Mumbai: India’s brokerages are busy reworking their math on the earnings prospects of companies, marking more of them as less likely to grow well due to rising inflation and few positive earnings surprises.
Four of the five domestic brokerages Mint contacted said they are not optimistic about upgrading earning estimates of firms and have, in fact, downgraded quite a few. Most companies getting the axe are in the capital goods sector, among the worst hit by rising raw material costs.
Not optimistic: The rising cost of commodities has led to higher finished goods prices that have kept consumers away, or slowed spending.
Analysts say there is now a definite slowdown as more companies are showing sluggish growth, though the trend started in the December quarter. The rising cost of commodities has led to higher prices of finished goods, which has kept consumers away, or at least, slowed their spending. This has cramped sales growth for companies, they say.
India’s wholesale price-based inflation rose 7.33% in the week that ended on 12 April, compared with the same week a year ago. Inflation has stayed above 7% in the preceding two weeks as well.
Firms that depend on exports, too, have taken a beating, hit by their exposures to exotic derivatives instruments bought to hedge against currency fluctuations. They have lost because the US dollar has become increasingly weak against some global currencies.
Till last week, 395 companies out of about 3,650 listed ones have declared financial results for the fourth quarter of fiscal year 2008 that ended on 31 March. Out of these, 13 are tracked by the benchmark 30-share Sensex of the Bombay Stock Exchange and 20 belong to the broader 50-share S&P CNX Nifty index on the National Stock Exchange. Barring one, all Sensex companies are covered by Nifty.
Net sales of these companies have increased 24.13% to Rs174,467.14 crore and net profit has risen 20.85% to Rs21,513.3 crore. The 13 Sensex companies have increased their net sales 29.72% to Rs82,771.61 crore and net profit 16.36% to Rs12,082.49 crore.
The 20 Nifty firms have increased their net sales 27.71% to Rs96,167.19 crore and net profit 17.42% to Rs13,475.48 crore.
Gaurav Dua, head of research at Sharekhan Ltd, said the firm has downgraded earnings estimates for five and upgraded estimates for just two, out of the 15 stocks that have announced results so far. The brokerage tracks 98 stocks.
The brokerage has downgraded stocks of capital goods and mid-cap companies because they have delayed in carrying out orders and have their margins threatened due to rising raw material costs, Dua said. Mid-cap companies are those with medium market capitalization.
Sharekhan has downgraded Bharat Heavy Electricals Ltd and SKF India Ltd, among others. The downgrade is about 2-3% on estimated earnings, Dua said. The firm has upgraded telecom and technology stocks such as Bharti Airtel Ltd and Satyam Computer Services Ltd. Bharti Airtel reported a 45.9% growth in sales during fiscal 2008.
Kotak Securities Ltd, on the other hand, has downgraded only three stocks in the capital goods and mid-cap space—10% of the 20-25 companies that have announced results and that Kotak tracks.
Dipen Shah, vice-president of private client group research at Kotak, said earnings estimates for Sensex companies that the brokerage tracks have largely been in line with its expectations.
“We had earlier lowered our earnings expectation from technology stocks. Also, we were expecting significant forex derivatives losses for private sector banks, which hasn’t been the case. Therefore, we haven’t felt the need to do any significant downgrades,” he said. “However, the capital goods space remains an exception and we have downgraded a few stocks belonging to the sector.” The firm has downgraded earnings outlook for Kirloskar Oil Engines Ltd.
Rajan Shah, chief investment officer at Angel Broking Ltd, said his firm has moderated earnings expectations before the results season kicked off. So, there haven’t been significant downgrades yet.
“We are not expecting any slackening of demand. The management teams of the companies we track tell us that they are confident of meeting the earnings expectations over the next few quarters,” he said.
Still the brokerage doesn’t see a reason to upgrade the stocks that have announced results.
Listed brokerage Motilal Oswal Securities Ltd said it would wait for the first quarter to end on 30 June before it reconsiders revisions in its earnings estimates. Before the results season, the firm had lowered its earnings estimates to 16% from 23% for fiscal year 2008.
First Global Ltd, another Mumbai-based brokerage, is among the few houses that have lowered its estimates in the past two quarters.
“Our earnings estimates were lower than the consensus estimates. Still, we are seeing more significant downward revision and very few positive surprises from the fourth quarter results,” said Devina Mehra, managing director at First Global. The brokerage has downgraded its earning estimates for Kirloskar Oil Engines and Axis Bank Ltd.
Ashwin Ramarathinam contributed to this story.