The financial year began with expectations of uncertainty and muted earnings in the first half, and a hockey-stick recovery in the second. Will this come true finally, or will we be disappointed yet again? I use the term ‘finally’ because we have been hearing about this elusive recovery for a long time now.
BloombergQuint looked at earnings for each of the last four quarters. And the picture is not too pleasant. The share of companies that have reported a sub-estimates quarter is now the highest in at least four quarters.
Most analyst reports at the beginning of the year forecast an 18 percent growth in 2017-18 and about 20 percent in 2018-19. These estimates remind me of Charles Dickens’s Great Expectations. Before people think I am being overly skeptical, here are a few data points.
- The second volume of the government’s Economic Survey has cut the growth forecast for FY18 to the lower end of the 6.75-7.5 percent range.
- The State Bank of India reported a credit growth of 1.5 percent in the April-June quarter.
While you could argue that this will pick up, can credit growth really recover to a level that it can be seen boosting economic activity?
Remember, a credit growth revival would ideally precede any positive data on GDP growth.
Even though borrowings are happening through commercial paper and other instruments, bank credit still is an important indicator.
Hence, if the underlying economic growth is not going to be as high as anticipated, will the earnings growth beat the current estimates? I doubt that. I believe come the second half of FY18, a lot of analysts would reduce their FY18 EPS estimates sharply, if not earlier. By how much? I don’t know.
What I can safely say is that the markets are unlikely to be terribly disappointed by these possible downgrades because they would have factored in lower numbers and started looking forward to the next financial year.
Keep in mind, India is a much-loved market. The benchmark Nifty 50 has risen over 20 percent year-to-date and there is a potential for earnings growth, elusive as it may have remained.
The Nifty EPS estimates are likely to hover around the 475-490 mark for FY18 and around 550 for FY19. Investors would be hoping that these numbers do come through and the wait doesn’t get stretched for too long. If we close FY18 with just some minor disappointments and corporate India starts to deliver in late-FY18/early-FY19, then the faith of investors will be vindicated.
Niraj Shah is Markets Editor at BloombergQuint.
RECOMMENDED FOR YOU
POPULAR