Analysts from Nomura and BNP Paribas are pessimistic on the upcoming earnings season and suggest that the overall economic growth has still not bottomed out. Yet they expect Sensex to close above 21,000 in FY 14

Last quarter (Q4FY13), Moneylife analysed data of 1,144 companies, and noticed that sales, operating profit and net profit were subdued, due to challenging market conditions and macro-economic headwinds (Read: India Inc Q4 net sales up 6%, net profit down 3%.) Research firms are being largely negative on earnings growth for Q1FY14, as the earnings season kicks off with Infosys’s results announcement. “June-quarter results suggest a continuation of the trend of steadily weakening top-line growth that has been at play over the past two years,” says a research report from Nomura. Analysts of BNP Paribas are of the opinion that, “revenue and earnings growth will remain tepid with profit growth (ex oil marketing companies) forecast to decline from 5-7% y-y growth in the first three quarters of FY13 to 3.7% y-y growth in Q1FY14.”
 

Nomura research expects sales to continue to decline and doesn’t expect any bottoming out soon. It expects June quarterly earnings to be weak. It said in its report, “Net sales growth is estimated to fall below 5% year-on-year (y-o-y) for the first time in four years. The continuing slide in topline growth suggests that overall economic growth has likely not bottomed out yet.” Yet the firm mentions that it , “continues to expect around 10% growth in market earnings in FY14F, compared with a 16% growth being forecast by consensus. Our Mar-14 ending target for Sensex remains at 21,700 which implies 11% potential upside from current levels.”
 

Research firm BNP Paribas, in its report, state “Earnings will face a double whammy from both slowing revenue growth and continued pressure on margins... We expect economic headwinds to continue to weigh on the earnings outlook.” The firm however mentions that it “has maintained a Sensex target of 21,300 since the beginning of 2013. Since we had assumed some downside to BNPP analyst earnings estimates at the beginning of the year, we see no reason to change the target.”
 

On the earnings front, the Nomura report goes on to say that “While profitability in the quarter will be hit on account of forex losses resulting from the 9% depreciation of the rupee, a commensurate depreciation in the same quarter last year will attenuate the y-o-y impact on earnings.” On the other hand, BNP Paribas has given a different perspective on the earnings preview. They believe that the market has not discounted many negatives, and therefore there’s a possibility of a downslide. In their report to clients, they state: “Recent risks to the Indian market include capital outflows and currency depreciation, domestic demand slowdown, policy direction moving towards populism again, and the postponement of an Asian economic recovery. These risks don’t seem to be adequately factored into earnings estimates.” Furthermore, they state: “Revenue growth moderation appears even more severe than the decline in earnings growth. Stocks and sectors depending on the domestic economic cycle – particularly autos, financials and capital goods – may see some earnings downgrades”



On how the different sectors are expected to perform, the Nomura report mentioned, “Key sectors expected to deliver sub-5% sales growth are autos, capital goods, metals and utilities.” It is overweight on pharmaceuticals, consumer discretionary and cyclical while it is surprisingly underweight on information technology. Further, it said, “the growth environment remains weak and y-o-y operating margin compression is expected to continue for capital goods, metals and transport infrastructure plays.” Unlike Nomura, BNP Paribas are bullish on information technology, while bearish on autos, PSU banks, telecoms and materials as well as cyclicals. It expects autos, financials, capital goods and metals to witness earnings downgrades. They also expect EBIDTA margin to decrease 90 basis percentage points on their universe of stocks.
 

However, both Nomura and BNP Paribas are bearish on public sector banks.  The worsening of asset quality is one of the factors that will affect PSU banks. We had written exclusively on this in our cover story last year (Public sector banks - Loans turning bad), long before analysts the realised extent of the mess. Nomura is bearish on State Bank of India but bullish on select private banks. On the other hand, BNP Paribas is bearish on PSU banks in general, stating: “PSU banks have a downside risk from worsening asset quality”.