Another pushback to earnings recovery
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After a poor December quarter, earnings downgrades continue.
The main culprits are public sector banks and commodity producers, but there are enough of them to pull down Nifty 50 estimates.
Where there was great hope for an FY16 earnings rebound earlier in the year, now profits of Nifty firms are estimated to decline marginally.
This naturally means that earnings growth estimates for FY17 will start looking bullish as the base (FY16 earnings) becomes smaller.
Indeed, brokerage firms’ estimates for earnings growth in FY17 range between 14% and 21%. But as the table shows, even these estimates have been chopped continuously as the economy is still struggling on the ground, there is no real demand revival and deflation persists.
Aggregate FY17 earnings estimates for Nifty 50 firms have been cut by 10.4% over the past six months, according to Investec Capital Services (India) Pvt. Ltd. This carnage has been widespread. Four out of five Nifty companies saw an earnings downgrade in the December quarter. Energy companies and financial institutions were the worst hit; the pace of downgrades has also accelerated in these industries, as the table shows.
If that is not bad enough, many public sector banks have postponed recognition of some bad assets to the March quarter. Exports haven’t picked up and if the Union budget doesn’t have some concrete steps to boost rural spending and increase capital expenditure, there won’t be much succour for earnings over the next two-three quarters.
Brokerage firms such as Investec Research expect another 10% downgrade in the FY17 earnings estimates for Nifty 50 companies. In that case, the fall in the markets might not be all that steep when viewed through the lens of fundamentals.