Mumbai: The trend of earnings downgrade continues to worry analysts in the current fiscal year, dashing hopes of a recovery anytime soon.

Despite expectations of a revival in profit growth for Indian companies in the March quarter (Q4), results across most sectors were below expectations. Earnings estimates by analysts have been cut not only for fiscal 2019, but also for the next one.

According to Bloomberg, for fiscal 2019, earnings estimates for Nifty 50 have been cut 3.83% since April. For fiscal 2020, the estimates are down 4.22%. Decelerating macros such as increasing bond yields, higher crude prices, rising inflation and a depreciating rupee are posing bigger challenges for corporate earnings growth.

In this year, crude prices jumped 16%, with a rise of 4.57% in May alone. According to analysts’ estimates, an increase of $10 per barrel in crude prices affects inflation by 50 basis points, assuming full pass-through of oil prices to consumers. Besides, the rupee has slipped 4.76% in 2018 so far, including a 1.09% loss last month.

Nischal Maheshwari, head of institutional equities at Edelweiss Securities Ltd, said there were four big concerns for corporate earnings. Rising input prices are weighing on margins. In comparison, between FY14 and FY17 lower input costs were a major growth driver for manufacturing firms. Rising interest rates ahead of the growth cycle and a lack of capital in public sector banks could hurt growth. Maheshwari says tightening global liquidity is weighing on international trade and a revival may boost earnings growth. 

“Given the prolonged downturn that we have had, it is difficult to exactly time the earnings recovery," Maheshwari said. “Having said that, FY19 certainly seems to be a much better year from the earnings perspective. However, the problem is FY19 Nifty earnings per share (EPS) forecasts are already quite high—around 25%—and, hence, there is certainly some risk to the same."

According to Kotak Institutional Equities, India’s macro is weak, its politics uncertain and valuations are rich—not a conducive combination for an earnings pick-up. The brokerage expects members of the Nifty-50 index to grow profits by 23% in FY19 from a lower base of FY18, post the earnings cuts in the Q4 FY18 results season. 

Motilal Oswal Securities Ltd estimates Nifty EPS for FY19-20 at 579/693, versus earlier 577/695. However, it said the estimates may be driven by a few cyclicals and, to that extent, have significant downside risks. Amid the continual earnings downgrades, premium valuations of Indian stocks are a concern for analysts. Sensex is trading at 17.68 times the expected earnings this fiscal. That makes it the most expensive among peers. The MSCI Emerging Markets index trades at 11.64 times. “India is trading at 10% above its long-term average. Hence, valuations on an absolute basis are still expensive," Maheshwari said. “However, it is not an India-specific phenomenon, rather an emerging market one."

Kotak Institutional Equities sees the valuation of the Indian market to be rich and said there was a significant disconnect between high-equity market valuations and a weak macro economic outlook.

“The Indian market has traded historically at much lower levels (full-float basis)," the firm said in a note on 31 May. “The improvement in India’s macroeconomic position in FY15-17 and the loose monetary policies of the global central banks in terms of low policy rates and various rounds of quantitative easing probably sustained valuations, despite significant earnings disappointments over the same period."

However, a normal monsoon from June-September, including the crucial month of July, is expected to boost rural consumption demand, particularly in the agricultural sector. “A prosperous farm sector will help alleviate some of the political risks this year given that farm unrest has been one of the top electoral issues for the 2019 general elections," Nomura said in a note on 30 May. “A good rainfall should marginally allay the nationwide call for expensive farm loan waivers."

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