Photo: Mint
Photo: Mint

The slippery slope of earnings downgrades

The favourable monsoon forecasts should act as an additional boost to consumption

Despite the promise of a resurgence in profit growth in the March quarter, the just-ended fiscal year has been disappointing when it comes to corporate financials. A second straight year of poor monsoon leading to drought, stagnant investment demand, commodity price meltdown and a banking system tottering on the edge of a crisis stymied all dreams of double-digit growth.

Indeed, as the chart clearly shows, earning estimates have been repeatedly cut not only for fiscal year 2015-16, but also for the current fiscal year. Since the beginning of March 2015, Sensex earnings per share (EPS) for FY16 have been pared by a fifth. Looking at it another way, Sensex EPS growth in FY16 is forecast to be less than 3%.

The cut in FY17 estimates has been even sharper.

According to Motilal Oswal Securities Ltd, state-owned banks have seen the deepest cuts—some 78% since March 2015—followed by metals (67%) and capital goods (42%).

That said, there are some mitigating factors which might see earnings growth pick up in FY17. For one, the full burden of the banking system clean-up is expected to show up in March quarter income statements; that will throw up a hugely favourable base for earnings next year.

Second, the favourable monsoon forecasts should act as an additional boost to consumption.

As Mint reported on Wednesday, some companies such as Maruti Suzuki India Ltd are already upgrading their sales forecast. The Seventh Pay Commission awards that will kick in later this year is another factor.

Third, there is evidence of volume recovery in sectors such as cement and sales growth in packaged consumer goods, according to Motilal Oswal Securities’ estimates. Moreover, commodity prices too have recovered from their bottom, which should fortify the earnings of metal producers.

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