 "Sensex's FY14 earnings under risk on growth worries")
Since the market direction is largely determined by the earnings expectations of corporates, it might not be smooth sailing for the S&P BSE Sensex in FY14. For one, a few prominent companies have seen their earnings estimates being lowered. Post-results on April 12, analysts had downgrade their FY14 earnings estimates for Infosys by 10-15 per cent. This will impact Sensex earnings by 0.5-0.6 per cent. The IT major, which accounts for 7.2 per cent weight in the Sensex, is not alone. Over the last one to two months, analysts have downgraded FY14 earnings estimate for Hindustan Unilever Ltd (over volumes concerns) and even ITC to a small extent. These three companies account for 21 per cent weight in the benchmark index.
Motilal Oswal Securities wrote in its strategy note that earnings downgrades over the last few months have again led to worries about growth recovery in FY14. It said, “We expect growth in FY14 to recover over FY13 levels as our bottom-up estimates indicate an EPS (earning per share) growth of 16 per cent. However, the current uncertainty does make us cautious and these estimates are prone to some downgrade in the first half of FY14.” Apart from individual stocks, sectors like metals, automobiles and banking & financials, which cumulatively account for 42 per cent weight in the Sensex, are also running earnings risks, considering the recent developments in these sectors.
“Apart from the political uncertainty weighing on the markets, there is risk to FY14 EPS estimates as well. Based on our analysis of the Q4 (March 2013 quarter) earnings preview numbers, we expect the FY13 Sensex EPS to close two per cent lower than the current consensus forecasts at Rs 1,183. This would imply an 18 per cent growth in FY14. This is optimistic in our view,” said Nischal Maheshwari of Edelweiss Securities in his recent strategy note.
Metals, with 5.1 per cent weight in the index, is running the biggest risk to expectations. The earnings of the sector are estimated to grow about 27 per cent in FY14. However, the recent fall of 4-10 per cent in international metal prices are not fully reflected in earnings expectations in many cases.
Recently, CLSA had cut Hindalco’s earnings estimates by 11-19 per cent for financial years 2013-15 factoring in higher India costs, higher India interest expenses and lower Novelis margins. In steel as well, prices are down in the last one month. And considering the election year ahead, hopes of higher domestic steel prices are low, posing a risk to earnings growth. That apart, the falling consumption demand and lower offtake from the automobile companies could keep pressure on steel prices and demand. In fact, inventory pile up and slow demand in the automobiles space, which accounts for almost 10 per cent weight in the Sensex, are causes of worry for earnings.
Consensus estimates suggest that automobile companies in the Sensex could report 23 per cent growth in earnings in FY14. Given that industry body SIAM expects overall vehicle volumes to rise six to eight per cent in FY14, the recent slowdown in demand for both passenger and commercial vehicles suggest that it will be difficult for auto companies to post such strong growth in earnings.
In fact, companies are already resorting to phased plant shutdowns and heavily incentivising clearing up of inventories, which is the early sign of risk to earnings in the automobile sector.
Besides automobiles, financials too, face risk to earnings. In the Sensex, these account for about 27 per cent weight and are expected to grow earnings at 18 per cent. Analysts fear the slowing credit growth and delayed recovery in the investment cycle (due to policy logjam, clearances, etc) would have a bearing on the earnings of banks and financial institutions (especially those in the public sector) in the coming months. Given this backdrop, it will be interesting to see how the rest of the companies perform. Whether they will be able to offset the earnings pressure expected in the above mentioned sectors or not will determine the overall trend in earnings. For now, though, it seems difficult.
Motilal Oswal Securities wrote in its strategy note that earnings downgrades over the last few months have again led to worries about growth recovery in FY14. It said, “We expect growth in FY14 to recover over FY13 levels as our bottom-up estimates indicate an EPS (earning per share) growth of 16 per cent. However, the current uncertainty does make us cautious and these estimates are prone to some downgrade in the first half of FY14.” Apart from individual stocks, sectors like metals, automobiles and banking & financials, which cumulatively account for 42 per cent weight in the Sensex, are also running earnings risks, considering the recent developments in these sectors.
“Apart from the political uncertainty weighing on the markets, there is risk to FY14 EPS estimates as well. Based on our analysis of the Q4 (March 2013 quarter) earnings preview numbers, we expect the FY13 Sensex EPS to close two per cent lower than the current consensus forecasts at Rs 1,183. This would imply an 18 per cent growth in FY14. This is optimistic in our view,” said Nischal Maheshwari of Edelweiss Securities in his recent strategy note.
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Key sectors at risk
Metals, with 5.1 per cent weight in the index, is running the biggest risk to expectations. The earnings of the sector are estimated to grow about 27 per cent in FY14. However, the recent fall of 4-10 per cent in international metal prices are not fully reflected in earnings expectations in many cases.
Recently, CLSA had cut Hindalco’s earnings estimates by 11-19 per cent for financial years 2013-15 factoring in higher India costs, higher India interest expenses and lower Novelis margins. In steel as well, prices are down in the last one month. And considering the election year ahead, hopes of higher domestic steel prices are low, posing a risk to earnings growth. That apart, the falling consumption demand and lower offtake from the automobile companies could keep pressure on steel prices and demand. In fact, inventory pile up and slow demand in the automobiles space, which accounts for almost 10 per cent weight in the Sensex, are causes of worry for earnings.
Consensus estimates suggest that automobile companies in the Sensex could report 23 per cent growth in earnings in FY14. Given that industry body SIAM expects overall vehicle volumes to rise six to eight per cent in FY14, the recent slowdown in demand for both passenger and commercial vehicles suggest that it will be difficult for auto companies to post such strong growth in earnings.
In fact, companies are already resorting to phased plant shutdowns and heavily incentivising clearing up of inventories, which is the early sign of risk to earnings in the automobile sector.
Besides automobiles, financials too, face risk to earnings. In the Sensex, these account for about 27 per cent weight and are expected to grow earnings at 18 per cent. Analysts fear the slowing credit growth and delayed recovery in the investment cycle (due to policy logjam, clearances, etc) would have a bearing on the earnings of banks and financial institutions (especially those in the public sector) in the coming months. Given this backdrop, it will be interesting to see how the rest of the companies perform. Whether they will be able to offset the earnings pressure expected in the above mentioned sectors or not will determine the overall trend in earnings. For now, though, it seems difficult.