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Corporate earnings estimates, which have already taken a knock this year, may be cut further, analysts said, as disruptions caused by the covid-19 outbreak continue to impact demand and corporate balance sheets. Weak earnings growth and high valuations could also slow the tearing rally in stock markets, which have gained more than 40% from their March lows.

Nifty consensus earnings estimates for FY21 and FY22 have been slashed by 13.44% and 22.06%, respectively, since the beginning of FY21, according to Bloomberg estimates.

There is a risk of further cuts, according to analysts at Nomura. “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 broking firm said in a report.

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

Consensus earnings per share (EPS) estimates for the Nifty have seen record cuts after the March quarter results, broking firm CLSA said in a note. January-March was the 22nd consecutive quarter of earnings cuts. Autos, banks, metals, midcaps and state-owned oil names were hit most, it said. Auto companies faced 32-68% cuts in earnings estimates for FY21, while banks and financials saw cuts of 28-42%.

Credit Suisse has a similar view. “Nifty FY20 EPS was Rs400, down 9% YoY to the same level as FY18, and 40% below Rs650 where it started 2.5 years ago. Apart from pharma and telecom (least impact of lockdown), every sector saw cuts to FY20. Consensus expects FY21/22 growth at 16%/38%," it said in a report.

Data from Capitaline showed that 35 Nifty companies, excluding banks, financials, oil and gas, saw net sales decline 6.98% year-on-year in January-March 2020, the lowest in at least 20 quarters, from a growth of 15.05% in Q4 FY19.

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