Nifty earnings estimates cut despite good Q2 show

Despite corporate earnings coming in-line with expectations amid key macro challenges like weak rupee, elevated bond yields and crude prices, over the last few days brokerages have downgraded their earnings estimates from Nifty. This may be a signal that it will take a lot more on the earnings front to excite markets.

In Q2, net sales of 40 non-banking, financial services and insurance (BFSI) (out of Nifty 50 companies) grew by 26.8% year on year, whereas net profit grew 10.9%. Net interest income (NII) of 10 BFSI (out of Nifty 50 companies), grew by 16.5% YoY, whereas net profit grew by 3.9%. In the BFSI segment, Bajaj Finance was yet again the best performer in NII terms (for the third consecutive quarter). In net profit terms, Axis Bank was the best performer with a profit after tax growth of 82.6%, owing to lower provisions.

In the Non-BFSI segment, the best-performing companies are Reliance Industries (in net sales terms) and Coal India (in net profit terms). Bharti Airtel was the worst performer in terms of net sales and Tata Motors (which reported a loss on the back of challenges faced by its subsidiary Jaguar Land Rover in the UK) was the worst performer in terms of net profit, for the second consecutive quarter.

Excluding corporate banks, Nifty profit growth in the second quarter came in at 12.8%. Nifty Ebitda margin (excluding financials, OMCs) contracted 40 basis points YoY to 20.7%. 66% of Nifty universe posted in-line or higher-than-estimated profit after tax. As much as 78% of Nifty universe posted in-line or higher-than-estimated Ebitda.

But downgrades in earnings estimates continue. "In comparison to estimates provided in Q1FY19 result insights, the Nifty EPS estimates are revised downward by about 4.0% for CY18, 1.9% for CY19 and 1.1% for CY20. Further, Sensex EPS estimates are trimmed by 6.5% for CY18, 2.7% for CY19 and 0.8% for FY20," says Jagannadham Thunuguntla, senior VP, head of research, Centrum Wealth Management.

In fact, there are more downgrades than upgrades in FY19. "Earnings downgrades overweigh upgrades by a factor of more than two times. Eight out of the 50 Nifty companies saw upgrades ( > 3%) in FY19 EPS, while 20 companies saw EPS downgrades," points out Gautam Duggad, head of research, Motilal Oswal Financial Services.

He said that Motilal Oswal's FY19/20 Nifty EPS estimates have been cut by 4.4%/2.9% to Rs 515/655 (prior: Rs 539/674). "We expect Nifty EPS to grow 13.1% in FY19. Nearly 70% of the earnings cut is driven by Tata Motors, IOC, Reliance and ONGC," he said.

Some brokerages are still optimistic even though they too have lowered their estimates. "For the past two years, we have been forecasting a turn in earnings which hasn't happened, creating deep scepticism whether the eight-year long earnings recession is over. While we have trimmed our F2019 and F2020 Sensex EPS by 1% to reflect Q2 results, revenue growth is a sign that we are headed for a strong second half, led by corporate banks," says Morgan Stanley.

Given the current market scenario, the earnings reported by companies suggest a gradual recovery setting in; however, sustenance of the same would be a key parameter, along with the demand scenario during the pre-election period. "H2FY19 growth may also not enthuse markets, as the base effect wears off and the impact of tight liquidity is felt. Our Nifty scenarios – base case of 9,500 for Mar-19 and upside/downside scenarios of 11,100/8,300 – imply unattractive risk-reward," says Gautam Chhaochharia, analyst, UBS Securities India.