Analysts' fantasy? EPS downgrade begins, 20% may become zilch by March
Excluding corporate banks, Nifty is expected to deliver muted 3.4 per cent YoY growth in FY20.
And analysts say they do not see any respite anytime soon.
Kotak Institutional Equities expects net profit of Nifty50 companies to grow 15 per cent in FY2020, versus 24 per cent estimated at the beginning of the earnings season.
“Q1FY20 results did little to lift the gloom with many companies missing our already low expectations and guiding for weak demand conditions for another 2-3 quarters,” Kotak analysts said.
They pointed out that net profit of Nifty50 companies grew 1.8 per cent year-on-year in June quarter, 0.8 per cent above expectations, driven largely by banks. Ebitda or earnings before interest, tax, depreciation and amortisation declined 3.4 per cent. While financials have been largely faring well, auto, consumption and capital goods sectors have been suffering from weak demand and various sector-specific issues.
Commodity-linked sectors are bearing the brunt of low commodity prices and a slowdown in the global economy.
Kotak analysts do not rule out further earnings downgrades for domestic consumption and investment sectors such as auto, capital goods, construction materials and consumer durables due to continued subdued demand conditions and global commodity and even for the IT sector due to global economic slowdown.
They expect net profit of Nifty50 companies to grow 19 per cent in FY2021.
Motilal Oswal Financial Services has cut Nifty EPS estimates for FY20 and FY21 by 3.9 per cent and 2.9 per cent to Rs 560 and Rs 671, respectively.
It expects Nifty EPS to grow 16.4 per cent in FY20 and 19.7 per cent in FY21. Nearly 74 per cent of the earnings cut is driven by SBI, IndianOil, ONGC, Tata Steel, BPCL and Tata Motors.
For FY20, Motilal Oswal analysts expect 13 per cent profit growth and 16.4 per cent EPS growth for the Nifty pack. As much as 90 per cent of incremental profits in FY20 for the Nifty would come from financials, they said. Excluding financials, they expect Nifty profits to stay flat year on year.
Excluding corporate banks, Nifty is expected to deliver muted 3.4 per cent YoY growth in FY20 (v/s 10 per cent/8.5 per cent in FY18/FY19). SBI alone is expected to contribute around 50 per cent of incremental FY20 Nifty profits.
“The direction of earnings revision for the broader market still remains downward, with 93 companies in the MOFSL universe witnessing an earnings cut of more than 3 per cent and 33 companies witnessing upgrades of more than 3 per cent. As many as 50 companies in our universe have seen earnings estimate cut of more than 10 per cent,” they said.
For the MOFSL universe, at the sectoral level, auto and oil & gas have seen 8 per cent earnings estimate cuts each, while for PSU banks, metals and telecoms firms, earnings estimates have been revised downward by 7 per cent, 10 per cent and 11 per cent, respectively. Cement, capital goods, healthcare, private banks and technology sectors have seen 1-3 per cent cuts, while consumer, NBFC and utilities segments have seen stable earnings estimates for FY20.
Earnings downgrades have been persisting for the past few years, as optimism and hope run high, while economic reality continues to paint a different picture.
“Earnings downgrades have been happening over the past few years,” said Vaibhav Sanghavi, Co-CEO at Avendus Capital Public Markets Alternative Strategies
“We think, Street had very high estimates at the start of the financial year. They expected 23 -24 per cent of Nifty earnings growth for FY20, which is not materialising. It will end up in the 15-17 per cent range, because of broader weakness and persistent slowdown in demand and the economy at large,” Sanghavi said.
That was the popular view.
“It looks far-fetched that the downgrades would stop,” said independent market analyst Ambareesh Baliga.
“They would continue unless we start seeing green shoots. We need to start seeing some upticks. In case the government announces some stimulus measures, and September quarter earnings turn out better, we may see earnings meeting expectations,” Baliga said.
Some disagreed that the downgrades were due to economic slowdown. “It’s not really the economy, it has more to do with the sell-side analysts’ fantasies,” said Saurabh Mukherjea, Founder, Marcellus Investment Managers
“Brokerages begin every year with 20 per cent EPS estimate for Nifty, and end with hardly any EPS growth,” Mukherjea said.