Fall season

To borrow from Karl Marx, if  “religion is the opium of masses”, then surely hope is the ‘substance’ that gives the market its high. For what else would explain the subdued sense of optimism pervading the domestic equity market? Last fortnight, the benchmark index clocked its biggest single-day gain since November 25, 2013, jumping 375 points (1.81%) on January 13 to 21,134 points. Ditto with the Nifty, which ended 1.64% up, at 6,272.75, marking its biggest single-day gain since December 20, 2013.

Not surprisingly, the likes of Abhay Laijawala, head of research at Deutsche Bank, are ready to believe that the markets are in for a real recovery. “Economic growth has bottomed, the corporate earnings cycle is seeing a second successive quarter of recovery, investment starts are seeing a glimmer of hope, driven by public sector projects, and record domestic investor disenchantment with equities may be ebbing,” mentions Laijawala in his 2014 outlook report. 

Surreal numbers

Given the historical earnings growth rate, FY14 estimates look overboard

But the fact remains that GDP growth estimates continue to be at sub-5% levels; the investment cycle is still to show signs of a recovery with over ₹2 lakh crore worth of fresh projects being shelved during the September quarter and investor apathy is at its peak.

Yet another fig leaf that sell-side analysts are hanging on to is the so-called recovery in earnings. After a 15-quarter low in the June quarter, when sales growth hit 2% and recovered 14% in the subsequent September quarter and showed double-digit PAT growth of (10%) after four quarters, there is the feeling that the recovery has begun. As the Street braces for the third quarter of earnings season, the consensus points to ending FY14 with a robust growth number. While most estimates are looking at 14% growth in earnings to ₹1,351, Rajat Rajgariah, head of research, MOSL, expects the Sensex EPS to grow by 11% to ₹1,317 and accelerate to 15% in FY15 to ₹1,518. But considering that after the 22% y-o-y growth seen in FY11, the subsequent growth rates for FY12 and FY13 were around 9% and 5%, respectively, the estimates look exaggerated. Especially considering that a large part of the sales performance was driven by currency gains in the last quarter.

Sharing the sense of scepticism in his report is Manishi Raychaudhari, head of research, BNP Paribas India: “Notwithstanding the recent improvement in the earnings environment, we think growth estimates for some sectors, especially for FY15, are overstated. We highlight banks, autos, consumer staples and telecoms in particular.” In fact, over FY09-FY13, defensives have done the most to keep the earnings momentum going by accounting for 43% of the EPS CAGR over the period, with industrials being a drag at -2%. Given that financials at 22% was the next big CAGR earnings driver over the same period, the picture does not make for a good reading as net NPA and fresh debt restructuring proposals have been gaining ground. While earnings growth estimates for FY14 are 9-14% for now, with too many variables at play, especially with general elections round the corner, the guessing game has just begun.