BofA Flags Emerging Risks To Earnings Outlook

BofA Securities Ltd. remains cautious about markets and has flagged risks to earnings outlook citing demand indicators and management commentary.

Risks emerge from slowing global growth, adverse policy intervention, currency depreciation, rising interest rates, and surging crude, Amish Shah, BofA's managing director and head of India research, wrote in a July 22 note based on screening of NSE 200 for stocks prone to these earnings risks. Yet, he said, the market is still to cut Nifty firms' profit-after-tax estimates meaningfully.

Barring segments like automobiles and air conditioners, aided by seasonal effects, management comments and anecdotes point to slowing demand due to high inflation, leading to volume erosion in fast-moving consumer goods companies, BofA said. Some of them have even cut their production by 15-25% as discretionary spending got hit by rising oil prices and increasing job losses, particularly in startups, it said.

The steel sector is already seeing an impact on demand, prompting steelmakers to advance planned shutdowns as inventory has piled up, the brokerage said. That's something even Seshagiri Rao, managing director at JSW Steel Ltd., corroborated in an interview with BQ Prime.

Policy intervention taken to contain inflation and rising current account deficit are also important earnings risks, Shah said. Measures such as an export duty on steel, import duty on gold, a windfall tax, and restrictions on wheat exports are testimony to that. The research firm said any sector witnessing supernormal profits is vulnerable to such policy headwinds.

The rupee, after having fallen 7% year-to-date, is expected to depreciate 2-3% more, resulting in companies with large forex liabilities to report significant mark-to-market losses, BofA said. Also, companies with high imports are likely to see their margins contract as the ability to pass the cost reduces with weakening demand outlook, the report said.

Demand remains constrained as risk of global slowdown has risen on the backdrop of several macro headwinds such as lower personal spending and June vehicle sales in the U.S., among others, BofA said. There is growing fear of recession in the U.S, according to Shah.

While China has already reported its lowest GDP growth in the second quarter since the pandemic began, Indian companies with significant export exposures, baring information technology and pharma sectors, would be impacted, it said.

BofA reported that leather and footwear exports are already down 15% to 20%, while outbound yarn shipments have fallen 70%.

In such a situation, both U.S. Federal Reserve and the Reserve Bank of India have hiked interest rates by 150 basis points and 90 basis points, respectively, since March 2020, to contain a surging inflation, the report said. That, it said, would impact earnings of highly leveraged companies due to increase in borrowing cost.

Shah said rising oil prices would impact sectors like cement, paints, FMCG, aviation and fertilisers, apart from hurting consumers discretionary spending through increased cost pressure. BofA commodities team forecast crude to average $105 a barrel in the second half of 2022, and full pass-through to the pump with imply a Rs 10-12 a litre hike in retail prices.

Crude-related costs, which account for 20% expense on transport and energy for Indian consumers, could hurt discretionary spends, BofA said.