Nifty FY16 earnings revised further downwards and why!
Thu, 10 Dec 2015 10:00:54 -0700
The FY16 and FY17 earnings estimates have been revised downwards to Rs 412.30 and Rs 499.85
The September quarter results were a disappointment. For the BSE200 stocks at a consolidated level, overall sales were down 3 per cent while Ebitda rose 4 per cent, interest outgo 8 per cent but tax outgo was down 7 per cent and PAT 2 per cent.

With no significant changes in earnings, we have been seeing disappointment over earnings expectations over the past few months and we have seen the EPS estimates for FY16 being revised downwards. The FY16 and FY17 earnings estimates have been revised downwards to Rs 412.30 and Rs 499.85 from the earlier levels of Rs 414.20 and Rs 501.60, respectively.

While in general, the IT companies came out with better performance during the quarter, they were cautious in their outlook.
However, with a strong performance in the US, we expect the IT sector to continue to deliver strong growth.

Financials is another area where we expect to see stronger earnings growth, following the disastrous performance in FY15. We believe India is on a relatively better positioning. Given the current uncertain environment, where one is expecting a US rate hike and soft commodity prices, we are maintaining our near-term trading range for the market between 7,500 and 8,200 levels.

Nifty50 at 7,613 is trading at 18.5 times FY16E and at 15.2 times FY17E estimated free float earnings. The last 10-year average for Nifty’s one-year forward PE is at 17.7 times, implying the Nifty at 16.4 times (12-month forward multiple for December 2017 EPS of Rs 477.90), which is continuing to trade at a discount to its last 10-year average of one-year forward multiple of 17.6 times.

The earnings growth is expected to be led by sectors such as financials, oil & gas, FMCG, pharma and IT. While private sector banks continue to deliver as per expectations, the PSU banks keep facing newer challenges. Overall, going forward, we expect the slippages in the financial services sector to be on the lower side than what we saw in FY15, and hence, the provisioning is expected to be lower leading to higher net earnings.

With the seventh pay commission award expected, passenger cars is expected to see good demand though tractors and motor cycles segments face headwinds.

MSCI India's premium to MSCI Asia (excluding Japan) over the last ten years averaged at 29 per cent and the current premium is at 28 per cent. The current FII sentiment is reflected in the current premia being lower than the 10-year average.

Though there is nothing like a near-term trigger, we expect FII interest to remain strong as India despite all the sluggishness in the domestic economy still continues to do well on a relative basis. We also expect India to have a superior earnings as well as a relatively stable currency.

The northeast monsoon has played havoc with south India, especially Tamil Nadu and the city of Chennai. Five meteorological subdivisions of south India -- namely Tamil Nadu, Coastal Andhra, Rayalaseema, Kerala and southern interior Karnataka -- receives about 30 per cent of their rainfall from the northeast monsoon (October to December). TN in particular receives 48 per cent of its rainfall during this season. While this area, except coastal Andhra Pradesh, has seen a significant increase, other regions have seen a lower rainfall.

Overall, the country witnessed 86.4 mm rainfall between October 1 and December 02 against the LPA of 111.4 mm, showing 23 per cent lower rainfall against the LPA. The rabi sowing continues to be lower at 370.2 lakh hectares vs 438.7 lakh hectares as of December 4, 2014.

With no near-term political trigger except the passage of GST bill, the Nifty50 seems to be in course for a trading range between 7,500 and 8,200 levels, given the current headwinds in terms of politics and the probable Fed rate hike.

We continue to maintain our 12-month Nifty target at 8,800-9,000 level. We remain overweight in financial services, and neutral on IT, automobiles, FMCG, healthcare and engineering and capital goods and underweight on metals.

Out top largecap picks include HDFC Bank, Infosys, Coal India, State Bank of India, ICICI Bank, Maruti Suzuki, Tata Motors, Larsen & Toubro, IndianOil, Aurobindo Pharma, Cummins India, GlaxoSmithKline Consumer Healthcare and Glenmark Pharmaceuticals, while top midcap picks are Hexaware Technologies, Jubilant Life Sciences, Sadbhav Engineering, Allcargo Logistics, JK Lakshmi Cement, Va Tech Wabag, NIIT Technologies, VRL Logistics and Ashoka Buildcon.

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