The last earnings season for FY20 has started. The three IT
majors have announced results which appear good under the given circumstances.
HDFC Bank also announced an encouraging set of numbers.
The brokerages have drastically cut estimates for FY21 and FY22
earnings apparently to factor in the business disruption caused by the lockdown.
Though there is still large variance in the estimates, the consensus appears to
be favoring a flat earnings growth in FY21 and single digit growth in FY21.
After reviewing earnings estimates of numerous brokerages, I
have realized that respective analysts might have just used this opportunity to
climb down from their egregious estimates, which have proven consistently wrong
for past 5 years at least. Their basic premise still appear erroneous to me,
though the data now appears much closer to the reality.
I would like to highlight just three points in this context:
1. The average earnings
growth of Indian companies has remained anemic ever since the global financial
crisis in 2008-09. The NIFTY EPS has grown at the rate of 5.1% CAGR in past 10
years.
2. The 5yr rolling NIFTY
EPS CAGR has ranged between 4 and 6% in past 6 years. This trend is likely to
sustain for next 3 years at least. It is important to note that COVID-19 led
disruptions may just be an additional, and not the primary, reason for the poor
earnings growth.
3. The market is still
pricing in a sharp recovery in earnings post FY21. There is no empirical
evidence to support this assumption. Extremely loose monetary policy, lower
crude prices, fiscal stimulus, and global growth recovery from lows during past
10 years have not resulted in any meaning acceleration in the earnings growth
in India. The structural reforms needed to accelerate the earnings growth
continue to remain elusive.
