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Nomura expects that the consensus earnings will fail to deliver the expected 14% growth in FY14 even as they describe that earnings will be key to stock performance for the current fiscal. It has picked ICICI Bank, ITC, Mahindra & Mahindra, Dr Reddy’s Laboratories and Zee Entertainment to perform well
Nomura Equity Research has sounded a cautious tone in its latest report to clients. The research firm expects markets to disappoint this year by saying that consensus earnings will fail to deliver the expected 14% growth. It expects earnings this year to be a key catalyst towards stock performance. The report said, “We continue to maintain that earnings growth would play an important role in determining market performance this year. We further believe that consensus earnings for FY14 will likely disappoint from the current expectation of 14% growth.” Nomura has shortlisted ICICI Bank, ITC, Mahindra & Mahindra, Dr Reddy’s Laboratories and Zee Entertainment as stocks which will perform well.
Consensus earnings are a metric, often used by analysts and investors alike, to measure sentiment and expectations of the market. It is an aggregation of all analysts’ expectations and a key tool for market valuation. In this case, Nomura doesn’t expect the market to deliver 14% earnings growth. At the same time, Nomura hasn’t re-rated either, which is a bit odd, due to “structural imbalances”.
Nomura expects that earnings will be a key catalyst for stock performance this year. It found that the correlation between consensus earnings and stock prices this year is far more than last year. In other words, stock prices are expected to react according to the quality of earnings expectations (not the outcome, though outcome can affect consensus earnings going forward). Data for Nifty index stocks reveal that more than half of the difference between individual stock price moves since the beginning of this year can be attributed to consensus earnings changes over the same period, the report said. Over the same period last year, the consensus earnings were only explained in less than one-tenth of stock price movements in Nifty.
The reason the focus has shifted back to earnings is because global factors do not look too good and focus is on how individual companies perform. Nomura says in its report: “Following contraction in global risk premiums in second half of the 2013 fiscal and the simultaneous rally in risky assets, we expect the focus to turn to domestic fundamentals this year.”
According to Nomura, Reliance Industries, Reliance Infrastructure, Punjab National Bank, Coal India, GAIL, ICICI Bank, NTPC, Cairn India, Axis Bank, Maruti Suzuki all have underperformed so far this year even though they have not been downgraded by analysts. The only stock which has outperformed despite downgrades has been, ironically, DLF.
Similarly, according to the report, the stocks which have outperformed excessively are Tata Consultancy Services, ONGC, BPCL, HCL Technologies, Lupin, Ambuja Cements and Dr Reddy Laboratories. The stocks that have underperformed most are Hindalco Industries, BHEL, Punjab National Bank, Bajaj Auto, Coal India, Bank of Baroda and Larsen & Toubro.
MCHI's property exhibition in Mumbai suggests weak demand from end-users due to high prices. There were a few discounts or promotional schemes on offer but none more than 5% of the sales price. Weak affordability remains the key concern for near-term volumes and a revival hinges upon income growth or a decline in property prices, feel analysts