The pandemic may help improve the accuracy of India’s analysts, who are guilty of overrating the nation’s earnings potential for years. That’s the view from ICICI Securities Ltd., which says that consensus one-year forward forecast for earnings-per-share on the Nifty 50 index has been overestimated by about 20% on average since FY14.
The discrepancy may reduce as a bleak economic outlook in the wake of the virus outbreak is prompting analysts to scale back their predictions, Vinod Karki and Siddharth Gupta of ICICI wrote in a note Friday.
Analysts have slashed their forward earnings estimate for the Nifty index for FY21 by 30% so far. Similar cuts seen when optimism turned into fear during the global financial crisis led to the estimation error being reduced to zero by 2010, Karki and Gupta noted. The same dynamic could play out amid the pandemic, bringing estimates closer to reality.
“Behavior post GFC indicates estimation error could reduce significantly, assuming the base case of an economic revival in FY22,” they wrote.
Companies on the Nifty index saw profits slump 53% year-on-year in the quarter ending March, while the consensus estimate was for a 7.4% gain.
The overestimation over the years has been driven, among other things, by expectations — that have still failed to materialize — of a revival in private spending following Prime Minister Narendra Modi’s landslide poll victory in 2014, according to ICICI.