Downgrade risks mount for earnings outlook on oil, rupee

The rupee’s longest rout since 2000 and oil’s surge to a fouryear high have put earnings estimates of Indian companies at the risk of downgrades.

Analysts have boosted the average profit forecast for NSE Nifty50 Index companies by 9.2 per cent this year, shrugging off a 12 per cent slump in the gauge since August.

But history suggests the divergence won’t extend for long, and the growing stress in Asia's third-largest economy may soon translate into lower projections.

Not that a weaker rupee is bad for all Indian companies — exporters including software producers and drugmakers will gain in local-currency terms. Still, the net impact on the broader corporate sector may be negative because of higher import bills. Add to that the tighter local-funding conditions, and profit estimates begin to appear optimistic.

“Key factors are rising input costs, volatile crude prices, rupee depreciation and tightening liquidity, all catalysts for market de-rating,” analysts led by Dhirendra Tiwari at Mumbai-based Antique Stock Broking wrote in a note. The brokerage expects earnings growth for Nifty companies to be 2.8 per cent on year in the fiscal second quarter, much slower than the 13 per cent expansion seen in the April-June period.

Demand in the world’s fastest-growing major economy is cooling after back-toback rate increases by the central bank, prompting policy makers to pause the hiking cycle in October despite the currency’s free fall. A default by a systemically important non-banking finance company aggravated the sell-off in stocks, which were already reeling under a tumbling rupee and elevated prices of crude oil — the nation’s top import.

“Rupee depreciation and higher crude prices will further widen the currentaccount deficit and pose a risk of higher inflation,” Pankaj Pandey, the head of research at ICICI Securities, wrote in a note this week. “There could be a downward revision in earnings across sectors post the adverse movement in macro parameters.”

Here’s what brokerages and investors expect from the September-quarter results season that kicks off Thursday with Asia’s top software exporter Tata Consultancy Services.