Six of 10 Nifty100 firms see earnings cut after Q1

Analysts say earnings downgrades are the steepest in recent times

Factoring in the likely disruption due to the introduction of the goods and services tax (GST), the Street had lowered its estimates for the June quarter (Q1) earnings.

Yet, to the surprise of investors, the performance of more than six out of 10 CNX Nifty100 companies fell short of even these reduced estimates. What’s more, there are an equally large number of companies that saw their earnings estimates lowered. And analysts say there could be more bad news.

To begin with, only 40 per cent of the companies in the Nifty100 universe managed to meet or outperform Street expectations. Sun Pharma, Emami, Dr Reddy’s Laboratories, GlaxoSmithKline Pharmaceuticals and Hindalco are among the companies whose Q1 earnings were significantly short of expectations. A deeper reading of the numbers suggests that much of the underperformance was because of sectors such as pharmaceuticals; banks, including non-bank finance companies; heavy engineering; and automobiles. The outperformers, which included Bharat Electronics, JSW Steel, NMDC, UltraTech, and Cipla, bettered their June quarter earnings per share (EPS) estimates by a steep 30-60 per cent.

A majority of analysts have again slashed their EPS estimates for FY18. Sixty-two of the Nifty100 companies witnessed downgrades in their EPS estimates since June 30. The highest earnings downgrade is 59 per cent, in the case of Steel Authority of India (SAIL), while the average decline in earnings is seven per cent for these 62 companies. Similar to the list of companies that fell short on earnings expectations, the top names that saw their earnings being downgraded include SAIL, Sun Pharma, Lupin, Dr Reddy’s, Bank of Baroda, and Tata Motors. The sectoral bias for FY18 EPS downgrades also mirrors the sectors that underperformed on the earnings front in Q1. On the other hand, only 38 companies saw an upgrade in earnings (of those just Tata Steel’s earnings increased in double-digits, at 11.1 per cent), with their average increase at 2.6 per cent.

A report by ICICI Securities says that the performance of the top 50 Nifty companies was more dismal. “Earnings de-grew in the June quarter after five quarters of positive growth. Free float Nifty50 earnings contracted by 4.7 per cent year-on-year, largely driven by pharmaceuticals (down 53 per cent year-on-year), energy (-13.9 per cent) and automobiles (-22 per cent). Major contributors to earnings upside were metals (up 142 per cent), retail lenders (23 per cent) and fast-moving consumer goods (or FMCG, up 7.7 per cent),” the report adds.

Sanjeev Prasad, senior executive director and co-head, Kotak Institutional Equities, in a note coauthored by him, states that further downgrades cannot be ruled out if the economy fails to recover quickly from the temporary disruption arising out of demonetisation and the GST. “We do not rule out an extended slowdown in consumption, hiring and investment in the informal economy if it is unable to cope with the changes arising from the GST and resultant formalisation of the economy,” he adds.

Foreign research houses have a similar view on India’s corporate earnings. Neelkanth Misha, managing director and India equity strategist, Credit Suisse, states that the pace of earnings downgrade has been on the rise after the Q1 results. The cut was about four per cent, significantly higher than subtwo per cent cuts to the FY18 EPS estimates seen in the past three quarters. He anticipates more downgrades for health care, cement and FMCG companies and warns that consensus estimates seem high for banks due to expectations of lower bad loan provisioning and a return to growth.

Ironically, India stands out as the country with highest one-year forward earnings downgrade at about eight per cent so far in FY18 — the highest among global peers, which markets are possibly ignoring. “India has been the best-performing emerging market during the same period which further validates our thesis that investor focus has shifted from near-term worries to longerterm optimism while continued institutional flows support equity markets,” ICICI Securities’ analysts caution. For Prasad, it is the valuations of the Indian market which are equally worrisome. He states that valuations are rich in the ‘growth’ parts and fair-tofull valuations in the ‘value’ parts of the Indian market. “We believe earnings will hold the key to market performance, given the limited scope of re-rating in most parts of the market. Also, we note that margins and profitability (FY17 and FY18-19 estimates) are at historically high levels, which may present headwinds to earnings,” he adds.

Experts, time and again, have been warning about the Indian stock markets’ valuations not matching the underlying fundamentals. While some say that the current round of corrections is a combination of weak global sentiments and constantly faltering earnings growth, it needs to be seen how much attention investors pay to these warning bells.

A majority of analysts have again slashed their EPS estimates for FY18. Sixty-two of the Nifty100 companies witnessed downgrades in their EPS estimates since June 30. The highest earnings downgrade is 59 per cent, in the case of SAIL, while the average decline in earnings is 7% for these 62 companies