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Business News/ Market / Stock-market-news/  FY18 earnings estimates may need to be cut further, say brokerages
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FY18 earnings estimates may need to be cut further, say brokerages

Sensex and Nifty's FY18 consensus earnings per share have already been pared by 11.1% and 9.45%, respectively, since the start of the fiscal and are now at Rs1,528.89 and Rs494.46

The difference between stock prices and corporate earnings in India widened further in FY18 as India’s GDP growth rate slumped to 5.7% in the June quarter ahead of GST rollout on 1 July and due to lingering effects of demonetisation. Photo: MintPremium
The difference between stock prices and corporate earnings in India widened further in FY18 as India’s GDP growth rate slumped to 5.7% in the June quarter ahead of GST rollout on 1 July and due to lingering effects of demonetisation. Photo: Mint

Mumbai: Indian stocks have set record after record this year even as earnings growth remained lacklustre, prompting some analysts to warn that consensus earnings estimates of Indian companies are still too optimistic about growth prospects and may need to be slashed further.

Sensex and Nifty’s fiscal year 2018 consensus earnings per share (EPS) estimates have already been pared by 11.1% and 9.45%, respectively since the start of the fiscal year and are now at Rs1,528.89 and Rs494.46, according to data compiled by Bloomberg.

The difference between stock prices and corporate earnings in India widened further this year as economic growth slumped to 5.7% in the June quarter, the slowest pace in three years, because of disruptions caused by the rollout of the goods and services tax (GST) from 1 July even as companies were recovering from the effects of demonetisation.

In a note on 15 November, UBS Securities India Pvt. Ltd said that a consensus Nifty earnings growth estimate of 13% year-on-year for fiscal year 2018 implies 20% growth in the second-half of the fiscal year, which appears too high.

“Top-down, we expect 7%/13% growth in earnings in FY18/19 vs. consensus 13%/21%, implying the potential for further cuts," UBS analysts Gautam Chhaochharia and Sanjena Dadawala said in a note.

“The consensus estimates do appear to be at the higher end, and downgrades are not ruled out. We are not at the end of that spectrum as yet," said Ajay Bodke, chief executive and chief portfolio manager at brokerage Prabhudas Lilladher Pvt. Ltd.

“People need to moderate their expectations in sync with evolving ground realities."

Prabhudas Lilladher expects Nifty EPS to come in at Rs479.6 and Rs568.1 for fiscal years 2018 and 2019, respectively.

The upgrade of India’s sovereign ratings by Moody’s Investors Services is a positive development, said Bodke.

“As risk premium for India comes down, the borrowing costs from overseas market will come down too. The currency also is likely to strengthen on this note, as the rating gets better. There would be likelihood of more FII flows in equities as well as debt," he added.

Moody’s on Friday upgraded India’s sovereign ratings to Baa2 from its lowest investment grade (Baa3) giving credit to the Narendra Modi government for its “wide-ranging program of economic and institutional reforms". It changed the outlook for India’s rating to stable from positive.

On a cumulative basis, Nifty earnings have declined by 1% from a year earlier in the first six months of the current fiscal year, creating a sizeable hurdle for meeting full-year consensus growth expectations, Deutsche Bank said in a 15 November note.

“To meet the current growth expectation of 14% y-o-y , 2HFY earnings need to increase by a substantial 28%," Deutche Bank analysts Abhay Laijawala and Bijay Kumar said in the note.

“While the worst of demonetisation and GST adjustments are behind and a gradual recovery is anticipated, consensus expectations for FY18 still appear to be unrealistically high."

An analysis of 99 of BSE 100 companies that have reported their September quarter earnings showed that 55 of them beat analysts’ estimates on net profit, while 44 fell short.

According to Motilal Oswal Securities Ltd, earnings downgrade-to-upgrade ratio improved significantly in the September quarter over the June quarter —with 58 companies from their coverage universe seeing earnings cuts of more than 3%, as compared with 81 in the June quarter. Also, 49 companies saw earnings upgrades of more than 3% in the quarter ended September, against 38 companies in the June quarter.

However, the ratio still remained skewed marginally in favour of downgrades. Motilal Oswal also cut Nifty earnings per share (EPS) target for fiscal year 2018 by 1.2%, but raised the target for fiscal year 2019 by 1%.

The brokerage expects Nifty EPS to grow 14% to Rs481 in fiscal year 2018 and 26% to Rs609 in fiscal year 2019.

A few brokerages had lower expectations to start with.

“For FY18, Sensex EPS to rise by 7-8% for FY18, and this implies a double-digit growth in earnings for the second half of the current fiscal year, which looks achievable as demand is likely to pick up in the second half, and because of the advantage of low base of the previous year," said Gaurav Dua, head of research at Sharekhan by BNP Paribas.

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Published: 20 Nov 2017, 01:32 AM IST
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