In the present environment of risk aversion, any expansion of price-earnings multiple is doubtful. The recent announcement regarding the mandatory increase in the public float will also lead to an increase in the supply of paper, an increase that may not be matched with an increase in demand at current prices as long as the uncertainty continues. In these circumstances, what matters most for the market is an increase in corporate earnings.
But for stocks to rise, earnings must increase more than already anticipated. How have the March quarter results been in this regard? Broking house Motilal Oswal Securities Ltd points out that the performance of the companies that make up the 30-stock Sensex has been slightly better than expected. While 11 companies reported higher-than-estimated earnings per share, nine fell short.
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Profit after tax of the Sensex companies was up 38% year-on-year, against their estimate of 33%. On a year-on-year basis, growth was impressive, with earnings before interest, tax, depreciation and amortization (Ebitda) of the Sensex companies rising by 40%. But that was because Ebitda growth was -13% for these companies during the fourth quarter of fiscal 2009.
Even so, eight of the 30 companies reported negative year-on-year growth in profits after tax.
What about earnings revisions? Motilal Oswal has a chart that shows the trend in the revision of the estimated combined earnings per share (EPS) of the Sensex companies. In March 2009, during the depths of the crisis, the EPS for the Sensex companies was just Rs980. That was revised upwards to Rs1,028 in June last year, as the market improved. By September, it was rerated to Rs1,103. But with the Sensex peaking out thereafter, the mood turned sober and downward revisions to Sensex earnings were made in December and, by March this year, the expectation was that Sensex EPS for fiscal 2011 would be Rs1,042. That has since been revised up to Rs1,078 in May. Note that it’s still below the estimate made in September last year. EPS growth is expected to be 30.5% this year, which means that high growth is already priced in.
Others are more conservative. Enam Securities Ltd, for example, expects a Sensex EPS of Rs996 for fiscal 2011. Interestingly, Motilal Oswal’s earnings upgrades after the March quarter results amounted to a mere 3% for the Sensex companies. What’s more, there were earnings downgrades for as many as 14 out of the 30 companies. Clearly, revising earnings upwards is not going to be an easy task. As a March quarter results preview by Emkay Research pointed out, “We believe that most of the earnings upgrades have been already factored in by analysts. Hence, a higher stock prices from this level has to be justified by a higher earnings multiple.” That is difficult in the current environment.
Graphic by Yogesh Kumar/Mint
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