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The recent downgrades of about 10-15% in Infosys’ FY14 estimates earnings--7.2% weightage in Sensex--post its results alone will have about 0.6-0.5% hit on Sensex earnings in FY14. However IT major is not alone even the most reliable source of earnings like ITC and HUL, which together have 13.73% weightage in Sensex have seen downgrades on account of issues relating to volume growth.
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 growth of 16%. However, the current uncertainty does make us cautious and these estimates are prone to some downgrade in first half of FY14”
Apart from the individual stocks, sectors like metals, automobile and banking & financial sector, which cumulatively account for 42% weightage in Sensex are running earnings risks considering the recent developments in the respective sectors. "Apart from the political uncertainty weighing on markets, there is risk to FY14 EPS estimates as well. Based on our analysis of the Q4 earnings preview numbers, we expect the FY13 Sensex EPS to close 2% lower than the current consensus forecasts at 1183. This would imply an 18% growth in FY14. This is clearly optimistic in our view. The political uncertainty further adds to the risk," said Nischal Maheshwari of Edelweiss Securities in his recent strategy note.
Key sectors at risk
Metals sector, which has 5.1% weightage in the index is running the biggest risk to the expectations, which are pegged at about 27% earnings growth in FY14. This is due to the recent fall in international metal prices at about 4-10%, which in many of the cases are not fully reflected in earnings expectations. Recently Hindalco's earnings estimates were cut by CLSA by 11-19% for the financial years between 2013-15 factoring in higher India costs, higher India interest expense and lower Novelis margins. In steel as well the prices are down in last one months and considering the election year the hope of higher domestic steel prices are low thus that poses a risk to earnings growth.
That apart, the falling consumption demand and lower off take from the automobile companies could keep a pressure on steel prices and demand. In fact due to inventory pile up and slow demand in the automobile space, which accounts for almost 10% weightage in the Sensex is the cause of worry for the earnings. Consensus estimates suggests that automobile companies in the sensex could report 23% growth in earnings, which is considered to be on the higher side given the recent slowdown in both passenger and commercial vehicle demand. Companies are already resorting to phased plant shut down and heavily incentivising to clear inventories which is the early sign of risk to earnings in the automobile sector. Besides automobile, financials too have risk to earnings.
In Sensex they account for about 27% weightage and are expected to grow earnings at 18%. Analysts fear that slowing credit growth and delayed recovery in the investment cycle is going to have its bearing on the earnings of the banks and financial institutions in the coming months.
