At the end of the September quarter, brokerages have uniformly downgraded earnings estimates for both fiscal 2012 and 2013. A bleak global outlook and local anxieties, including rising inflation and interest rates, have led to the downgrades. The consensus earnings per share estimate for FY12 is down 6% to 1,185 for the Sensex from 1,260 at the end of the March quarter. More worrisome is the sharper downgrade of 7.3% for earnings during FY13 over the same period.

Since December, there have been about five-six rounds of downgrades. An Edelweiss Securities Ltd report has highlighted that the ratio of upgrades to downgrades (revisions ratio) has decisively inched downwards.

True, revenue growth has been steady and in line with expectations. But operating and net profit growth has faltered because of fuel costs, wage expenses, commodity prices and interest rates. Therefore, the earnings downgrade is led by domestic plays such as infrastructure, capital goods, real estate, banks, auto and telecom.

According to estimates by Motilal Oswal Securities Ltd, contributors to earnings downgrades (within the Sensex firms) are State Bank of India (35%), Oil and Natural Gas Corp. Ltd (14%), NTPC Ltd (13%) and Bharti Airtel Ltd (12%). Earnings upgrades have been witnessed in Tata Consultancy Services Ltd (12%) and Reliance Industries Ltd (11%).

Equity market indices have corrected across sectors, bringing down valuations to more realistic levels. The Sensex is down 20% from its peak level in January, while some sectors have seen a bigger drop in stock prices. Infrastructure, capital goods and realty are the worst performers, with most of them quoting lower than their book value. However, oil marketing firms, pharma and information technology services are sectors that might buoy earnings during the year. For now, the Sensex is trading at a reasonable 12-13 times its one-year forward earnings.

Is it a good time then to buy into Indian equities? Despite a contraction in valuation, it may be prudent to wait for the outlook given by corporate managements, following the September quarter earnings. Analysts expect the Sensex firms’ year-on-year growth during the September quarter in the region of 20%, lower than the 25% growth in the June quarter. Margin contraction is expected to be sharper than the last several quarters because of cost pressures. Further, the rupee depreciation will lead to mark-to-market losses, which will further hurt profitability. Some analysts estimate about one-third of the Sensex firms will post a decline in earnings.

Are valuations at a trough then? Although most of the local negatives factors have been factored into valuations, policy inaction or global sovereign risks may take down price-earnings (P-E) multiples to about 10 times forward earnings.

Besides, the impact of inflation and the cost of retail funds on consumer demand are yet to be felt fully. A demand slowdown could hurt consumer goods firms’ margins as the pass-through of cost increases becomes tough. Input cost reduction, too, will be offset by a depreciating rupee. A forecast by Standard Chartered Securities points to a 12-month Sensex target of 16,000, suggesting a P-E multiple of 12 times FY13 earnings forecasts. Perhaps, there’s more pain than gain in the near term, as analysts now see a re-rating possibility only in the last quarter of FY12.

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