Glimmer of hope
For the first time in years, aggregate earnings estimates of companies on the Nifty index have risen during the results season.
Kotak Institutional Equities has raised Nifty earnings estimates by 2%, thanks to better-than-expected cost control by Indian companies as well as to factor in the benefit of higher commodity prices for some large companies.
The performance in Q2 may have put a floor on earnings, Kotak’s analysts said in a 15 November note to clients.
This is in contrast to the past many quarters, where Indian companies disappointed during the earnings season. A moot question, then, is if this can be seen as an inflection point as far as earnings go.
Sanjeev Prasad, managing director and co-head at Kotak Institutional Equities, says, “We are already factoring in a high earnings growth of 23% in financial year 2018-19. To that extent, it’s premature to get carried away by the earnings beat in the September quarter. Besides, some of the upgrades are because of higher commodity prices, rather than on account of the results themselves.”
In addition, while reported earnings have been decent on an aggregate basis, at the same time, the macroeconomic situation appears to be worsening. For one, higher crude prices are a concern; and inflation numbers have been higher than estimates lately, putting paid to hopes of rate cuts by the central bank.
And to top it all, with valuations at more than 17 times FY19 earnings, there’s hardly any room for error as far as the earnings performance goes. Put differently, Indian firms need to show far more consistency on the earnings front; while the beat in the September quarter is welcome, their track record in the previous quarters is far from reassuring.
“In particular, the consumption basket trades at lofty multiples on historically high margins and profitability and the market is unprepared for any change in the positive narrative arising from underlying changes in the economy. We would watch for disruption to business models of (1) listed companies due to formalization of the economy and technological disruption and (2) informal sector entities from formalization and its negative implications for consumption and jobs,” Kotak’s analysts wrote in the note.
In the past quarter, Nifty earnings have grown 13.5%, more or less in line with estimates. Sectors such as automobiles, industrials and telecom did well vis-à-vis expectations. A general trend was that some companies across sectors tightened their belts and reported better-than-expected profit margins. Telcos, for instance, reported better-than-expected profits, despite the fact that revenues were slightly lower than estimates.
For banks, slippages lessened and bad loan ratios improved. This was, however, offset by rather muted credit growth for many lenders, a symptom of the muted investment demand in the country. Results of consumer goods companies suggest consumption demand in urban areas is picking up, and is doing better vis-à-vis rural areas. But even in the case of the latter, things are better compared to last year thanks to a good monsoon.
In short, there are a fair amount of green shoots visible in the September quarter results; although, given the patchy track record of Indian companies, it makes sense to wait and watch if the improvement in earnings performance can be sustained.