For the past few years, equity analysts had been cutting earnings estimates drastically for the entire year after the first quarter numbers were revealed. However, after the first quarter results of 2019-20 were announced, there were no major reductions in EPS estimates for major indices. Though there were some earnings downgrades after a bad set of numbers appeared in the later part of the results season, they were nullified by the earnings upgrade after the initial set of good numbers. The expected Sensex EPS for 2019-20 remains around Rs 2,000—close to what it was a few months back (see chart).
After years, no major cuts in EPS estimates
Results season started with low estimates, which played out accordingly.
Are we seeing the end of bad results? Are earning bottoming out? Improvement in earnings does not appear to be the case, considering aggregate earnings have fallen further this quarter (see chart). The stance of analysts can be attributed to very low expectations. “Analysts upgrade or downgrade estimates when results are not on expected lines. Since we started the results season with very low expectations and results played out accordingly, there was no need to cut earnings estimates further,” says Rajat Sharma, CEO, Sana Securities.
Earnings have fallen in the first quarter
Net profits are down due to lower margins and also increase in interest and tax.
Figures are y-o-y growth in aggregate results. * Profit before depreciation, interest and tax. Based on results of 1,696 companies declared so far; Compiled by ETIG Database
Sector-based analysis of results reveal more. “The auto sector was expected to report bad numbers and banks were expected to report good numbers and both were mostly on expected lines,” says Sonam Udasi, Senior Fund Manager, Tata Mutual Fund. For example, auto and auto ancillaries have reported a net profit fall of 49% and 38% respectively. Similarly, the NBFC sector has reported a net profit fall of 40% y-o-y. Experts believe the trend will continue in the coming quarters. “Subdued performances from NFBCs, auto and auto ancillaries will continue for some more quarters,” says Sharma.
The banking sector, on the other hand, reported an aggregate net profit of Rs 18,633 crore, compared to an aggregate net loss of Rs 2,264 crore during same period last year. Since the indices are overweight on the banking sector, the expected EPS remained stable. Troubles for NBFCs are expected to continue in the coming quarters as well. “Faster growth by the NBFC segment was because of the pains in the banking sector. With that easing, banks may take back some of the market share it lost to NBFCs,” says S. Krishnakumar, CIO, Equity, Sundaram Mutual Fund.
Better than expected monsoon rain is the other reason why analysts held on to their current estimates. “The earnings estimates of 2019-20 was based on the assumption of a poor monsoon. With monsoon deficit falling to around 3%, most analysts will wait for second quarter numbers before cutting earnings estimate for 2019-20,” says Jaspreet Singh Arora, CIO, Equentis Wealth Advisory Services.
Outlook for 2019-20
Barring a few problem sectors, other sectors are reporting stable numbers (see chart). This provides confidence that aggregate earnings are bottoming out. For example, big FMCG companies like HUL, ITC, etc were able to report decent numbers. Things have started stabilising on the export front and the pharmaceutical sector has reported an aggregate earnings growth of 13%. More importantly, problem sectors like real estate have turned around and reported good numbers in the first quarter, mostly because of the shift from unorganised players to organised listed players.
Many sectors reported positive numbers
Barring a few problem sectors, others continued to show decent growth.
Figures in percentage. *Value in negative because of losses reported during the same period last year.
The current high expected earnings growth—around 20% compared to the actual 2018-19 EPS—can be a reason for disappointment in the coming quarters. However, things won’t be very bad for the whole of 2019-20. “Nifty earnings growth was very low for 2017-18 and 2018-19. So the market will be happy with a decent growth, say around 16-17%, compared to the current expectation of around 20%,” says Udasi.
Market mood and results
Another structural change taking place now involves how market react to negative numbers. Unlike previous quarters, the market seems to be losing patience and has started pounding stocks that are coming out with bad numbers, especially from pockets that are expected to do well. Investors need to be careful with highly valued and fast growing consumer facing NBFCs like Bajaj Finance and HDFC, among others, as their growth now will be challenged by the resurgent banks.