Modest Earnings Cut In First Quarter Masks Sectoral Divide

Three months into the financial year, analysts have already cut their earnings expectations for Nifty 50 companies citing higher input costs and rising rates.

The consensus earnings per share forecast of Nifty 50 companies is now 1.7 percent lower than what analysts expected in April, according to estimates tracked by Bloomberg. While that's a modest cut, estimates for most sectors—barring IT and utilities—were lowered. There was no change for financials.

To be sure, brokerages have been overestimating earnings every financial year starting April 2011 and lower the target as the year progresses. This year has been no different.

Yet, markets are banking on an earnings recovery this financial year. And expectations are already facing headwinds. Rising fuel prices have widened the nation's current account deficit, pulling the rupee down to its all-time low. Costlier crude also threatens to stoke inflation and could prompt the central bank to hike rates.

Higher rates and rupee depreciation against the greenback is likely to put a brake on consumption, Chakri Lokpriya, managing director at TCG Asset Management, told BloombergQuint suggesting that may hurt earnings. The investment firm, which cut EPS expectations by 2-3 percent, expects further downgrades.

Analysts didn't change their expectations from financials—which have the highest weight in Nifty 50. Indian banks, led by public sector lenders, are saddled with about Rs 10 lakh crore worth of bad loans, hurting credit growth.

Lokpriya said that along with a weakening rupee and rising rates, a lower credit growth and lack of capital for banks will likely result in further cut in earnings estimates.

Gaurav Dua, head of research at BNP Paribas' Sharekhan, too cited banking stress, along with pressure on margins due to rising input costs, to lower earnings forecast by 1.5 percent.

Sectoral Picture

Seven out of 10 sectors were downgraded, led by communications and healthcare. Communications and pharmaceuticals saw the steepest downgrade.

The sectors which are impacted by rising commodity prices have been significantly revised down, said Pramod Gubbi of Ambit Capital, which too cut overall expectations but lower than the consensus at 1 percent.

All IT Stocks Upgraded

Earnings estimates for all software services providers in Nifty 50 were upgraded. IDBI Capital is positive on Tata Consultancy Services Ltd. and Tech Mahindra Ltd. Urmil Shah, research analyst at IDBI Capital Markets and Securities Ltd., expects TCS to report the best improvement in revenue growth among large caps. Tech Mahindra Ltd. is expected to continue with its higher productivity, utilisation and operational efficiency, Shah said.

Signs Of More Pain For Pharma

All pharma stocks were downgraded. Pricing pressure in the U.S. is likely to continue, said Ranjit Kapadia, senior vice president at Centrum Broking. Competition will only rise as the U.S. drug regulator has started charging fees and hired more staff to clear pending filings (abbreviated new drug applications). The companies will also be squeezed for margins as three out of the five large distributors have merged, he said.