×
Home Companies Industry Politics Money Opinion LoungeMultimedia Science Education Sports TechnologyConsumerSpecialsMint on Sunday
×

Hazard ahead for earnings

Hazard ahead for earnings
Comment E-mail Print Share
First Published: Thu, Jul 08 2010. 10 23 PM IST

Illustration: Jayachandran / Mint
Illustration: Jayachandran / Mint
Updated: Thu, Jul 08 2010. 10 23 PM IST
The current earnings season could well bring a reality check for valuations of Indian stocks. Since January this year, the MSCI India index has outperformed the MSCI Emerging Markets index by at least 5%. This is on the back of an outperformance of 15% in 2009. Indian stocks are now trading at a fair premium to peers, and this is in large part due to strong earnings growth forecasts. Based on current valuations, the markets are pricing in a strong growth of around 25% for this fiscal.
Illustration: Jayachandran / Mint
The results for the June quarter will give strong clues on whether these expectations will be met. According to estimates by Kotak and Motilal Oswal’s institutional equities research teams, the net profit of Sensex companies (excluding energy firms) is expected to rise by 29% year-on-year in the June quarter. This looks impressive and suggests that Indian companies are set to start the year on a strong footing. But the aggregate numbers hide the fact that some sectors such as cement, construction and telecom will report a decline in earnings. Overall growth will be strong because of a jump in profit in some sectors such as metals and automobiles, where the year-ago June quarter represented a low base for some companies.
Consensus earnings estimates for Sensex companies have declined since the December quarter and March quarter results. Considering that raw material prices have increased and so have interest costs, a further downgrade in earnings is likely. In fact, hardly any research teams and fund managers expect earnings upgrades after the June quarter results are announced.
This is unpleasant news for investors in Indian equities. With valuations already at a premium, and given the current caution among global investors, a rerating is highly unlikely. The only factor that can drive valuations are earnings, and they seem to be flagging.
Also, regardless of how Indian companies perform this quarter, earnings estimates for this year and the next are at risk because of changes in the global economic situation. If it worsens, commodity prices will decline and reported earnings will end up being far lower compared with current projections. After all, profit linked to commodity prices makes up for a large part of earnings estimates for the next two years. If the economic condition improves, the central bank is likely to get more aggressive with its tightening measures, especially keeping in mind the high inflation. This will hit earnings of sectors that are sensitive to interest rates.
Current earnings estimates leave little room for error, and the June quarter results could point to this hazard.
Will earnings live up to expectations? Tell us at views@livemint.com
Comment E-mail Print Share
First Published: Thu, Jul 08 2010. 10 23 PM IST