How soon will higher EPS estimates translate into actual growth?2 min read . Updated: 25 Sep 2019, 10:18 AM IST
- One-year forward consensus Bloomberg EPS estimates for the Nifty50 index jumped to ₹688 following the tax cuts after having hovered at ₹640 in the recent months
- A number of brokerages have revised their earnings per share (EPS) estimates, anticipating a turnaround in corporate confidence
A massive surge in key benchmark equity indices was one indicator of the Street’s euphoria following the announcement of a cut in corporate tax rates. Another indicator was a plethora of brokerages revising their earnings per share (EPS) estimates, anticipating a turnaround in corporate confidence.
Data shows that one-year forward consensus Bloomberg EPS estimates for the Nifty50 index suddenly jumped to Rs688 following the tax cuts after having hovered at Rs640 in the recent months.
But when it comes to India Inc’s earnings revival, it is easier said than done. While the sentimental impact of corporate tax cuts has already played out on EPS estimates, how soon actual earnings growth improves is anybody’s guess. That is simply because improvement in earnings would depend on how these tax savings are used by the companies.
Some options are: de-leveraging of balance sheets, price cuts/higher promotions to spur demand, higher payouts to shareholders through dividends and higher capex investments.
Abhiram Eleswarapu, head of India equity research at BNP Paribas says, “We feel some of them may not be able to pass them onto consumers, others may use the proceeds to fund expansions/new investments, while a few others may offer selective price discounts to spur demand. In the autos space, we think there isn't much scope for further discounts. That may also apply to other categories within consumer discretionary. Consumer staples companies, on the other hand, may choose to increase the grammage to improve volumes, especially in categories where demand is elastic."
According to foreign broking house Morgan Stanley, companies may choose to invest these savings in new plant and equipment given an additional tax break for new investments, 17% in lieu of 25% earlier. Also, investing in expansions would kick start the long-awaited recovery in private capital expenditure cycle. However, given that many industries are already dealing with situation of overcapacity, a broad-based revival is unlikely in the near term.
Now, how companies utilize these funds would partly decide EPS improvement. What would also have a bearing on the future course of earnings are external factors such as movement in oil prices and recovery of global demand. Export focused sectors would also be watching the rupee’s movement.
Meanwhile, some analysts believe that now that India is almost on a par with many of its Asian peers on corporate taxes, it would lead to a re-rating of valuations. On a one-year forward price-to-earnings basis, the MSCI India index is currently trading at 17 times. Valuations have come-off from their peak of 19 times but India trades higher than MSCI Asia Ex-Japan’s multiple of 12 times.
“In short, while the government is taking steps to boost overall confidence, for companies’ EPS to actually improve beyond the tax cuts; it could take a few months at least," Eleswarapu said.