Editorial: Earnings downgrades

Jan 10 2014, 03:07 IST
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SummaryA few more could be around the corner

While the Street will continue to look for changes in the capex cycle, there aren’t too many encouraging signs at the moment given that loan growth has been remarkably subdued at 15% levels even though this is busy season; while the rate of investment starts is up 29% on a qoq basis, this is led entirely by public sector investment while private investments are declining. And though the capital goods piece is going to disappoint with a sharp 20%-plus fall in profits, consumer firms too won’t be turning in the kind of numbers they have—continuing high inflation has meant a fair amount of down-trading by consumers, and even the ever-reliable rural market is slowing. If the consumer durables sector is tipped to do well, it would be driven by a good performance from Tata Motors’ JLR operations; indeed, if the 30 Sensex companies see a fairly decent jump in earnings of 13% yoy in the December quarter, it will be thanks to the strong showing by some of the overseas subsidiaries like a Tata Steel Europe.

Just a handful of companies will account for the bulk of the profits—oil marketers will probably post losses, banks as a group will see earnings fall, as will utilities; a weak rupee will boost profits of IT and pharmaceutical firms. At an aggregate level, India Inc is unlikely to turn in encouraging results despite a helpful base effect—whether it’s commercial vehicles or cement, data shows companies are reeling under the downturn in the economy. Which is why another downgrade of earnings for FY14 can’t be ruled out. BofA Merrill Lynch believes Sensex earnings for FY14 will come in at sub-R1,300 while for FY15 they would be downgraded to R1,425 from R1,580. That would make the market a bit more expensive—at 20,713, the Sensex trades at 14.5 times FY15 estimated earnings—but not prohibitively so. And should there be a strong government at the Centre in five months’ time, the expectation of a turnaround in the economy alone would be enough for analysts to want to go back to their spreadsheets.

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