(Bloomberg) -- Against a slowing Indian economy, Emkay Global Financial Services Ltd. has flashed a warning sign for stock investors: be wary of optimistic Indian analysts who predict earnings growth.
“We hold a mirror before the Indian sell-side analysts, particularly focusing on how consensus estimates move over time,” Sunil Tirumalai and Kruti Shah, analysts at Emkay wrote in an investor note dated Aug. 2. The backdrop of a slowing economy and the low probability of any big-bang stimulus doesn’t bode well for overall growth or the earnings outlook, they wrote.
Analysts have a poor track record of predicting annual earnings at the top 50 companies in India and their latest estimates may not be any different, based on the brokerage’s data. Emkay said consensus earnings estimates have been reduced in 11 of the past 14 years, while analysts are beginning to build initial forecasts for the financial year that runs through March 2021.
Emkay has a “cautious stance” on India’s NSE Nifty 50 Index as it doesn’t see the gauge’s valuation pricing in the earnings risks. Profits at Nifty companies that have reported earnings so far for the April to June period signal average growth of only 5% from the same period a year earlier, versus estimates of 20% to 30% that analysts have built for this and next fiscal years, Emkay said.
Here are some other calls from the brokerage
Emkay’s stance is reflected in the nearly 4% cash position it has built for its Nifty portfolio. It’s underweight shares of automakers and wireless carriers.
The brokerage likes shares of software exporters, banks with most of their lending to companies, and capital-goods makers that could gain from continued government spending on infrastructure.
India’s economic slowdown is deepening and fiscal constraints limit the government’s ability to provide stimulus, the brokerage said.
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