Firms with significant global exposure may contribute to downgrades.
The focus is firmly shifting to the impact of global events on the Bombay Stock Exchange’s Sensitive Index’s (Sensex’s) earnings. With more than half its 2011-12 earnings from companies with a significant global exposure, the Street is worried.
Until recently, the markets were concerned about slowing domestic growth, rising interest rates and high commodity prices. As a result, analysts were seen downgrading the earnings of India Inc. That is changing.
| HIGH GLOBAL EXPOSURE | ||
| Company | Contribution to | Overseas revenue |
| Sensex FY12 PAT | as % of total | |
| Reliance Ind. | 12.79 | 60 |
| Tata Motors | 6.97 | 53 |
| Infosys | 6.74 | 97 |
| Tata Steel | 4.94 | 70 |
| Tata Consultancy | 3.05 | 90 |
| Bharti Airtel | 2.74 | 25 |
| M&M | 2.58 | 20 |
| Hindalco Ind. | 2.56 | 68 |
| Bajaj Auto | 1.48 | 28 |
| Wipro | 1.44 | 90 |
| Sun Pharma | 0.83 | 45 |
| Cipla | 0.75 | 60 |
| Sun Pharma | 0.40 | 55 |
| Contribution of overseas revenues to a company’s consolidated revenue is approximate Numbers are based on analysts’ estimates of FY12 profits; Source: Analyst reports | ||
"So far, the bulk of the downgrades that have happened are because of the domestic issues. But, as we go ahead, we could see the global companies contributing to further downgrades in the Sensex earnings," says Rajat Rajgarhia, director, research, Motilal Oswal Securities.
Currently, the consensus estimates of Sensex earnings are about Rs 1,150 a share for 2011-12, which reflects the impact of domestic issues. However, while there could be some gains on account of lower commodity prices, the overall impact of a slowing world on India Inc’s earnings is unlikely to be positive in the current financial year.
Among companies and sectors with a visibly large exposure to global markets are information technology (IT), metals and automobiles, as well as Reliance Industries, India’s second most highly valued company.
Concern on the IT sector (Infosys, TCS and Wipro) is for obvious reasons, as almost 90 per cent of their revenue comes from clients based in international markets like the US and Europe and, second, the trio contribute about 11-12 per cent to the Sensex. According to analysts, the slowdown and uncertain macro-economic situation in the US and Europe means a likelihood of clients curtailing spending on IT. In fact, most IT companies have already reported disappointing volume growth and pressure on margins in the June quarter. Analysts, thus, see risk in terms of an earnings downgrade.
Not surprisingly, after the US debt downgrade in early August, IT stocks were among the worst hit. Analysts have already cut their estimates for Infosys from Rs 182 per share in January to Rs 173 currently, which is about a Rs 4 impact on the Sensex earnings. While the situation is still evolving, the near-term hope is depreciation in the rupee.
In metals, the earnings of Tata Steel and Hindalco, which have large exposure abroad, could be at risk. Tata Steel, which account for almost five per cent of Sensex FY12 estimated profits, could see its earnings get downgraded, given the recent decline in steel prices (down 13-15 per cent from the recent peak) in the European markets, coupled with the subdued demand outlook. "The near-term concerns for Corus remain on account of subdued steel prices in the international markets and margin pressure due to higher input costs. We have recently reduced the FY12 EPS (of Tata Steel) from about Rs 70.8 to Rs 60.9," says Jatin Damania, who tracks the metal sector at SBICAP Securities.
In the non-ferrous space, Hindalco generates about 68 per cent of revenue from its overseas subsidiary, Novelis, which in turn generates 85 per cent of its revenue from European and American markets. International aluminium prices have corrected from a peak of about $2,760 per tonne in May to about $2,350 per tonne. This, along with the concerns over demand and high inventory at LME, could have a bearing on Hindalco’s consolidated earnings in the coming quarters. Sterlite Industries, too, is likely to feel some of the heat due to lower metal prices.
Reliance Industries, the single largest contributor (company-wise) to Sensex earnings, generates about 65 per cent of its revenue from abroad. The company's consensus EPS have been downgraded from about Rs 77 in January to about Rs 70. This alone has eroded about Rs 12 from the Sensex’s FY12 earnings.
While analysts believe its EPS will see some downgrade, they are waiting for more clarity in the global oil and industry. "Key downside risk would be a prolonged global slowdown, leading to lower refining and petrochemicals' earnings," says Pradeep Mirchandani, analyst at JP Morgan in a recent note on the company.
The automobile sector (12 per cent of Sensex profits) may seem a domestic story but some of the large names in this space like Tata Motors (almost 50 per cent) generate considerable revenues from abroad. Tata Motors has already seen a sharp decline in its EPS estimate from Rs 97 in January to Rs 66 currently. This reflects the concerns over its global sales volumes, down about six per cent in July. In a recent report, Goldman Sachs reduced its target price for Tata Motors by 28 per cent to Rs 774, due to expectations of lower revenue growth in the current year. Other companies like Bajaj Auto and Maruti, however, may not see a major impact on earnings, given their relatively lesser presence abroad and product profile.
