Thought for the day
"Apparently there is nothing that
cannot happen today."
-
Mark Twain (American, 1835-1910)
Word for the day
Beatific (adj)
Giving joy, blessing or
making exceedingly happy
(Source:
Dictionary.com)
Teaser for the day
Could VHP set the clock back insofar
as economic deterioration of India since 19th century is concerned?
2015: Earnings picture still hazy, valuations not crazy
"In economics things take longer to happen than you
think they will, and then they happen faster than you thought they could."
Rudiger
Dornbusch
The dictum of Rudi Dornbusch has proved itself time and again.
It is true for the present state of Indian economy and therefore corporate
earnings also.
The current consensus estimates for FY16 and FY17 corporate
earnings are running at 17-18%. Most of these estimates appear to be
discounting a sharper economic recovery in FY15-FY17 than what the actual
trends so far are showing.
To the credit of analysts, we have seen some serious downgrades
in past three months, the forecasts however still appear more optimistic. In my
view, it is a clear case of hope rather than data driving the analysis.
As per Credit Suisse research, so far, industrials and materials
have driven the downgrades. In fact, over the last two years, seven out of ten
sectors have seen net downgrades to their FY16 earnings.
On disaggregate basis, of late there have been suggestions that
while the commodity producers may see even sharper downgrade post 3QFY15
results, we may see upgrade returning to the commodity consumers, especially
consumers and automobile. The data for November 2014 has shown some promise
especially in core sectors. However, the recent commentaries of the managements
of sector leaders like HUL, Hero Honda, and Maruti is not very encouraging
suggesting a disconnect.
In my view, expecting any dramatic turnaround in at least 1H2015
may cause disappointment. Given the low level of capacity utilization and high
operating leverage, the outlook for revival of capex and therefore industrial
sector remains little hazy.
The financial sector has shown strong earnings growth in recent
quarters. However, doubts over asset quality cloud the earnings' profile of
most state owned banks and NBFCs.
In absence of a material growth in the demand, most of the
earnings growth appear to be coming from cost rationalization, lower finance
cost and expected better utilization.
In my view, we are not likely to see any major surprise on
earnings front during 2015. It will mostly be the continuation of existing
trend - marginal deterioration in 1H2015 and a gradual improvement in 2H2015.
I also do not see much probability of re-rating of PE multiples.
Though, the de-rating is possible, should the global risk aversion accelerate.
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