Graphic by Prajakta Patil/Mint
Graphic by Prajakta Patil/Mint

Corporate earnings estimates likely to fall further

The Bloomberg consensus estimates of Sensex earnings per share for FY16 and FY17 have been steadily falling since the beginning of this fiscal year

The good thing for the stock markets is that expectations of corporate earnings in the September quarter are already low. It lowers the probability of nasty surprises. Most brokerages expect net profit of the 30 companies on the Sensex, India’s benckmark equities index, to grow by low single digits. Weak consumption and investment demand may continue to hurt profits.

It’s not surprising then that the Bloomberg consensus estimates of Sensex earnings per share (EPS) for 2015-16 and 2016-17 have been steadily falling since the beginning of this fiscal year (see chart).

In the June quarter, earnings growth remained sluggish at around 1.6%. As a result, the consensus earnings growth forecast for the current financial year and the next was cut by 6.6% and 5.8%, respectively.

Despite the cuts in estimates, aggregate Sensex earnings growth expectations remains high. The Bloomberg consensus estimates EPS growth of 14.4% for 2015-16 and 20% for 2016-17 for the 30 companies. With earnings growth in the first two quarters remaining around 2-4%, it is a pretty tall order. Very likely there is further room for earnings downgrades.

“Consensus Sensex EPS growth for FY16 is approximately 17% on a bottom-up basis," Bank of Americ Merill Lynch said in their equity strategy note dated 6 October. “We expect this to get downgraded to 8-10%." Twelve out of the 30 Sensex companies are expected to show a contraction in profits, according to Bank of America Merill Lynch.

Another area of concern is a sequential drop in margins. Kotak Institutional Equities estimates Ebitda (earnings before interest, tax, depreciation and amortization, or operating profit) margins for Sensex companies, excluding energy firms, to ease to 17.4% in the three months ended 30 September from around 18% in the June quarter. Margins are likely to fall even after low commodity prices.

While liquidity may continue to drive up the market, the fact remains that fundamentals remain weak and further earnings downgrades could hurt stocks.

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