)
Within the BSE-100 companies (excluding oil marketing companies), more have witnessed FY15 estimated earnings downgrades by analysts than upgrades after the March quarter results. By Bloomberg data, 18 companies have witnessed a little more than five per cent cut in their FY15 consensus earnings estimates, while 13 companies' FY15 earnings estimates have been raised by a little more than five per cent. Overall, estimates for two companies remained unchanged, 32 saw an increase while 66 saw their estimates lowered.
Saurabh Mukherjea, chief executive, institutional equities, Ambit Capital, says, "There have been no major surprises this quarter, barring Larsen & Toubro (L&T). We believe the ability of information technology (IT) stocks to surprise on the upsides is wading. This quarter, misses continue to outnumber hits as was the case in four or five quarters."
A comparison of earnings estimates as on March 31 (before results season began) with that as on June 2 for BSE-100 companies shows that Ashok Leyland (from earnings per share, or EPS, of Rs 0.04 to Rs 0.06), Adani Power (up 865 per cent), Ranbaxy (loss estimates trimmed 33 per cent), Adani Enterprises (up 26 per cent), and Jindal Steel (up 16 per cent) top the list of highest earnings upgrades. On the other hand, Jaiprakash Associates (cut by 46 per cent), IDBI Bank (down 28 per cent), Reliance Communications (down 24 per cent), HDIL (down 14 per cent) and Sesa Sterlite (down 11 per cent) witnessed highest earnings downgrades (see table).
Cyclicals such as commercial vehicle (CV) makers (Ashok Leyland, Tata Motors) continued to report weak performance due to sub-par volumes in the quarter. But due to initiatives on the cost front as well as expectations of domestic demand revival in FY15, analysts have upgraded their estimates for these companies.
Key telecom companies (barring Idea Cellular, EPS upgraded by two per cent) Bharti Airtel and Reliance Communications witnessed earnings downgrades in the quarter. The sector has seen downgrades largely due to the expected entry of Reliance Jio. For Bharti, the cuts were lowest at four per cent. Subdued performance of its African business was a key negative in the quarter, though domestic performance was healthy. Large part of earnings cuts were due to higher interest costs for Reliance Communications, which will keep its profit margins under pressure, say analysts. Real estate companies, too, remained under pressure due to continued demand weakness and high debt.
Banks, particularly public sector banks (PSBs), witnessed earnings cuts, given the continued stress on assets and weak macroeconomic scenario. But State Bank of India (SBI), Bank of Baroda and Canara Bank surprised with upgrades between two and five per cent. PSBs are likely to gain most from a potential economic recovery and have recently been upgraded by many analysts. UltraTech Cement and Ambuja Cements performed well with the latter benefitting from good volumes and cost savings even as tax reversal and lower interest costs boosted the former's performance.
The bad news ends there. Experts say the earnings cycle has bottomed out and remain positive on the prospects of India Inc this financial year.
Tirthankar Patnaik, director and strategist, institutional research at Religare Capital Markets, says, "I think results were slightly better than expectations. Though margins continue to rule the roost, one would have wanted overall sales to be better. But that has not happened. Downgrades are meaningfully lower. While the Earnings Revision Index is negative (reflecting more downgrades than upgrades) but we believe it will break through into positive territory soon."
Mukherjea says select cyclicals are showing initial signs of a turn at the volume and revenue level. "We are factoring 15 per cent earnings growth for the Sensex in FY15. That is still an improvement over the 10-11 per cent in Sensex earnings growth witnessed in FY14. We believe the pace of earnings growth is picking up from low double-digits to mid-teens, though a V-shaped recovery in earnings or economy is unlikely."
Ashok Leyland’s March quarter performance was boosted by higher earnings before interest, taxes, depreciation, and amortisation (Ebitda) margin due to all-round cost savings, price rises and favourable product mix. Driven by sharp reduction in debt, the working capital days were at a five-year low of eight days. The company is likely to benefit from an economic revival, which will push sales of heavy and medium commercial vehicles. Though most analysts remain positive on the stock, near-term upsides are limited.
Adani Power witnessed highest earnings upgrades of 865 per cent to Rs 0.78 per share as it posted profit in the March quarter after bearing losses for seven quarters. This was due to approval of a rate rise by regulators with respect to its Tiroda, Maharashtra, power project. This also boosted the earnings of parent Adani Enterprises, which owns close to 70 per cent in Adani Power. Analysts remain bearish on Adani Power's prospects and expect the stock to fall due to rich valuations.
Ranbaxy Laboratories’ March quarter performance was impacted by flattish sales (due to suspension of active pharmaceutical ingredient, or API, shipments from Taonsa and Dewas facilities), weak operating margins, lower other income and increased tax rates leading to a net loss of Rs 74 crore (its fourth straight quarterly loss). The company has been struggling to meet US Food and Drug Administration (USFDA) norms and most of its facilities are under the USFDA import alert. This means its weak financial show is likely to continue in the near term. After its acquisition by Sun Pharma, analysts believe the Ranbaxy scrip will track developments at Sun. Analysts at Emkay Global Financial Services said, "We believe Ranbaxy numbers can surprise sharply on the upside in FY16 and FY17 once remediation costs for USFDA issues begin to taper." Most analysts have a buy on the stock (target Rs 490).
