NEW DELHI: For years now, actual earnings outcomes of Indias benchmark equity indices have been a cruel joke on consensus forecasts that analysts put out at the start of every year.FY18 was no exception.
And probably, FY19 will not be any different.
And there is a good reason for that.When analysts made their earnings forecasts for FY19, for around two-thirds of Nifty50 companies, they might have made their estimates based on hopes and dreams.
Or so says a study.
As an investor, if you have tried to build a portfolio around these projections, it is anybodys guess where you are headed.Brokerages often put out their index targets based on such projections, and they tend to create unwarranted euphoria among investors, promoting them to build in high expectations and allocate more money to equities.Which is why market veterans suggest investors to go for a bottom-up approach instead of constantly looking at the index to make investment decisions.The disaster with earnings projections in FY18 has been squarely blamed on poor performance by banks.
Since, Nifty EPS growth for FY18 has been marked down to nil from 6-7 per cent projected at the beginning of the year, says Edelweiss Securities.For FY18, Nify50s earnings per share (EPS) stood at Rs 445, and consensus estimate projects it jump to Rs 556 this financial year.Out of the Rs 110 expected addition to FY19 EPS, Rs 76 is projected to be contributed by sectors where earning forecasts are either too aggressive or high.Poor show in earnings in last four quarters has led to a 3 per cent downgrade in EPS projections for FY19.
But even after incorporating it, EPS growth expectations are still very high at 24.72 per cent.
This leaves them prone to downgrades, the brokerage said.Edelweiss Securities divided Nifty50s projected earnings in three categories: Dreamer, which include sectors where the ask rate for earnings growth is aggressive, nothing less than a day dream; Hopefuls, where hopes are quite high; and Realists, where earnings expectations are reasonable, but valuations may or may not be cheap.Mapping earnings expectations with valuations, we find cement, consumer discretionary and NBFCs are expensive relative to history, with high earnings growth expectations.
While realist stocks are also expensive, but growth risks appear lower, the brokerage said.Edelweiss put corporate banks (where consensus is building in an EPS forecast for FY19 that is higher than even FY16 numbers), export plays in auto sector (China recovery is seen as catalyst) and telecom and cement sectors (pricing) in the dreamer category.Dalal Street is expecting these sectors to see a V-shaped recovery.Metals, NBFCs , utilities, pharma, agrochemicals and consumer discretionary sectors come in the Hopefuls bracket, while IT, energy, domestic auto plays, consumer staples and industrial fall among Realists.Edelweiss noted that the markets sensitivity to earnings downgrades has increased further over the previous two quarters.
Sectors with big EPS downgrades have suffered sharp corrections while the ones whose earnings have sustained/improved have rallied.For the cement sector, consensus forecasts are ignoring the recent spike in oil prices, which may increase variable cost-to-tonnes ratio in FY19 and weigh on earnings, unless demand surges.Among hopefuls, Dalal Street is building in a 20 per cent EPS growth for NBFCs in FY19, which is a five-year high.
For consumer discretionary plays, higher input costs are likely to persist through FY19 easy gains done, but they will need to pass it through to maintain margins, the brokerage said.In case of realists, retail banks, domestic auto companies and industrials are seen as well-placed bets as that Dalal Street is forecasting a 1520 per cent EPS growth, which looks achievable, Edelweiss said.