FY14 earnings estimates rise 0.5%

While weak rupee will support export earnings, domestic sectors set to recover as stalled projects take off and govt spending picks up

After sharp cuts in earnings estimates through the year, analysts ended 2013 on a positive note. In December, analysts upgraded the earnings per share (EPS) of Sensex companies by 0.49 per cent to Rs 1,351. While the upgrade isn’t substantial, it suggests a change in direction. As industrial growth continued to fall through the year, analysts continued to cut estimates almost on a monthly basis.

While the upgrade story does not suggest the current financial year is expected to witness a change in the fortunes of corporate India, it definitely suggests earnings of India Inc are set to get a boost from a weaker rupee in the third and fourth quarters of FY14.

Credit Suisse justified its overweight position on India on January 2 on the basis of EPS upgrades, as it believes these revisions could be an inflection point for markets. The brokerage says: “While the general election is still months away, we believe there is support for our call for a potential inflection point on return on equity from 2014 consensus EPS revisions.” So far, the weakening of the currency and higher export earnings have been a big driver of earnings upgrades.

However, going forward, the strategists are convinced that even the domestic sectors will see a pick-up in earnings, too.

Of the 11 sectors, analysts claim, earnings revision for eight has either remained flat or been upgraded. This is indicative of a broad-based pick-up in earnings. CLSA in its strategy note for 2014 has said domestic autos, public-sector banks, metals and mining, capital goods, cement, and power will lead the earnings improvement. The process of economic recovery will only impact the pace of recovery, not the actual recovery itself.

  Analysts kicked off 2013 with high hopes of a pick-up in GDP growth and earnings as it was a pre-election year. As the year progressed, it became apparent that corporate India was showing no signs of a turnaround as demand for steel, cement, consumer goods and automobiles dipped. After several faulty predictions, the market is now basing its optimism on hard facts. One of the big drivers of a recovery in earnings would be a recovery in economic growth. Economists are forecasting a shallow recovery in 2014-15. There seems to be consensus on the fact that growth bottomed out at 4.4 per cent in the first quarter of FY14. CLSA expects GDP growth to recover to six per cent levels in 2014-15.

One of the big factors that will drive recovery is the improvement in industrial activity, which will get a boost from government spending and unlocking of existing investments of stalled projects. The other big factor is the macroeconomic stability and higher foreign currency reserves. After several months, India’s foreign currency reserves are above $290 billion and the ratio of reserves to the current account deficit is improving to a three-year high of 7x. There's no denying that persistent inflation and fiscal profligacy continue to be risks. CLSA is of the opinion that corporate earnings growth should react favourably to the improving macro and the brokerage expects domestic sectors earnings growth to revive from near-zero per cent in FY14 to 15 per cent in FY15.