4 min read.Updated: 12 Feb 2015, 12:44 AM ISTAmi Shah
The poor performance may lead to a cut in earnings estimates for the coming fiscal year, which, in turn, could make valuations appear stretched
Mumbai: Corporate earnings for the December quarter are falling way short of street expectations—attributable as much to over-optimistic forecasts by analysts as to the underlying weakness in domestic demand which continues to hurt companies.
The poor performance may lead to a cut in earnings estimates for the coming fiscal year, which, in turn, could make valuations appear stretched.
A Mint analysis of 315 of BSE-500 companies that have announced their fiscal third-quarter earnings and for which comparable data is available for at least 25 quarters, showed aggregate net sales rose at a mere 0.25% from a year ago, the slowest pace since the quarter ended March 2010. Aggregate net profit for this sample dropped 4.65%—the worst showing since the quarter ended March 2013.
If banks, information technology (IT) and oil companies are excluded from this sample, the aggregate net sales for the 227 firms that have reported earnings, rose 4.88%—the slowest such growth rate in three years. Net profit for these companies increased by 1.54%—the slowest since the quarter ended March 2013.
For 21 of the 30 Sensex companies that have announced their December quarter earnings, aggregate net sales dropped 4.6% from a year ago, the first such decline since the September 2009 quarter. Net profits for these companies declined 1.7%, the first such drop since the quarter ended March 2013.
“Numbers (earnings and sales) have been disappointing, and have turned out to be a lot worse than consensus expectations," said Sanjeev Prasad, senior executive director and co-head of Kotak Institutional Equities, the arm of Kotak Securities Ltd.
Others echoed this sentiment.
According to Rajat Rajgarhia, director of research at Motilal Oswal Financial Services Ltd, earnings for the universe under the brokerage’s coverage has shown zero growth against an estimate of 5% growth, with several sectors seeing a slowdown and drop in profit margins.
Of the 315 firms included in Mint’s analysis, 156 missed Bloomberg’s consensus estimates for their net profit, while 111 beat the estimates. There were no consensus estimates for 48 companies.
In a note on 2 February, UBS Securities India Pvt. Ltd, the Indian securities arm of UBS AG, said that 40% of the companies under its coverage had missed estimates. This proportion is higher than the previous quarter, said UBS.
In a note on 10 February, JPMorgan said that after a decent start, the surprise ratio of quarterly earnings has turned adverse. While almost 60% of Indian large-cap companies have reported earnings, only 26% surprised the street positively, said JPMorgan.
“I think people got too excited, too early, and that is the problem," said Prasad, referring to earnings expectations.
R. Venkataraman, managing director of IIFL Holdings Ltd, said that based on an analysis of non-financial companies in the BSE-500, earnings before interest, taxes, depreciation and amortization (Ebitda, a measure of operating profit) and PAT (profit after tax) margins are at a 15-year low; net debt/equity is at a 15-year high; and return on equity has nearly halved from the peak level seen in 2006-07.
“Also financials, the single largest component of Indian equity indices have been under great stress in the past three years," Venkataraman pointed out.
State-owned banks continue to struggle with asset quality concerns. Even private sector banks, which have managed stressed assets better than their state owned peers, saw some increase in bad loans in the three months ended December. Top private sector lender ICICI Bank Ltd, for instance, reported gross non-performing assets of 3.4% for the quarter compared with 3.05% in the year ago quarter.
Some other index heavyweights have disappointed too.
Engineering major Larsen and Toubro Ltd’s December quarter performance reflected the turmoil in the core sectors of the domestic economy, as its net profit plunged 23%.
Energy giant Reliance Industries Ltd posted its first net profit drop in nine quarters as a slump in the price of crude oil hurt its refining margins and drove down inventory value.
Prasad of Kotak said that he may prune his projection of a 16% earnings growth in 2015-16 for companies that constitute the Sensex and Nifty index, to 13-14%.
Rajgarhia of Motilal Oswal said his brokerage would be revising downward its estimates for 2014-15 and 2015-16 after the disappointment in the December quarter. A significant recovery is likely only in the second half of 2015-16, he said.
“Lower interest rates, sustained low commodity prices and some pick-up in corporate capex cycle will remain the key triggers for this recovery."
The BSE’s Sensex rose 29.9% in 2014 and another 8.53% thus far in 2015 to hit a record high of 29,844.16 points of 30 January. It is currently 4.3% off this level at 28,553.97 points
According to Bloomberg estimates, the Sensex is trading at 18.21 times 1-year forward earnings, at 53.5% premium to the MSCI EM (emerging markets) Index which trades at 11.86 times. The index also trades at a 15.3% premium to its five-year average of 15.81 times.
If brokerages were to cut earnings forecasts, the valuations could look stretched.
“There is clearly a challenge, and market has more downside risks, than upside triggers at this point," said Prasad, pointing out that the recent rally in the market was attributed to the macro-economic environment turning favourable on the back of a sharp decline in crude oil prices coming off. “If crude prices start gaining again and hit $70, that together with the fact that earnings have been disappointing, could lead to a correction."
Ravindra Sonavane contributed to this story.
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