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(Photo: Reuters)
(Photo: Reuters)

India Inc's earnings may see sharp spike in downgrades post Q1

The pandemic-induced lockdown has taken a serious toll on demand and hence has caused a concern in corporate balance sheet

MUMBAI : India's prolonged earnings downgrade continues as covid-led disruptions have further weakened an already fragile business environment. The nationwide lockdown imposed to contain the pandemic has taken a toll demand and corporate balance sheets.

Market analysts feel that there could be a sharp spike in earnings downgrade as growth outlook deteriorated further in the June quarter and as most companies have stressed on difficulty in providing guidance or predictions for business growth.

Weak earnings growth and high valuations may break the tearing rally in stock markets, which have gained over 40% from their March lows.

As per Bloomberg estimates, Nifty consensus earnings estimates for FY21 and FY22 have been slashed 13.44% and 22.06% respectively from the beginning of this fiscal year.

According to analysts at Nomura, there is a risk of further cuts to current estimates. “Nifty consensus earnings estimates for FY21 and FY22 are down 27% and 16%, respectively, since the start of FY20… We believe the market is looking beyond FY21 earnings, and on two-year forward basis, the market is at 15.6 times, above the long-term average of 14.4 times," the brokerage firm said.

To an extent, near term earnings are supported by pent-up demand, low raw-material costs, lower discretionary expenditure and no material increase in credit costs but Nomura cautioned that reversal in some of these factors and slower economic growth, there are risks to further cuts in earnings estimates.

Others concur. "Nifty FY20 EPS was 400, down 9% YoY to the same level as FY18, and 40% below 650 where it started 2.5 years back. Apart from pharma and telecom (least impact of lockdown), every sector saw cuts to FY20. Consensus expects FY21/22 growth at 16%/38%," said Credit Suisse.

Foreign brokerage CLSA also said that consensus earnings per share (EPS) estimates for the Nifty have seen record cuts after March quarter results. January-March was the 22nd consecutive quarter of earnings cuts.

According to CLSA, autos, banks, metals, midcaps and state-owned oil names were hit most. Auto companies were hit with 32-68% cut in earnings estimates for FY21 while banks and financials saw a cut of 28-42% in earnings estimates, CLSA said.

To be sure, data provided by Capitaline showed that 35 Nifty companies excluding banks, financials, oil and gas saw net sales decline to 6.98% year-on-year in January-March, at least 20-quarter low from a growth of 15.05% in Q4 FY19.

Similarly, adjusted net profit slipped to at least 20-quarter low to 20.28% in fourth quarter of FY19 from a growth of 10.20% in January-March of FY18.

"Management commentaries suggest more volatility and disruption in earnings ahead with several Nifty companies seeing fresh double-digit EPS cuts for FY21," said Motilal Oswal Financial Services Ltd. The brokerage said it is worried that adverse economic impact of covid-19 is expected to wipe out FY21 earnings growth.

Direction of earnings revision for the broader markets remains downward – with 113 companies in the Motilal Oswal Financial Services coverage witnessing an earnings cut of over 5% and 25 witnessing upgrades of over 5% for FY21.

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