Corporate earnings for June quarter are not fully complete, but it is important for investors to do a round-up as many key companies have reported numbers. Amid concerns of higher than average valuations for equity markets and slowing inflows, it is important for corporate earnings to hold up their end of the bargain. In the long term, markets are slaves to earnings. So, how did earnings perform? Well, an interim earnings review shows that numbers have met modest expectations.
Importantly, at the halfway mark for the larger stock universe, the trend in earnings revision still remains skewed in favor of downgrades and has accelerated at the margin. This just goes on to show the weak underlying operating environment. Of the 28 companies surveyed in 30-share Nifty, the signal that we are getting is that earnings have been largely in line with estimates. Unfortunately, the consumption demand outlook has turned weaker. The only bright spot is private sector banks while cement companies seemed to have given a positive surprise on realization front.
Of the 28 Nifty companies that have announced their earnings as on August 2, about 67% have either met or exceeded most estimates on the profit front. The earnings upgrade/downgrade ratio has, however, declined sequentially. One should avoid EBITDA comparison in this quarter i.e April to June as there have been changes pertaining to the implementation of Ind-AS-116 standards.
Sales, and PAT for the 28 Nifty companies have grown at 8%, and minus 1.9% YoY. This was against estimates of about 6% sales growth and profit rise of 1.1% YoY, respectively. "Among the Nifty constituents, Tata Motors, UPL, IOCL, Axis Bank, Vedanta and Tech Mahindra missed our PAT estimates, while Bharti Infratel, IndusInd Bank, Asian Paints, JSW Steel, Reliance Industries and Zee Ent. reported better-than-expected numbers," says Gautam Duggad, Head of Research, MOFSL.
He added that so far, MOFSL financial year 20/21 Nifty EPS estimates have been cut by 1.2%/1.1% to Rs 576/683 from Rs 583/691. EPS means earnings per share, a metric of profitability. Overall, sector-wise, automobiles companies have seen a 7-8% earnings cut for FY20. Metals, media, capital goods and mid-cap universe have witnessed earnings downgrades. Private sector banks, NBFCs and consumer companies earnings have not seen much change. Cement companies have seen an upward revision in FY20 earnings so far.
Consumer companies have delivered okay but the managements feel demand remains weak and worry about rural demand. Private sector banks have reported a slight downtick in loan growth, which reflects the weakness in the economic environment. Asset quality trends have been mixed, and no clear sign can be deciphered.
The much-discussed NBFC sector shows diverging trends. But importantly, everyone seems to be cautioning about growth in several segments.
In auto sector, most vehicle makers expect softer demand and inventory levels are high. They are not ready to call it a bottom as yet. In the export-led IT sector, margins have been soft but thankfully demand trends, however, are not alarming.
In the capital goods space, June quarter has been mixed. Weakness in the refining and petrochemical margins persists in Oil & Gas space. Performance of the Metals pack so far has been weak but it has met modest expectations.
UBS experts say that while equity investors see India as a growth story, the recent slowdown is casting doubt on that story.
"Our view is that a negative feedback loop may be developing in the economy. We have been forecasting earnings disappointments for the last five years and continue to do so. However, the likely policy response and potential for 'big-bang' reforms ahead could lift Nifty multiples to 18x 1- year forward PE. Our Nifty base case for December 2019 is 11,000 with upside/downside scenarios of 12,400/9,400," wrote Gautam Chhaochharia, Analyst, UBS Securities India Pvt. Ltd, in a note.
This pessimism is not shared by Morgan Stanley. Its June 2020 target is 45,000, at which level the BSE Sensex would trade at a forward P/E (Price/Earnings) of 18.5 times and at a trailing P/E of 22 times, higher than the 25-year trailing average of 19.7 times.
UBS models imply 9%/13% YoY growth for FY20/21 for the BSE-200 (excl. oil marketing companies and SOE banks) vs. the Street at 17%/16%). "Our top-down forecast for the headline Nifty is 16%/15% YoY growth for FY20/21 vs. the Street at 26%/18% YoY. Financials contribute 70% of incremental FY20E earnings growth. Nifty ex-financials earnings growth for FY20/21 is likely to be 6%/10%, in our top-down view," says the UBS expert.
Morgan Stanley's Ridham Desai and Sheela Rathi feel that for financial stocks, which is the mainstay of earnings, credit costs may have peaked, driven by the bankruptcy process and a recovery in economic growth. "Recapitalization should also help the corporate banks. Loan growth prospects are improving as the economy gathers pace. Non-banks face growth slowdown, but the stronger ones look in a good position and are further helped by the budget announcements," they say. (The author is a journalist with 14 years of experience)