Analysts have been quick in downgrading Indian blue-chip companies after their first quarter results. Large caps, such as the State Bank of India, Tata Motors, Bharti Airtel, Maruti and Jindal Steel & Power, have all seen a downgrade by leading brokerages, such as UBS, Goldman Sachs, Standard Chartered, and HSBC, among others.
Even domestic brokerages have remained active in downgrading blue-chips; Kotak Institutional Equities reduced its rating of Nifty companies, such as GAIL, HDFC Bank, Reliance Industries, L&T and IT majors TCS and Infosys.
Such downgrades are expected to continue even for the next two quarters as analysts price in the effect of India?s slowing GDP growth on corporate earnings. In the recent past, there has been an increasing number of downward revisions for India?s GDP.
The Reserve Bank of India (RBI) cut its 2012-13 economic growth forecast to 6.5% from the earlier 7.2% due to a combination of high fiscal deficit, persistent inflation and below-average monsoon.
This revision was followed by economists cutting their economic forecast on India as Goldman Sachs, CLSA and Citigroup, in the recent past, lowered their outlook for India?s GDP to 5.7%, 5.5% and 5.4% for the current fiscal year.
In a previous study by FE, which compared the GDP growth of Indian with corporate earnings for more than two decades, concluded that, on an average, the Sensex earnings have grown 2.2 times that of the economic growth rate.
Currently, the Sensex is trading at 13.6 times its FY13 expected earnings, indicating an earnings growth of 14% compared to the last fiscal. Some analysts believe that earnings downgrade are likely to continue in the next few quarters, albeit at a slower pace than since the beginning of 2011, and may even fall to a single-digit growth.
However, according to Rajesh Cheruvu of RBS private banking, easing input cost pressure and policy rate cuts could trigger an early recovery in the earnings and investment cycle. ?Earnings estimates are expected to turn optimistic post-September quarter results,? he added.
According to Barclays Capital, as of the week ended August 8, consensus earnings estimates continue to slide with an additional 43-bps cut for 2012-13 and 21-bps for 2013-14 since the previous week. For a set of 72 companies from the BSE 100 universe, the consensus earnings have been lowered 89 bps for the current financial year, resulting in an earnings growth forecast of 14%.
