Brokerages downgrade estimates as earnings disappoint

On Wednesday, 3 firms brought out reports on risks to earnings and all said Sensex EPS might not grow on expected lines

 

Following the disappointing earnings this season, brokerages have cut their estimates of earnings growth this financial year. On Wednesday, at least three major brokerages brought out reports on risks to earnings. All the three —Motilal Oswal Securities, India Infoline and Edelweiss — said Sensex earnings per share(EPS) might not grow on expected lines.

According to a Motilal Oswal Securities India strategy report, more companies reported results below analysts’ expectations, compared to those that exceeded expectations. The brokerage cut its Sensex EPS target for this financial year, as well as FY16.

“A total of 45 companies reported PAT (profit after tax) higher than estimates, 59 companies below and 52 in line. On the Ebitda (earnings before interest, tax, depreciation and amortisation) front, 44 companies exceeded estimates, while 56 were below estimates…Post this quarter, our Sensex EPS for FY16 has seen a downgrade of 0.5 per cent to Rs 1,866 (growth of 22 per cent), while the FY15 EPS stands at Rs 1,529 (one per cent downgrade), growth of 14 per cent,” it said.

UPGRADES LOSE STEAM

• Current results season has disappointed analysts
• IIFL, Motilal Oswal, Edelweiss highlighted earnings risk on Wednesday
• Sectors which had shown resilience earlier, such as the consumer segment, have also disappointed
• Some sectors like cement and automobiles have shown positive surprises
• Overall, consensus earnings have been downgraded 0.9 per cent

The institutional brokerage arm of India Infoline also cut its earnings estimates. “The just-ended…result season was slightly below expectation. We cut our earnings growth expectations for the IIFL universe of 182 companies by one per cent each for FY15 and FY16 and are now forecasting 13.7 per cent growth for FY15 and 15.0 per cent for FY16,” read an emailed statement from Prabodh Agarwal, head of research at IIFL Institutional Equities.

An Edelweiss Securities results review for the September quarter, too, pointed to a decline in earnings. “In the second quarter of FY15, FY15 (expected) and FY16 (expected) Sensex EPS had been scaled down one-two per cent. The FY15 and FY16 consensus forecasts now stand at Rs 1,560 and Rs 1,845, respectively, implying 16-17 per cent CAGR (compounded annual growth rate) through the next two years. Given the traction in demand, there are downside risks to FY15 numbers. However, FY16 could be achievable, given the moderation in commodity prices, lower interest costs and some improvement in demand,” said the report, authored by Prateek Parekh.

A UBS India market strategy report noted its consensus earnings estimates had been scaled down 0.9 per cent during the earnings season. Both sales and profit growth were below expectations, according to the November 15 report, authored by analysts Gautam Chhaochharia and Sanjena Dadawala. The report, however, added 63 per cent of the companies it covered had either met or exceeded expectations.

The sectors that disappointed included consumer staples and the consumer discretionary segment, according to IIFL and Edelweiss.

“Domestic consumption, which was showing signs of a revival, seems to have lost pace. Export-related sectors (the main driver of corporate earnings) also witnessed a slowdown,” said the Edelweiss report.

Sectors in which earnings exceeded expectations included the cement and automobile segments.

Brokerages aren’t writing off the market yet, noting growth is still higher than in the years after the financial crises. “Our bottom-up estimate of earnings of Sensex constituents indicate Sensex EPS CAGR of 19 per cent during FY14-17. This is significantly higher than the eight per cent CAGR in FY08-14,” said the Motilal Oswal report.

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