Thanks to a host of domestic and global macro headwinds, the consensus earnings estimates for the 30 Sensex companies witnessed a slew of downgrades in the 2011 calendar year. While rising interest rates, along with higher input costs, put profitability under stress, slowing demand, a stalemate on the policy front and an unprecedented sharp depreciation in the value of the rupee against the US dollar aggravated the pain for India Inc.
The bad news though ends there. Latest Bloomberg estimates and analysis of a couple of research houses show the worst seems to be behind. The pace of downgrade of earnings estimates has slowed down sharply and indicates the earnings downgrade cycle has bottomed out.
What’s more? The recently announced December quarter results broadly met Street estimates, with some companies even surprising on the upside. Brokerage firm Edelweiss Securities wrote in a recent report, “During the earnings season, the Street has downgraded 2012-13 estimates by 1.5 per cent. This is in contrast to the trend observed in the previous quarter, when the downgrade was much sharper.”
| FY 13 EARNINGS: STARS AND LAGGARDS | ||
| Stars | FY13E EPS | % Upgrade* |
| SAIL | 9.7 | 17.1 |
| State Bank of India | 280.3 | 17.0 |
| Tata Motors | 37.9 | 11.8 |
| Cairn India | 47.3 | 9.0 |
| Sun Pharma | 24.5 | 8.5 |
| Laggards | FY13E EPS | % Downgrade* |
| Bharti Airtel | 20.2 | -20.3 |
| Tata Steel | 44.4 | -17.8 |
| JSPL | 49.9 | -8.9 |
| NTPC | 11.0 | -8.7 |
| Reliance Industries | 69.1 | -8.4 |
| E: Estimates, * % Upgrades/downgrades in the FY13 EPS estimates Source: Motilal Oswal Securities | ||
“On a positive note, there have been some improvements at the margin — for the first time in almost three quarters, the breadth of earnings revision has improved. This in no way implies we are out of the woods, but we may be closer to the bottoming out of the earnings down cycle.”
However, CLSA sounds more confident. In a report dated February 21, Mahesh Nandurkar and Bhavesh Pravin Shah of CLSA wrote, “The corporate earnings trend is stabilising (our 2012-13 Sensex EPS, or earnings per share, has remained unchanged at Rs 1,269 over the last 45 days and through the third quarter results season), and the earnings downgrade cycle has ended.”
The Sensex EPS estimates for 2011-12 and 2012-13 have already been toned down by 10 per cent and 13 per cent, respectively, since the beginning of this financial year. Against an EPS of Rs 1,260 for 2011-12 and Rs 1,491 for 2012-13 for the Sensex estimated on April 1, 2011, Bloomberg consensus data shows these are pegged at Rs 1,132 and Rs 1,297, respectively, a reflection of the weakening macroeconomic scenario in 2011.
The recent cut in the cash reserve ratio is also an indication of easing monetary policy stance. Experts believe a rate cut is imminent in the first quarter of 2012-13, which could ease the funding woes of India Inc and mitigate risks of slowing consumer demand to some extent. Lower interest costs will also aid profit margins of companies. Further, most commodity prices seem to be cooling down, providing some relief to operating margins of companies in the form of lower input costs.
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While a weaker rupee (down by 16 per cent against the US dollar in 2011) could offset some of these gains, it will aid margins of export-driven sectors such as information technology and pharmaceuticals, among others, a trend visible in the December quarter results. However, a sharp recovery in the rupee could change the equation.
Abhay Laijawala, head of research, Deutsche Equities India, said, “In addition to an already sharp earnings cut, which should provide support, several cost pressures are likely to either peak out or moderate from here on. While prices of several key commodities were already down in late 2011, an imminent turn in the Reserve Bank of India’s rate cycle should also lower interest rates and the 16 per cent decline in the rupee value should help stem its weakness henceforth. Unless we witness another Lehman-moment kind of shock, we believe a large part of earnings cuts is behind us.”
Analysts at Deutsche Bank said in a report last month they remained constructive on 2012 and believed confidence in Indian markets should begin to return by the end of the first quarter of 2012, three to six months prior to their expectation of an economic and earnings turnaround, unless there was a systemic crisis emanating from Europe or the geopolitical issues in the Persian Gulf escalated. They are building on Sensex earnings growth of 15 per cent for 2012-13.
While the worse seems to be behind, it may still not be the time to celebrate, as there could be some party spoilers. Apart from an unstable situation in the euro region, the key risk for India is the crude oil price, hovering around $120 a barrel — 9.8 per cent more than the December quarter average price and 8.1 per cent higher than the average CY2011 price. A sharp rise in crude oil prices can impact India Inc negatively and will remain an overhang on earnings.
CLSA analysts, who have raised the market target multiple to 14.5 times and the Sensex target to 20,800, said rising international crude prices and possible tax or fuel hike might delay potential rate cuts by RBI. This could be a risk to market sentiments building large hopes on rate cuts.