Even as coronavirus (Covid-19) pandemic is yet to peak and its impact fully known on the fortunes of Corporate India and the economy, most brokerages have started to trim earnings estimates for India Inc for the next financial year 2020-21 (FY21).
Analysts at Jefferies, for instance, suggest that the markets are already pricing in a 15 per cent drop in earnings given the current valuations. Within Nifty 100, they believe, 63 per cent stocks, including HCL Technologies, Infosys, ITC, Hero MotoCorp, Marico and Petronet, are building in a higher earnings downgrade of over 20 per cent. The earnings cut potential, Jefferies says, for select companies in the auto, energy, financials, industrial, materials & metals, technology and the utility sector could be higher between 25 to 45 per cent.
“Market decline has taken Nifty price-to-earnings (PE) to 13.3x one-year forward consensus earnings, 15 per cent below its last 10-year PE multiple. In other words, the market is already pricing in a 15 per cent earnings cut. While the Nifty had bottomed at much lower PEs (8x) during the global financial crisis (GFC), the cut to consensus earnings then was 22 per cent. Other market bottoms (Euro-2011, Taper-2013, Yuan devalue-2016, Demonetisation-2017) in last decade had averaged 13.2x PE,” wrote Mahesh Nandurkar of Jefferies in a co-authored report with Abhinav Sinha.
Those at Motilal Oswal Securities, too, have priced in a 10 per cent cut in Nifty earnings estimates in FY21. Global cyclicals, they believe, will see significant earnings downgrade given the sharp fall in commodity prices and expected moderation in global economic growth. “Domestic economy facing sectors will also see downward revision in the earnings forecast due to restricted movements to prevent the outbreak of coronavirus,” they wrote in a recent report.
From the recent peak on February 19 2020, the Indian equity market has corrected 28 per cent (in US dollar terms), underperforming many regional peers. The uncertainty around Covid-19 spread has expanded the risk premium for equities. The fall has been magnified as foreign institutional investors dumped Indian stocks and sold to the tune of $4.8 billion in the last 11 days alone (till March 16), data shows.
Taking into account the current slower economic growth and changes in the prices of commodities and currencies, analysts at Nomura estimate 10 per cent and 8 per cent downside risk to FY21 and FY22 consensus’ earnings estimates, respectively.
“We see earnings risk across sectors driven primarily by financials autos, information technology (IT) services and metals. We acknowledge additional risk, particularly to near-term earnings, but if Covid-19 spread is contained it will have a limited impact on long-term earnings, in our view,” said Saion Mukherjee, managing director and head of India equity research at Nomura in a recent co-authored report with Neelotpal Sahu.
Meanwhile, Morgan Stanley and Goldman Sachs expect the global economy to head into a recession going ahead in 2020. Morgan Stanley sees 2020 global growth to dip to 0.9 per cent, the lowest since the global financial crisis (GFC) and says the global recession in 2020 to be deeper than in 2001. “We expect global growth to contract by 0.3 per cent in the first quarter (January – March) of 2020 (Q1-20) and 0.6 per cent in 2Q20,” wrote Chetan Ahya, chief economist and global head of economics at Morgan Stanley in a co-authored report with Derrick Y Kam, Nora Wassermann and Frank Zhao.