Graphic: Mint
Graphic: Mint

Street hoping too much from earnings

Agrarian and liquidity crisis, a weak private capex cycle, political uncertainty and a possible global economic slowdown paint a gloomy outlook for earnings

From the looks of it, the earnings growth outlook for Indian companies should be fairly subdued next year. First, the agrarian and liquidity crisis have to be contended with, which is already having repercussions on consumption demand. To add to that, investors have to factor in a weak private capex cycle, political uncertainty and a possible global economic slowdown. A combination of these factors paints a gloomy outlook for earnings.

But none of this is reflected in earnings estimates for the next financial year.

“Consensus forecasts are calling for Nifty earnings growth of 13% in FY19 followed by a sharp pick up to over 20% growth in FY20, which could risk being too optimistic," said Abhiram Eleswarapu, head of India equity research at BNP Paribas.

In its 2019 outlook report, BNP Paribas said that India’s earnings growth potential is around 14-15%, slightly higher than nominal GDP (gross domestic product) growth, and not 18-21% as current consensus seems to suggest.

“We are sceptical about the growth estimates in financials, healthcare and consumer discretionary companies," it added.

Similarly, analysts at ICICI Securities Ltd said that in the current scenario of low industry credit growth and a hardening in the cost of borrowing, the benefits of financial and operating leverage are missing. So, a sharp acceleration in earnings seems unlikely. The brokerage expects Nifty earnings to grow at around 15% in the medium term.

Consensus estimates, however, are still to account for some of the negative factors that have cropped up in recent months. As such, investors may be in for an unpleasant surprise next year.

To be sure, there are some positive factors that could support overall earnings growth in quarters ahead. For instance, the recent correction in crude oil prices, if sustained, can result in substantial cost savings for a number of industries. Besides, slowing down of the non-performing assets recognition cycle can boost bank earnings. But the negatives seem to outweigh the positives for now.

Meanwhile, a recent survey by Bank of America Merrill Lynch showed that fund managers are now most bearish on the global economy since the 2008 financial crisis.

A net 47% of them think global profits will deteriorate in the next 12 months. This is a major reversal from a net 39% saying profits would improve a year ago.

A global slowdown can weigh on Indian companies’ earnings, since a number of them depend on exports and have large overseas subsidiaries as well.

In short, investors should take earnings estimates with a pinch of salt and tread with caution.