Forced by weak numbers for fourth quarter running; analysts say more bad news to come
A dismal September earnings season — in which aggregate sales for the Sensex fell for the fourth consecutive quarter, a first — has forced analysts to downgrade earnings estimates for both this year and FY17. This is the third straight year the Street has been downgraded on profit estimates and it may not be the end of it. “We see another two to three quarters of earnings cuts until the economy gathers momentum,” Kotak Institutional Equities (KIE) said in a report.
KIE estimates the increase in FY16 earnings for the Nifty set of companies will be 8% compared with 14% earlier. The brokerage also believes the Nifty FY17 EPS could come in at R500 rather than the R513 estimated currently.
On Tuesday a fund managers’ survey by Bank of America Merrill Lynch showed the outlook for India has been lowered from overweight to neutral, the first time since October 2014. Investors seem to prefer China, which was upgraded to overweight.
BofA-ML noted the earnings season had seen a sharp downgrade in FY16 Sensex EPS growth from 16.5% to 12.5%. “We expect further downgrades to FY16 consensus,” the brokerage wrote.
While expectations were always tempered, given the challenging economic environment, most heavyweights from Idea to ITC and Vedanta to Wipro missed estimates.
As analysts pointed out, the profit numbers would have been lower had it not been for several one-off items such as those for NTPC, Tata Steel or Bharti Airtel.
Despite lower commodity prices having helped bring down costs, companies weren’t able to make meaningful money because weak demand, especially in rural India, stymied top line growth. Moreover, consumer goods companies and two-wheeler manufacturers needed to step up promotions and discounts to attract customers. Among those that gained from lower costs and turned in a better performance was Maruti Suzuki — the carmaker’s earnings grew 42% to Rs 1,225.6 crore.
However, the lack of consumer confidence was visible in the subdued volumes at Asian paints, ITC and Hero MotoCorp. The muted demand in rural markets was seen in the huge miss by Mahindra and Mahindra Financial Services, which missed earnings estimates by 25% and saw a deterioration in asset quality. Ramesh Iyer, MD, M&M Financial Services, observed on an analysts’ call that the firm was yet to see any major fundamental shift for growth returning back to normalcy. Hindustan Unilever reported a more than 2% year-on-year decline in e in net profit even as India’s biggest consumer goods company maintained a 6% volume growth for a third consecutive quarter. The company has been resorting to price cuts for the soaps and detergent portfolio for several quarters now. Rural demand remains listless in the wake of flat farm incomes; analysts worry two consecutive weak monsoons will impact consumption spends by rural households.
Weak global trade has also hurt India’s exports while the lack of domestic investment has slowed down job creation. KIE observed risks to earnings have increased due to sluggish operating performance of companies and continued weak macroeconomic conditions. “We see downside risks to our estimates for several sectors without a steep recovery in domestic consumption and investment,” it noted.
Gautam Chhaochharia, head of India Research at UBS, said companies don’t see the need to expand capacity in a weak demand environment. “While the pick-up in private corporate spending will take time, the recovery in infrastructure and could also be gradual as it is only the government that is spending,” added Chhaochharia.
According to Anoop Bhaskar, head, equity, UTI Mutual Fund, in an environment of patchy economic growth, the disappointing earnings performance at large has made value investing a tough task. “Companies performing consistently have seen a substantial re-rating as compared to those that performed in the last five-years but now face operational headwinds affecting their profitability, Bhaskar said. “Consequently, a lot of funds have shifted their focus on companies with better near-term earnings visibility,” added Bhaskar.