Sensex companies are expected to report only single digit profit growth in the quarter ending March 2015. Several sectors may struggle to grow profits in the coming year. As a result, analyst firms are gearing up to downgrade their profit growth expectations not just for the coming fiscal, but also the year after that. The effect of these expectations can alre®bharatady be seen in the fall in the Sensex.
Here are six things to know:
1.Earning shock in March 2015: The December quarter earnings were below expectations. This disappointment is expected to continue in the March quarter and the markets may be in for an earnings shock. Net profits of the BSE 30 index companies may grow only 6.3% in the January-March quarter of 2015, as per a report by Kotak Institutional Equities. This is below the double digit growth expectations for the year. Annual earnings growth has been 8-10% in the past 5 years, according to a Livemint report quoting Dhananjay Sinha, co-head of institutional research at Emkay Global. However this year, earnings growth is expected to be in the 5% levels, the report said. This is much lower than the expected growth of 15%.
2. Downgrades in financial year 2016: Despite government’s focus on structural reforms, economic recovery has been slow. Earnings growth for the financial year 2016 was expected to be 19%, while that for the FY2017 was seen at 17%. With the latest March results expected to be in single digits, the expectations for the coming years have also been downgraded by at least 5 percentage points. India has seen the second largest forecast downgrade in Asia so far this year, as per a CLSA report.
3.Investors look for safety: Although the Indian stock markets have fallen, Indian equities are still expensive. When the earnings fall, the price to earnings (PE) ratio for the stocks become unattractive. The PE ratio measures how much rupees you shell out in exchange for every rupee earned by the company. It thus compares the share price with the company’s earnings capacity. The higher the ratio, the costlier the shares. This usually leads to a fall in share prices until the company’s profits grow. The expensive valuations is why Indian equities are the third worst performing among major stock markets in the last one month, after the Russian and Turkish markets, as per a CLSA report. As a result, investors are turning to safer options of investment or are holding on to cash.
4.Fall in Sensex: The Sensex lost more than 650 points on March 26, 2015, the second-largest one-day fall for India’s benchmark equity index in the recent past. It fell to below 27,500 points from its all-time high of 30,025 points on 4 March 2015. Lower march quarter earnings expectations and downgrades in the coming year earnings growth have resulted in the fall. Global cues of rising oil prices and the impending rate cut in the US have also made investors rethink their investments.
5.Reduced daily average investments by FII: There is a general agreement on the attractiveness of India as an investment destination in the long term. This is due to structural changes as well as a pro-growth central government. However, lower earnings expectations and a downgrade in the earnings growth for the coming years has resulted in a reduced investment by FIIs. The average daily net investment in Indian shares by FII was $ 13.71 crore in January 2015. This declined to $ 7.97 crore in February 2015 and $ 8.92 crore in March 2105. FIIs have already invested in droves in the Indian market. Without further positive cues, it is unlike to expect further inflows.
6.Sector watch:Sectors that are cyclical – those affected by the economic state – and industrials are likely to see a big change in their valuations, according to analysts. This means cement and capital goods companies could see a downgrade. Banking sector players may also underperform on fears of non- performing assets going up. However, the companies in the engineering space, particularly road development segment, could do well due to an increase in orders. IT companies with major international contracts and export oriented Pharma companies are also expected to do well.