Citi also said earnings miss was big in Q1 across most sectors with BSE100 earnings falling 1 percent YoY in Q1
One of the key reasons for the sharp fall in the market in July-August was dismal June quarter earnings. This elevated the risks of a further downgrade, brokerages said in their review report last week.
All brokerages downgraded earnings estimates as half of the companies they cover missed expectations. As a result, brokerages feel the target for earnings estimates predicted earlier for FY20 is unlikely to be met.
“Earnings downgraded across the board. Our coverage universe pre-ex earnings growth is at 5-quarter low Of 0.2 percent. Ex-PSU oil sector, our coverage pre-ex earnings increased 15 percent and ex-oil & gas, metals & financials, our universe pre-ex profit fell 1 percent,” CLSA said.
Of 114 companies it covers, 36 percent companies’ earnings were below expectations, 15 percent were in-line and 49 percent were above estimates, it added.
The brokerage said earnings downgrades (55 percent of coverage universe) were nearly thrice of the upgrades (19 percent) after June quarter earnings. Hence CLSA cut Nifty earnings for FY20/21 by 5 percent against 3 percent/4 percent by consensus.
The brokerage expects 18 percent earnings growth for FY20 against consensus forecasts of 21 percent.
Citi also said earnings miss was big in Q1 across most sectors with BSE100 earnings falling 1 percent YoY in Q1.
Nifty/Sensex earnings rose 3 percent/13 percent YoY, missing estimates by 4 percent and 10 percent, respectively. Ex-financials earnings declined 17 percent YoY, it added.
The brokerage said 33 percent of BSE100 earnings beat their expectations, but 51 percent missed estimates.
“Revenue missed expectations across sectors barring energy, financials and auto. EBITDA missed expectations across sectors barring energy, healthcare and telecom. Earnings missed across all sectors barring energy,” it explained.
Citi said in FY20, barring few exceptions, earnings are expected to decelerate across sectors and hence, its Nifty FY20 earnings growth expectation stands at 16 percent YoY. As a result, it cut Sensex’s target to 39,000 from 39,600.
Citi preference remained for growth visibility, reasonable valuations and defensive appeal.
“Earnings downgrade risks remain elevated. We cut Nifty EPS estimates by 4 percent and its downgrade/upgrade ratio has weakened to 3x,” said Motilal Oswal which expects Nifty EPS to grow 16.4 percent in FY20 and 19.7 percent in FY21.
While explaining in detail, the brokerage said 74 percent of earnings cut was driven by SBI, IOC, ONGC, Tata Steel, BPCL and Tata Motors.
ICICI Securities also said the number of downgrades is 3.3x the upgrades. Antique Stock Broking downgraded Nifty EPS by 5.6 percent for FY20 and 3.6 percent for FY21.
“Overall, net profit growth momentum has significantly weakened in Q1 and ex-financials Nifty net profit growth declined 13.1 percent,” it said.
But overall analysts are pretty confident that banking and financials are expected to drive earnings going forward as they feel NPA crisis seems to have bottomed out and credit growth is expected to pick up in second half of the current financial year.
Even the big bull of D-Street, Rakesh Jhunjhunwala, in an exclusive interview with CNBC-TV18 last week expressed his concerns about the state of the market, and short-term slowdown in the economy due to NBFC crisis, elections and fiscal situations.
Motilal Oswal said financials may contribute 90 percent of FY20 incremental profits for Nifty and ex-financials, Nifty profits are expected to stay flat YoY.
