Singapore: Indian earnings estimates for the next fiscal year may be cut another 25%, led by revisions for banks, as the economy weakens, Credit Suisse Group said.
Analysts will probably double the one-quarter reduction in forecasts since November for the year starting 1 April, as profit growth at banks, brokerages and developers falters, Credit Suisse analysts Nilesh Jasani and Arya Sen wrote in a report. Predictions for companies on the Bombay Stock Exchange’s benchmark index, Sensex, this fiscal year have been lowered by 15%.
The Sensex has dropped 6.6% this year, extending 2008’s record 52% slump, as the global recession and financial crisis weighed on the outlook for corporate earnings. Investors should avoid financial companies, making up 32% of profits after tax in India, because current predictions for their earnings are too optimistic, Credit Suisse said.
“We remain underweight on the sector and expect it to be the main contributor to depressed 2010 earnings,” the analysts said. “For financials’ profits to grow at over 30% year-on-year, while the rest of the corporate world is witnessing a contraction of the same magnitude, is unsustainable.”
Financial companies’ earnings, which grew about 30% in the third quarter from a year earlier, will falter as the Reserve Bank of India cuts interest rates, demand for loans slows and provisions increase, the report said.
The benchmark index on Thursday rose 27.45 points to 9,042.63.
The measure is valued at about 9.3 times reported earnings, down from a high of as much as 28 times in January last year. The gauge is trading at 10.4 times next year’s profit estimates.
Valuations are unlikely to get cheaper and the index will fluctuate at around Credit Suisse’s target of 9,000 on speculation of a sharp rebound in earnings in 2011, the analysts said. The outcome of India’s elections this year will also determine the performance of the market, they added.
“Essentially, we deem a sharp decline in 2010 earnings-per-share forecast as inevitable but not an attendant fall in equity indices,” the report said.
State Bank of India, the nation’s largest, had said on 24 January that profit for the three months ended 31 December rose 37% from a year earlier as companies borrowed more and investments in bonds gained. HDFC Bank Ltd, the third largest by market value, last month posted a 45% increase in its third-quarter profit.
Credit Suisse has an “underperform” recommendation on State Bank of India and a “neutral” rating on HDFC Bank. They also advised investors to be “underweight” in brokerages and property companies.