Demonetisation Aftermath: Nifty Earnings To Take 1.6% Hit In Current Fiscal
Nifty 50 earnings downgraded by 1.6% post demonetisation
The NSE Nifty 50 companies are expected to see a drop in their earnings in the financial year 2016-17. Estimated earnings per share for the index has been downgraded by 1.6 percent post demonetisation, according to a consensus of analysts tracked by Bloomberg.
The Nifty is expected to report an EPS of Rs 437 as against Rs 444 two months back. Brokerages have downgraded earnings expectation from the 50 companies that constitute the Nifty, resulting in the drop in EPS of the index.
The withdrawal of old Rs 500 and Rs 1,000 currency notes triggered a severe cash crunch, slowing consumption in the heavily cash-reliant Indian economy. Companies in sectors like automobiles, banking, cement, fast-moving consumer goods and media/telecom faced headwinds, leading to an earnings downgrade for the second half of 2016-17.
Consumer Sector
The three consumer companies in the Nifty 50 have seen their earnings estimates being lowered by up to four percent.
Asian Paints Ltd.’s projected EPS has been lowered by 3.6 percent. Eighty percent of paint demand comes from re-painting, and since this is highly discretionary in nature, cash-strapped consumers are expected to delay spends in this segment, according to Credit Suisse.
Demand for FMCG products too is expected to revive only after two to three quarters as the cash crunch has forced consumers to switch to smaller packs.
Downtrading is visible in terms of smaller pack sizes within a brand. However, there are still no signs of consumers switching to lower priced brands within a category.Religare Securities Report
Hindustan Unilever Ltd.’s expected EPS has been lowered by 3 percent, while ITC Ltd. has seen its earnings estimates downgraded by over 1 percent.
Multiple consumer companies have hinted at lower advertising budgets to tide over slowing demand.
Advertising spends to be cut as it is discretionary and companies can increase intensity to time it with liquidity improvement in the economy.ICICI Securities Report
The FMCG sector is a major advertiser, and lower spends will hurt media companies. The estimated EPS of Zee Entertainment Ltd., the only media company in the Nifty 50, has been cut by 3.5 percent.
Cement Sector
Nearly 65 percent of the cement demand comes from real estate, another sector that relies heavily on cash. With the shortage of cash hurting real estate sales and construction supplies, the second-rung impact will be seen in the cement industry. No surprises then that the expected earnings of cement companies in the Nifty 50 have been downgraded by 3 to 23 percent for the current financial year.
A channel check conducted by Kotak Securities in 25 cities shows that demand may have fallen by as much as 70 percent in certain regions.
Auto Sector
Earnings have been revised in the range of 2 to 18 percent for the auto companies in the Nifty 50 index, with Tata Motors Ltd. witnessing the biggest downgrade of over 18 percent.
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Demand for automobiles plunged in November and December as the cash crunch hurt consumers. Two-wheeler manufacturers were worst hit since a significant portion of sales happens through cash whereas most four-wheeler purchases are financed through credit.
Earnings per share estimates of two wheeler companies like Bajaj Auto Ltd., Eicher Motors Ltd., and Hero MotoCorp Ltd. have been reduced by two to three percent.
Over and above the cash crunch induced slowdown in sales, Tata Motors’ earnings estimates were slashed also because of weaker than expected Jaguar Land Rover sales. Maruti Suzuki’s estimates have been raised, while Mahindra & Mahindra Ltd’s estimates are unchanged.
Banking Sector
Banks may witness a mixed impact on their earnings post demonetisation. Three out of the eight lenders in the Nifty 50 have seen an up to 2.5 percent upward revision in FY17 earnings estimates. But the expected EPS of the country’s largest lender, State Bank of India, has been cut by 5.3 percent, followed by Axis Bank Ltd. (-2.5 percent) and Kotak Mahindra Bank Ltd. (-1.1 percent).
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Credit growth is likely to slow down in the short term, especially in auto, loans against property, personal, and small and medium enterprise segments. HSBC, in its December 9 report, estimates loan growth across banks under its coverage to take a knock of two to five percent in FY17. Given the costs of ATM recalibration, operating expenses are likely to inch up, and SME and agriculture lending segments too stare at a possible rise in bad loans.
Treasury gains on banks’ bond portfolios could offset some losses and potentially lift earnings in the second half of the year, which explains lower earnings downgrades compared to other sectors. Also, margin boost from the higher share of low-cost current and savings account deposits could offset the negative impact of higher bad loans.
