Earnings downgrades back
Investors might have to lower earnings expectations for FY17 & FY18 due to demonetisation impact and other uncertainties
After two years of constant earnings downgrade, investors were looking forward to FY17, in particular the second half, with much expectation. The belief was that this could be a year of strong bounce-back in India Inc’s earnings trend. However, this hope has petered out after the September quarter results. “The earnings growth expected in FY17 on an all-sector basis could take more time and is likely to spill over into the next financial year,” says Anand Radhakrishnan, chief investment officer, Franklin Equity.
After two years of constant earnings downgrade, investors were looking forward to FY17, in particular the second half, with much expectation. The belief was that this could be a year of strong bounce-back in India Inc’s earnings trend.
However, this hope has petered after the September quarter results. “The earnings growth expected in FY17 on an all-sector basis could take more time and is likely to spill over into the next financial year,” says Anand Radhakrishnan, chief investment officer, Franklin Equity.
Yet, there haven’t been major downward revisions to earnings estimates and until a week ago, the Street was hopeful that Sensex earnings could grow by 12-15 per cent in FY17. This hope has come to an abrupt halt; investors might again have to brace for a round of earnings downgrades, thanks to demonetisation .
Mahesh Nandurkar, India Strategist of CLSA, the brokerage and investment entity, cautioned that earnings growth estimates need to be revised downwards by fourfive percentage points. CLSA said the consensus earnings growth estimate at the start of the financial year was 16-17 per cent for FY17 and 18-19 per cent for FY18. It now believes earnings could grow by 10-12 per cent for FY17 and 15 per cent in FY18, year-on-year. “Introduction of goods and services tax, coupled with demonetisation, is expected to have short-term negative impacts on demand and earnings,” he explained.
Adding: “Consumer durables will see a bigger impact compared to staples on demonetisation, while property and housing finance companies might face a negative impact for a longer term.”
Other experts also see a risk to earnings growth for at least the current financial year. Gautam Duggad of Motilal Oswal Securities explains, “Against the current backdrop, we expect Q3 (the December quarter) earnings to be impacted the most. Thus, the earnings recovery thesis expected in the second half of FY17 is in jeopardy.”
He feels automobiles, fastmoving consumer goods, retail, consumer durables, mid-cap companies, cement, telecom and non-banking financial companies could see earnings downgrades for FY17. It is difficult at this stage to quantify the earnings impact.
Amisha Vora, joint managing director, Prabhudas Lilladher, has lowered her revenue target for FY17 to 6.5-7.5 per cent as against the earlier 10-12 per cent estimate. “The consumption sector at every end of the spectrum might see a huge year-on-year decline in earnings, as huge Diwali salesrelated stocking was also seen in the December quarter. It will take two to three quarters for things to get back to normal,” she feels.
Introduction of GST in FY18 might also prolong the earnings recovery cycle, Vora believes.
Experts think the timing of the demonetisation could alter the scale for Indian equities in the near term. “We are likely to witness a third straight year of flat earnings growth and the Indian equity market might look stretched and volatile for some time,” says Dhananjay Sinha, head, institutional research, at Emkay Global Financial says.
Foreign portfolio investors (FPIs) action will also be watched. Sinha expects them to remain sellers in the Indian market. “Uncertainty on a US Fed rate hike will also weigh on FPIs,” he says.