The average earnings per share estimates of some of India’s top companies have been downgraded by 21%, the sharpest since 2008 when the financial crisis stemming from the collapse of Lehman Brothers eroded margins of most of the world’s large companies.
The earnings downgrade, which reflects a weak forecast of future profitability, has been led by banks, commodity companies and industrials, which have been affected by the surge in bad loans at banks, fall in commodity prices and the tepid capex spending, according to ICICI Securities (ISec). The outlook will take at least two to three quarters to improve, it added.
Apart from describing profitability, the earnings per share is a key ratio that can also compare different companies. ISec compiled the data based on stocks reviewed by at least 5 brokers.
“There is a lot of pessimism on the Street. The global environment is negative and people are expecting that the next few quarters may not be great,” said Ravi Sundar Muthukrishnan, co-head of research at ICICI Securities.
Among the BSE 100 stocks, EPS upgrades for 2016-17 have decreased from 19 to 10, and downgrades increased from 79 to 90, according to the report. A similar trend was observed among 234 mid-cap stocks, where EPS downgrades increased from 167 to 183.
The earnings downgrades have been led by public sector banks, which reported a steep rise in non-performing assets and provisions for bad loans, last quarter. Commodity players, too, have seen sharp EPS downgrades as prices of crude oil, steel, among other commodities, crashed.
State Bank of India, Punjab National Bank, Cairn India, Tata Steel and Hindalco are among the companies that have seen sharp EPS downgrades.
SBI, the country’s largest lender, reported a 62% drop in net profit for the quarter-ended December and rival Punjab National Bank’s profit plunged 93%. A slump in crude oil prices almost wiped out Cairn India’s profit.
Not surprisingly, among the Nifty50 stocks, earnings of PSU banks have been downgraded by 32% on average, versus around 5% downgrade of earnings of private banks, according to ISec.
Another brokerage, Philip Capital, has cut its earnings estimates for 53% of the companies it covers further by 12% for the current fiscal and by 11% for 2016-17.
According to analysts, companies will continue to report lacklustre earnings for two-three quarters more, as rural growth remains sluggish, capacities at most firms remain under utilised, and high debts continue to bite.