Street sees 19% earnings growth in FY16

Tepid show by firms in FY15 fails to temper analysts’ enthusiasm; many keep door open for downside risks

India’s equity analysts seem to be firm believers of ‘Fortune favours the brave’. Even after a disastrous FY15 that saw their corporate earnings estimates going for a toss, analysts continue to believe India's top 30 companies will be able to grow earnings in double digits in FY16.

Adjusted profits of the 30 Sensex companies declined 2.2 per cent in FY15 as sales grew an anaemic 2.3 per cent. In April last year, analysts had projected a profit growth of 15 per cent.

And, hold your breath, they are now building in a 19 per cent profit growth for Sensex companies in FY16. This is despite the fact that nothing much has changed on the ground and most sectors continue to battle weak demand.

Brokerages, however, have played it safe by saying downside risks remain and further downgrades could happen after the first six months.

Kotak Institutional Equities sees downside risks to its FY16 earnings estimates, as a meaningful recovery in private sector investment is four quarters away. Earnings estimates for 60 per cent of the companies have been downgraded by IIFL and only 25 per cent have seen upgrades. Despite this, the brokerage is estimating a 19 per cent earnings growth for companies under its coverage (excluding energy) in FY16. Motilal Oswal Securities expects Sensex EPS to grow 18 per cent to ~ 1,605.

While IIFL says earnings recovery will be gradual, the brokerage is building in 19 per cent growth in net profit for companies under its coverage (excluding energy). This is predicted on the basis of a revenue growth of 11 per cent in FY16 from 8.8 per cent in FY15 and 90basis point expansion in operating margin. These might seem very optimistic from the current lows, the IIFL report adds, but the margin expansion would be driven by lower interest costs.

Also, with FY15 figures coming in sharply below estimates, the estimates for FY16 have expanded even further, thanks to the low base of FY15. Barclays says while absolute earnings per share (EPS) forecast for FY16 has declined 417 basis points on downward revision since April 1, the base effect of higher cuts to the FY15 EPS have contributed to FY16 EPS growth estimates rising to 21.5 per cent from 19 per cent at the start of the earnings season. Barclays expects BSE 100 companies (ex-energy) to report revenue growth of four per cent and operating profit to grow 20 per cent.

Such earnings projections also disguise the market’s valuation, which possibly will prevent a sharper meltdown. Given the current earnings projections, the Sensex trades at a price-earnings multiple of 16.7 times (one-year forward). The number would look very different if one factored in lower earnings. According to Motilal Oswal, BSE Sensex trades at a PE of 16.7x, which is above its historical averages and at a three per cent premium. Its price/book is at its historical average and trades at 2.7x. Sensex return on equity (RoE) at 16.3 per cent is below the long-period average of 18.2 per cent. According to Bloomberg’s estimates, Sensex earnings per share is estimated to grow to ~1,749 in FY16, a 40 per cent growth from FY15’s ~1,250. Clearly, sharper downgrades are likely in the days to come.

Given this backdrop, India's claim of being the fastest-growing economy in the world seems an empty boast, if the decline in corporate earnings is anything to go by. In the first quarter itself, risks to the economy have increased. A consecutive year of weak monsoon will have a collateral damage on rural India.