Corporate earnings continued to disappoint, dashing hopes of a much-awaited recovery with Nifty earnings for the March quarter touching a five-quarter low of 400.69 per share. The divergence between estimates and actual earnings per share (EPS) has been in the range of 32-40% in the past three quarters, according to Bloomberg data.

Earnings growth is critical for a sustained rally in the markets at a time when domestic equities continue to enjoy lofty valuations levels despite lack of any fundamental support.

Major challenges such as rural stress, liquidity shortage and weak pick up in capex cycle have been reasons for companies falling short of their expected earnings, according to analysts.

“Uncompetitive rupee value, intermittent volatility in oil prices, poor investment decisions of the past, few policy actions, slippages or accumulation of NPAs, economic slowdown, liquidity squeeze, slow judicial process, rural income slowdown and over bullish analyst estimates are some key reasons for the actual Nifty earnings falling short of estimates," said Deepak Jasani, head of research, HDFC Securities Ltd.

According to Nomura, Nifty universe reported a 9.1% annual earnings growth for the March quarter. However, excluding financials, earnings fell 3% year-on-year, in line with consensus estimates. Excluding financials, earnings growth was 5.4% from a year earlier for FY19. Earnings missed analysts’ estimates for consumers, autos, healthcare and media, and were ahead for cement, utilities and IT services.

Analysts said a key disappointment in Q4FY19 earnings was an across-the-board annual drop in margins largely due to input cost pressures resulting from commodity prices, appreciating rupee leading to fall in EBIT (earnings before interest and taxes) margins for IT companies, competitive intensity in discretionary consumption space and lower gross refining margin (GRM) for oil marketing companies.


“Earnings growth for Nifty has remained in single-digits for the past five years...Although we remain constructive on medium-term earnings growth on a low base, near-term slippages due to growth slowdown cannot be ruled out," Nomura said in a note on 7 June.

According to the Japanese brokerage firm Nomura, the intensity of consensus’ earnings cuts in FY19 has been higher than in the past two years. For Nifty universe, FY19 earnings were 11.4% lower than the estimates at the start of the year. “Consumption growth is adversely impacted by slower income growth, higher oil prices, liquidity tightening caused by consumption," it said.

Other analysts largely agree that negative earnings surprises continued as majority of companies missed consensus estimates for net profit and EBITDA (Earnings before interest, taxes, depreciation and amortization) estimates while sales were mostly in-line, which led to earnings downgrade in FY19.

Earnings estimates by analysts have been cut not only for fiscal 2020, but also for the next one. According to Bloomberg, for fiscal 2020, earnings estimates for Nifty 50 have been cut 1.6% since April. For FY21, the estimates are down 1.9%. “Global integration of businesses, disruption in business models, regulatory overkill, over investment in capacities in the past without considering competitiveness, promoter incapability to face turbulent times/shady promoter motives, availability of liquidity, over leveraged balance sheets are some reasons for continuous earnings downgrade," said Jasani at HDFC Securities.

Other factors that may impact corporate earnings growth include deficient monsoon, global trade war, deteriorating macro situation and weak local currency.

Despite the cut in FY20 Nifty EPS, Edelweiss Securities Ltd believes the street estimates are still quite high. “This, along with high valuations, renders us cautious on the markets," said analysts at Edelweiss.

Amid the continual earnings downgrades, premium valuations of Indian stocks are a concern for analysts.

Analysts said positive sentiment, expectations of reforms and a potential revival in domestic flows could keep valuations rich. “At 20 times FY20 EPS, Nifty is trading at 15% premium to long period average. Optimism on stable government and potential reforms, earnings recovery and FII flows has driven Nifty to an all-time high," Motilal Oswal Finacial Services Ltd said. The brokerage’s NiftyFY20/21 EPS estimates remain unchanged at 604 and 706, building in growth of 25.6% and 16.9%, respectively but said the direction of earnings revision for the broader markets still remains downward.


nasrin.s@livemint.com

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