One way to look at this is that the decline in earnings in the December and March quarters came as a surprise. But the difference between the analysts’ estimates and actual numbers reflects a tendency among market participants to be overly sanguine about growth prospects. While last year’s disappointment has led to cuts in earnings estimates for the next two fiscals, investors and analysts, it appears, remain hopeful. Analysts at most brokerages still expect earnings to grow 18-19% annually in the next two fiscals. And, as if that wasn’t enough, it turns out that the valuation multiples of a number of stocks have got re-rated in the past year.
Mumbai: Indian companies’ performance in the March quarter was not only poor, but it was also the worst in at least the last 14 years. According to figures compiled by Kotak Institutional Equities, the overall earnings of members of the BSE Sensex declined by 10.9 percent in the quarter ended March 31. This is worse than the result during the height of the financial crisis, in the March quarter of FY09, when earnings fell by 10.6%. Earnings for the full year also fell somewhat, despite analysts’ expectations of double-digit earnings growth until early 2015.
Analysts at Kotak wrote in a 2 June note to clients that the most remarkable feature of fiscal 2015 was not the disappointment in earnings, but the astonishing re-rating of multiples in several sectors, despite consistent earnings disappointments and downgrades. The valuations of capital goods stocks such as Larsen and Toubro Ltd and top pharmaceuticals stocks such as Cipla Ltd have risen by 50% in the past year, despite reporting a decline in earnings in FY15. Supported by easy global liquidity, a number of valuation bubbles appear to have formed around Indian stocks.
As far as the performance in the March quarter goes, while there are a few bright spots, the overall showing was glum. Kotak’s analysts say in the note that banks’ slippages and non-performing loans remained high, volume growth was weak across all the major domestic sectors and that the growth rate of order booking among industrial firms showed a decline. The information technology sector, which isn’t dependent on the domestic economy, too, disappointed on revenue growth. The results of telecom firms suggested that pricing pressure could remain a recurring theme, thereby derailing hopes of earnings upgrades on the back of tariff increases.
The few bright spots included a recovery (albeit small) in automobile sales and some continued growth in sales of some discretionary goods such as durables and paints. But, on the whole, things aren’t expected to improve in a hurry. The HSBC India Composite Purchasing Managers’ Index (PMI) Output index fell to a seven-month low in May, reflecting consecutive drops in the rate of private-sector output growth in the past few months. Analysts at CLSA Research pointed out in a 3 June note to clients that growth in the core Index of Industrial Production, or IIP, has fallen to nearly zero, a 10-year low, and a quick revival appears unlikely.
The recent weakness in the markets suggests investors are gradually factoring in the bleak news that has emerged on business fundamentals. But with Sensex valuations still at over 20 times trailing earnings, there could be a lot more pain, unless things improve dramatically.
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