With the election-led euphoria has settling and the street shifting its focus on the ground realities, including RBIs stern stance on inflation and the financial performance of corporate India, the earnings expectations for the fiscal have witnessed some downward adjustments in the past one month.
The consensus outlook on FY15 EPS (earnings
per share) for Sensex has tapered down by about 0.8% to R1,550 from R1,561 in the past one month, shows a Bloomberg compilation.
Recently, Deutsche Bank acknowledged that revisions for FY15 earnings have moderated. The foreign brokerage, in a recent research note, said its analysts reduced earnings for 30 companies and raised profit expectations for 24 companies, ...reversing the trend of positive FY15 earnings revision ratios in the past four months.
In particular, earnings outlook for companies including L&T, Thermax, ABB, Coal India, Bajaj Auto, HDFC Bank, ITC and JSW Steel were lowered by 18% to 3% by Deutsche analysts. Such downward revisions may continue in the near future as analysts build in the impact of the latest earnings season, which concludes soon and appears generally subdued.
As per a Bloomberg compilation, June quarter numbers of 260 companies have collectively trailed street estimates by 1%, with results of 146 companies disappointing the street.
Companies from sectors like consumer goods, telecom, healthcare and materials failed to meet analyst expectations.
In an earnings preview report, in which it forecasted the June quarter earnings recovery to become broad-based, Bank of America Merrill Lynch had said its analysts are building in strong earnings growth of 17% for FY15, equaling a bottom up EPS of R1,570 for Sensex companies. The brokerage, however, recognised that this estimate might be downgraded to R1,500, reflecting a 12% yoy growth.
Indeed, since the start of the year, Sensex EPS projections have seen a decline from R1,587 in mid-December to R1,566 in March to R1,550 as of Wednesday. The latest number depicts yoy growth of about 15.5%.
As such, continuous descending revisions would indicate extension of a trend that prevailed in the past three fiscal years. Since FY12, every year, the earnings forecast begun with profit growth expectations of about 15%, but subsequently declined towards a range of 7%-10% .
However, a section of the market is of the opinion that it may be too early to expect a substantial downgrade, given that the positive impact of the economic recovery and government policies will be evident in the second half of the year.
Andrew Holland, CEO, Ambit Investment Advisors, expects FY15 earnings to grow anywhere between 15-20%. He argues that the expansion that is based on a GDP growth of 5.5% for the fiscal is going to be back-ended as the impact of economic recovery starts flowing through the operational gearing of Indian companies. Nomura recently upgraded its August 2015 Sensex target to 30,310, citing likely re-rating of market's earnings multiples to 16.4. The brokerage said the target is based on a 'conservative' 12% earnings CAGR (compounded annual growth rate) for four years ending FY17.
Since early February, market valuations have expanded as the street started pricing in the possibility of formation of a BJP-led central government. The Sensex is currently trading at about 15 times its one year forward earnings, in line with its historical average.