The earnings revision indices (ERIs) of MSCI India and the Institutional Brokers’ Estimates Systems (IBES), key measures of sentiment, have both been trending up since the last quarter. According to Religare Capital Markets Ltd, ERI is the number of upgrades minus the number of downgrades divided by total number of changes. That it is still in negative territory means the downgrades still outpace the upgrades, though the scenario is getting better. Ideally, however, one could say that the earnings downgrades have bottomed out only when it moves into zero or positive territory.

As the chart shows, the indices continue to be in negative territory, but there has been an improvement. Religare, in its earnings preview for the December quarter, says that while there have been more earnings downgrades than upgrades until now, the improvement seen is likely to continue.

The positive sentiment is due to anticipation of earnings growth due to higher exports, perhaps hinging on economic recovery in developed countries. Meanwhile, the stability of the rupee indicates control on import costs of key raw materials. A part of the profit growth is expected from margin expansion in spite of moderation in revenue growth. A note by Credit Suisse Securities Research and Analytics says that there have been three consecutive months of earnings upgrades consensus, starting from October. Further, the recovery is becoming broad-based with eight out of 11 sectors seeing flat or upgrades in earnings, rather than downgrades. Sectors expected to lead earnings growth in the December quarter are mainly information technology, auto, metals, pharma and telecom.