Brokerage projects Sensex EPS to be under R1,300, an earnings growth of 8-9%

The market may be close to the bottom of the earnings cycle, but the new financial year is unlikely to be one of recovery.

According to a latest note by the Bank of America Merrill Lynch, 2013-14 Sensex earnings per share (EPS) are likely to be under R1,300, depicting an earnings growth of 8-9%. As a result, the current consensus expectations of 17% bottom-up growth faces facing a risk of downgrades.

Ahead of the last quarter earnings of 2012-13, the brokerage anticipates two key factors to result in the earnings downgrades in FY14. It sees concentration of financials and energy companies that account for half of the Sensex profit growth in the fiscal to lead to downgrades. Further, due to a delay in economic recovery, the expected recovery in margins may disappoint on the back of weak sales growth in FY14 as well as slow interest rate cuts. For the latest fiscal, analysts are building-in an increase in sales growth and margins in energy, metals and some of the auto sectors. ?These sectors are likely to be vulnerable to downgrades,? it said in a note.

In addition to Tata Motors, Tata Steel and Bharti, which drove Sensex EPS downgrades in FY13, even BHEL contributed to earnings revision of FY14. FY13 EPS is expected to stand below R1,200, indicating a 5% growth.

After a subdued December quarter earnings of India Inc, analysts have increasingly turned cautious on hopes of earnings recovery. Besides dismal margins, a further drop in volume growth to its lowest since 2008 financial crisis daunted the experts.

In its results preview after December earnings season, Credit Suisse said the commentary from company managements failed to indicate any bottoming out during the three months to December 2012. The foreign brokerage argued that the slowdown is deepening and widening with the so-far-robust consumption also starting to weaken amid increasing infrastructure slowdown and sustained asset quality issues for the bank.

Similarly, after the last results season, Kotak Institutional Equities pointed out that the underlying trend in volumes, profitability and non-performing loans for the banking space do not signal a recovery.