Will earnings downgrade continue in the coming months? | Outlook Business
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Will earnings downgrade continue in the coming months?
Consensus earnings growth estimates for FY16 have already come down to just 7% 

BNP Paribas MF’s Anand Shah and Macquarie Capital’s Rakesh Arora on whether there’s more earnings downgrade in store 

Anand Shah, CIO, BNP Paribas Mutual Fund

We expect earnings to move up from here on. Whether it will be a strong recovery or a slow one is difficult to say, but we are definitely in for a turnaround. This is because we do not expect further correction or stress in the commodities space. Instead, we expect companies in this space to start contributing to overall earnings. We also have domestic sectors such as FMCG, automobile, pharma and consumer goods that are doing relatively well. We might see earnings bouncing back this quarter due to higher operating leverage in certain sectors, lower input costs and lower interest costs, all of which will help companies witness higher operating and net margins. The only worry stems from banking, which will have a negative impact because of the additional provisioning hitting its profitability in this quarter. Exports, which account for a very large portion of earnings, might face some challenges due to pharma and IT. However, the rupee depreciation will negate a large part of these worries. 

Rakesh Arora, MD and head of research, Macquarie Capital

We expect earnings growth to be muted in Q3FY16. For our coverage universe, we estimate that earnings will decline by 3% on a Y-o-Y basis in Q3FY16. Much of the weakness is due to global sectors such as metal and mining, IT and pharma. Metal and mining companies are still reeling under severe pressure because of low prices hitting net profit. Excluding the global sectors, net profit growth is better — at 13% — for the period. There will be some benefits because of lower commodity prices in the form of better margins. Companies have also been able to save on interest costs, but this might be marred by foreign currency exposure. On top of that, one-offs like the Chennai floods will have an impact on earnings, too. Part of this is reflected in consensus estimates for FY16, which have come down dramatically to just 7% growth, which seems achievable. We expect the earnings downgrade cycle to continue. In fact, we expect the consensus estimate Y-o-Y growth for FY17 to be 10% instead of the projected 20%.

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