Earnings forecast for 2017-18 could be overestimated

MUMBAI: Indian stocks have set record after record this year even as earnings growth have remained lacklustre. Some analysts warn that consensus earnings estimates of Indian companies are still too optimistic about growth prospects and may need to be slashed further.

Sensex and Nifty’s fiscal year 2018 consensus earnings per share (EPS) estimates have been pared by 11.1% and 9.45%, respectively since the start of the fiscal year and are now at ₹1,528.89 and ₹494.46, according to data compiled by Bloomberg.

The difference between stock prices and corporate earnings in India has widened further this year as GDP growth slumped to 5.7% in the June quarter, the slowest pace in three years.

In a note on November 15, UBS Securities India Pvt Ltd, said that consensus’ Nifty earnings growth estimate of 13% year-onyear for 2017-18 implies 20% growth in the second-half of the fiscal, which appears too high.

“Top-down, we expect 7%/13% growth in earnings in FY18/19 vs. consensus’ 13%/21%, implying the potential for cuts,” UBS analysts Gautam Chhaochharia and Sanjena Dadawala said in a note.

“The consensus estimates do appear to be at the higher end, and downgrades are not ruled out,” said Ajay Bodke, CEO and chief portfolio manager Prabhudas Lilladher Pvt Ltd. The brokerage expects Nifty EPS to come in at ₹479.6 and ₹568.1 for fiscal years 2018 and 2019, respectively.

The upgrade of India’s sovereign ratings by Moody’s Investors Services is a positive development, said Bodke. “As risk premium for India comes down, the borrowing costs from overseas market will come down too. The currency also is likely to strengthen on this note, as the rating gets better. There would be likelihood of more FII flows in equities as well as debt.”

Moody’s on Friday upgraded India’s sovereign ratings to Baa2 from Baa3. It changed the outlook for India’s rating to stable from positive.

On a cumulative basis, Nifty earnings have declined by 1% from a year earlier in the first six months of the current fiscal, Deutsche Bank pointed in a November 15 note. “To meet the current growth expectation of 14% yoy , 2HFY earnings need to increase by 28%,” Deutche Bank analysts Abhay Laijawala and Bijay Kumar said in the note.

An analysis of 99 of BSE 100 companies that have reported their September quarter earnings showed that 55 of them beat analysts’ estimates on net profit, while 44 fell short.