More downgrades than upgrades after June quarter results

More downgrades than upgrades after June quarter results

The companies that make up the Bombay Stock Exchange (BSE) Sensex have, in the aggregate, missed their earnings estimates for the June quarter. Earnings growth for the 30 Sensex companies has fallen short of the Bloomberg consensus estimates, according to research from Edelweiss Securities Ltd. That hasn’t had much of an effect on the market though and the Sensex has been moving up during the results season. The Sensex’s trailing price-earnings (PE) multiple has also gone up, from an average of around 20 in May to 21.8 currently. That seems to indicate that it is PE expansion rather than earnings growth that has driven the market up. The PE expansion has, of course, been driven by the return of foreign institutional investor (FII) inflows. It’s interesting that these inflows have continued in spite of monetary tightening by the Reserve Bank of India (RBI) and the absence of significant earnings upgrades. That seems to indicate it is liquidity spilling over from developed markets that is driving the market. That’s also evident from the fact that the MSCI indices show that India has slightly underperformed the Emerging Markets Asia index during the last three months.

Also See Off The Mark (Graphic)

While most brokerage houses have retained their fiscal 2011 and 2012 earnings forecasts, a few have revised them upwards. For instance, a report by Edelweiss Securities says, “Fiscal 2011 Sensex earnings were upgraded to Rs1,070 (from Rs1,050 at the start of the earnings season); for fiscal 2012, they remained broadly same at Rs1,263." Motilal Oswal Securities Ltd upped its earnings estimate for the Sensex for fiscal 2011 by 1% to Rs1,067 while it reduced its fiscal 2012 estimate by 1% to Rs1,263.

But the aggregates may be hiding the real picture. The Edelweiss data shows that only 12 of the Sensex stocks beat their consensus estimates. And although the brokerage has increased its earnings estimate for the Sensex companies for the current fiscal, a large part of that is on account of an upward revision in Tata Motors Ltd’s earnings. Post-results, it upgraded only two companies and downgraded seven. Motilal Oswal has been more optimistic, upgrading 11 and downgrading 14. For fiscal 2012, the proportion is even worse, with eight upgrades and 17 downgrades. And the outlook for metals, which contributed significantly to the earnings growth in the June quarter, is uncertain, based on global demand.

The market is currently trading at around 17.2 times fiscal 2011 earnings estimate and around 14.5 times fiscal 2012 estimates. We have the government divestment programme ahead of us and perhaps more rate hikes from RBI. On the macro front, exports have started to slow, while the April deadline for the introduction of the goods and services tax (GST) is unlikely to be met. At the moment, there are few triggers that could take the markets higher, apart from liquidity.

Graphic by Naveen Kumar Saini/Mint

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