Earning estimates for benchmark indices may dip

With a number of measures announced in Budget 2012-13 likely to hurt earnings of several key companies, earnings estimates for the benchmark indices could be lowered. Among the bigger companies whose profit could take a bit of knock are ONGC and ITC.

Also, the government?s huge borrowing programme could impact the bottom line of banks.

According to Jyotivardhan Jaipuria, MD & head of research at BofAML: ?Due to persistent cost pressures, companies may see limited volume gains, which are reflected in the earning expectations for 2012-13 at this juncture.? In his opinion, the consensus Sensex earnings estimates, which depict earnings growth of 14-15% for FY13, may be trimmed by about 1% due to company-specific issues. In an investment note, Citi said the Budget was unlikely to drive the market in the near-term. While it expects infrastructure, utilities and power stocks to benefit from an investment focus, Citi sees a 1-2% fall in earnings across companies with the energy sector taking the ?largest hit?.

BNP Paribas believes the valuation for the Sensex may fall from current levels of 13.6 times one-year forward P/E to a range of 12-12.5 times, due to a potential delay in the cyclical recovery. It cites the lack of fiscal consolidation and high inflation as factors that could delay policy easing by RBI. Earnings estimates for the Sensex for 2012-13 range between R1,258, as put out by Motilal Oswal, and R1,200, as envisaged by Bank of Amercia Merrill Lynch, in reports released in February.

?The quantum of the impact would depend on how much of the duty burden is being passed on to the end consumers. That could be tricky for companies like ONGC because of the subsidy issue. However, we expect the consensus Sensex earnings for FY13 to decline as low as 9-10% from the current expectations of 12-15% before bottoming out, ? said the research head of a brokerage.

In the Budget, finance ministry announced a hike in cess on domestic crude production from R2,500 per tonne to R4,500 per tonne. This is expected to have significant effect on the profits of upstream oil companies, namely, ONGC, Cairn India and Oil India. The earnings of Cairn and ONGC may fall by as much as 8-11%. Collectively, both these large-cap stocks account for 3.75% of the 50-share Nifty index.

The Budget also announced a 10% ad valorem increase in the excise duty on cigarettes, while modifying the size based excise duty structure. Motilal Oswal reduced ITC’s FY13 volume growth assumption from 6% to 3%, offset by price hike expectations from 6.2% to 12%. Similarly, the announcement of making the partnership pharma companies eligible for MAT has weighed on the stock price Sun Pharma.

As for BHEL, absence of expected increase in the customs duty on imported power plant equipments for ultra and mega power projects, which would have benefited the domestic manufacturer, has weighed heavy. The stock has lost the most among the Sensex and Nifty constituents since the Budget was announced last Friday.

Notwithstanding these likely dampeners, some of the Budget proposals are expected to benefit companies from power, steel and auto segments. The removal of import duty on thermal coal and permission to raise funds through external commercial borrowings(ECBs) are likely to help power producers.