Most of the top 50 Indian companies are expected to report lower profits than estimated at the beginning of the year as they face multiple headwinds, including disruption from the Goods and Services Tax.
Analyst tracked by Bloomberg downgraded earnings estimates for 34 of the 50 Nifty companies after the results for the first quarter ended June. The index constituents’ aggregate net profit growth is expected remain flat at 1.5 percent in the year ending March 2018, Kotak Securities said in a report. It has lowered its Nifty earnings per share estimate by over 3 percent to Rs 462.
“We do not rule out further downgrades if the economy fails to recover quickly from the temporary disruption arising from demonetisation and implementation of GST,” said Kotak Securities. The brokerage had another warning: an extended slowdown in consumption, hiring and investment in the informal economy can’t be ruled out if it is unable to cope with the changes arising from GST.
The average earnings of Nifty 50 companies declined 8.4 percent year-on-year in the quarter ended June. While automobile and consumer goods companies faced disruption ahead of GST, banks felt the impact of higher slippages and drugmakers faced pricing pressure in the U.S.
Many consumer goods, auto and staples makers disappointed in the first quarter, said Girish Pai, head research-institutional equities at Nirmal Bang Institutional Equities. But it’s not only due to GST transition. Weak demand and pressure on margins due to higher commodity related costs also had an impact, he said.
Pharmaceutical companies, banks, software services providers and oil and gas majors are expected to post lower-than-expected earnings for the full financial year, he said.
Brokerages Dolat Capital and Edelweiss Securities Ltd. also lowered Nifty 50 aggregate earnings per share estimates for the full financial year by 4.5 to 7 percent. “We have more upgrades than downgrades on our coverage of Nifty 50 companies. Yet, the quality of downgrades is far sharper than the upgrades,” said Amit Khurana, co-head equities and head of research at brokerage Dolat Capital.
Edelweiss Securities also said Nifty 50 earnings missed its estimates. “We expect Nifty to post an EPS of Rs 515 for FY18, down 4.5 percent,” said Prateek Parekh, research analyst at the brokerage.