Keeping the faith

Post first-quarter earnings, FY14 estimates are likely to be further downgraded

Sell-side analysts are expected to be optimistic and objective, but not necessarily in that order. While an objective view does help the investing community at large, optimistic reports are integral to one’s survival on the sell-side. No wonder then, most analysts are projecting that FY14 will be a much better year in terms of earnings growth for frontline companies. The consensus: Sensex companies will see an earnings growth of 19% in FY14 compared with 7% during the last financial year. However, like any composite score, this 19% earnings growth has a wart and that, in this case, is one of back-ended growth.

Indian companies hit a rough growth patch post the 2008 global credit crisis and since then are yet to find their mojo. The first quarter of FY14 is likely to mirror the persistently weak sales growth over the last few quarters. For the current financial year, the task is daunting as, in the first quarter, barring the FMCG sector, growth for most sectors is expected to be flat. Hence, companies will be under pressure to make up for the slack in the first quarter. If one were to use the analogy of a
high scoring one-day cricket match, analysts are hoping for a successful chase.

Given the lack of policy initiatives, companies and analysts alike are banking on low interest rates and the bountiful monsoon to revive animal spirits. Saurabh Mukherjea, head of equities, Ambit Capital, says the previous three rate cuts by the RBI and the normal monsoon will power corporate earnings in the following quarters. “An uptick in central government expenditure in a pre-election year and pick-up in agricultural sector growth should help,” he adds.

Harsha Upadhayay, head of equities, Kotak Asset Management, is among those who believe that the earnings picture will improve from the second quarter. Like most fund managers, his optimism comes with a caveat, “This expectation could be at risk, if first quarter earnings turn out below the already muted expectation.” According to him, the sectors that will deliver promising results this quarter are FMCG, pharma and IT, whereas metal, cement, power and capital goods will disappoint. As for Ambit’s Mukherjea, his firm is bullish on oil and gas and technology, and has downgraded estimates for the auto, industrials, real estate and metals sector. For now, the Bloomberg consensus earnings estimate for the current fiscal reads ₹1,426. If earnings growth does not play out as hoped for, bullish investors will pay a heavy price for a cheery consensus.