HYDERABAD : Corporate earnings of India Inc remained weak for the quarter ended March 2019, prompting analysts to downgrade stocks from sectors including auto, banks and consumer staples.
While the weaker-than-expected results indicate a slack in sentiment, it’s likely that the slowdown fears have spilled over to the next few months, which in turn could lead to slower economic growth.
As a result of the earnings misses in Q4, brokerage Kotak Securities now projects FY19 net profits of the Nifty-50 Index to grow 13 per cent versus 22 per cent at the beginning of FY19. It expects 24 per cent growth in Nifty-50 Index net profits for FY20, largely driven by a steep recovery in profits of banks such as Axis, ICICI and SBI on the lower loan-loss provisions over FY21 and reasonable PCR in FY19, followed by low slippages in FY21 on peaking of bad loans in FY19. The brokerage has cut estimates in other sectors to reflect lower volume and profitability assumptions.
“The multiple of growth stocks have hardly seen any de-rating over the past 12 months, despite steep price correction in the case of certain stocks in the automobiles and components sector and meaningful-to-moderate earnings misses and downgrades in other consumption-related stocks over the past 12 months,” it noted.
India faces certain structural challenges in the form of declining household savings rate and high fiscal deficit. In other words, India’s growth over the past few years may have been supported by household consumption driven by declining savings and government investment led by widening fiscal deficits including off-budget borrowings by quasi-government entities.
Stating that the overall market valuations are rich, the Kotak report said that the Nifty-50 Index trades at an assumption of 24 and 17 per cent growth in FY20 and FY21 in net profits, with the bulk of the incremental earnings coming from banking sector on normalisation of profits in case of certain banks. Analysts aren’t ruling out further earnings downgrades in a whole host of sectors in case the current economic slowdown was to be more prolonged versus our expectations.