Corporate earnings are being downgraded thick and fast following a disappointing earnings season in which a host of heavyweights and most mid-caps have reported numbers well below Street expectations.
Indeed, the economy may have grown by a smart 7.5% in Q3FY15, but that’s not reflecting anywhere in the performance by companies. For a sample of 1,091companies (excluding banks and financials), net profits were down 10% year-on-year in Q3FY15, on the back of minuscule 1.3% y-o-y rise in sales and a 47% basis points fall in operating profit margin. Even a 234-basis points y-o-y fall in raw material costs (as a share of sales) couldn’t resurrect the bottom line.
As Sanjeev Prasad, senior executive director, Kotak Institutional Equities, observed on Tuesday, even as macroeconomic conditions improve, it’s not translating into better earnings. “Clearly, there was some kind of a disconnect building in between the valuations which had gone to very high levels and earnings which were not really increasing. People are now recalibrating those expectations,” Prasad told a television channel.
KIE now estimates Sensex earnings will grow at just 7% in the current year, against 14% anticipated around August-October and at 13-14% in FY16 from 16% expected earlier.
While the sluggish volume growth of 3% y-o-y at Hindustan Unilever versus expectations of 5-6% and the drop in domestic volumes of 17% y-o-y at Bajaj Auto are signs that consumers are still holding back, the more than 14% drop in the standalone profit at Larsen & Toubro to R1,060 crore for Q3FY15 makes it clear the capital goods cycle is nowhere close to turning. L&T on Monday lowered the guidance for growth in its order book for FY15 to 15-20% from 20% earlier, saying recovery in its domestic business could be up to a year away.
While Reliance Industries’ earnings have been downgraded by 4% for FY15 over the last one month, with analysts pricing in the fall in the price of crude oil, in the case of Bajaj Auto too, earnings estimates have been lowered for 4% with demand expected to remain weak.
Following a relatively poor Q3FY15 in which its African operations again dragged down the profits, forecasts for Bharti Airtel’s consolidated Ebitda have seen a 3-4% cut while consolidated earnings have been pruned by 8-16% for FY16.
Analysts are now pencilling in only a single-digit volume growth for HUL and only a modest expansion in margins flowing through from lower raw material costs, since prices of several products have been lowered.
With Tata Steel having reported a fall of 69% y-o-y fall, analysts have trimmed the Ebitda estimates for FY15-17 by 9-16% thanks to sliding iron ore prices, aggressive dumping of steel by China and a declining cost curve arising out of the strength in the dollar.
Bank of Baroda and Punjab National Bank have seen sharp downgrades, of 12% to 18%, for FY15 given concerns of asset quality; there has been an increase in both non-performing assets and restructured assets in Q3FY15. Consensus expectations on the earnings potential of corporate India for FY15 and FY16 have been tempered; Sensex consensus earnings per share (EPS) estimates have come off 1% and 3% to Rs 1,792 and Rs 1,827, respectively, since January 2015.
According to Andrew Holland of Ambit Capital, the Q3 numbers of corporate India, while failing to meet market expectations, aren’t “alarming”.
“With lower commodity prices, the margin improvement is already under way. Financial gearing and substantial expansion of top line will follow the on-ground recovery going ahead,” Holland said.
The Sensex lost 490 points on Monday and ended in the red for the seventh consecutive day.