlook on this front isn’t that bright considering that commodity prices have picked up considerably thanks to the increase in the global liquidity situation. Indian companies would also soon have to contend with the fallout of a weak monsoon. And a few companies such as Tata Motors Ltd and Hindalco Industries Ltd that beat street estimates have to still report consolidated results, which are expected to be half as exciting.
While the markets have been strong in the past month owing to strong liquidity conditions, there’s certainly not enough in corporate results to justify this rise.