The actual Q3FY16 performances of the Indian corporates are much below market expectations. Profit after tax (PAT) was expected to grow at 4% for Sensex stocks and 7% for BSE100 on a YoY basis. But the actual numbers are -1% for Sensex and -7% for BSE100. For the nine months of FY16, Sensex earnings growth is +0.5% and -5.5% for BSE100. The large caps are outperforming compared to the broader market as usual but we are not seeing signs of stabilisation in earnings growth. This is the 5th consecutive quarter where earnings continue to be lackluster. Post this, the revised expectation for Sensex EPS stands at Rs 1,280 for FY16 and Rs 1,500 for FY17. The expectation for FY16 has sharply come down by 7% in the last 2 months from Rs 1,375 but expectation continues to be high for FY17E with 17% growth (Bloomberg).
Based on the latest number, Sensex is trading at a P/E of 15.5x on a 1-year forward basis, which is at 10-year average. The earnings expectation continues to be high and it has been so for a long time. If we revise the expectation for FY17E from a high of 17% to its half at around 8%, then the P/E will be above the historical average at 17x. This highlights the risk in spite of the recent correction. The outlook for earnings continues to be weak owing to the deflationary nature of the global economy and slowdown in domestic economy. But we can assume that earnings trajectory will change to positive as global commodities and Chinese economy stabilise.
The current volatility has peaked from the culmination of global factors like the hike in the US Fed rate, sharp fall in oil price, risk of hard landing in China and devaluation of Yuan within a short span of 2-3months. To identify as to when we can expect stabilisation in earnings, will also depend to the global economy that is currently facing many headwinds.
Coming back to the results season, the positive sectors are Energy and Auto; FMCG, IT and Pharma are a mixed bag and all other sectors are showing negative earnings growth. A large factor of this negative earnings outlook is linked to global factors for sectors like metals, IT and oil. But even excluding this we can understand that domestic sectors like Power, Mining, FMCG and Telecom are finding it difficult to achieve earnings growth. The maximum negative surprise comes from the financial sector due to the Reserve Bank’s regulatory requirement to clean up the banks’ balance sheets. Broadly speaking, from the banks’ commentary NPA restructuring can continue for at least next 1-2 quarters.
Usually India has outperformed the other emerging markets, but our performance is under stress during the near-term especially in the last 2-3 months. Currently, we are underperforming and we may continue to be so given the domestic issues like historical outperformance in expectation of revamp in earnings which continues to be negative, lack of reforms and low expectation from the forthcoming union budget. These factors push the pressure towards the Union Budget as an important event to watch out for.