‘India Inc likely to see some more earning downgrades’

While there is a rush of reform measures, the worst is yet to be over for India Inc. In an interview to Bloomberg TV India, Kotak Institutional Equities Senior Executive Director and Co-Head Sanjeev Prasad says there could be some more earnings downgrades and that will keep the markets choppy.

You have predicted another few quarters of earnings downgrade. What’s the reason for this cautious note?

In the next two to three quarters, there are still some issues that need to be ironed out before the economy starts recovering. As of now, both consumption and investment are looking weak. The export story also looks quite weak, considering what is happening in the global economy.

So, if you look at the earnings for FY17, consensus estimates are for 20 per cent growth for the Nifty index. When I look at some of the assumptions, I think there are four-five sectors where we still need to see earning downgrades, particularly for the oil and gas and metal space — current oil prices or metal spot prices are well below the prices forecast by our analyst team, for example.

So, clearly, we’ll see some downgrades if we don’t see any recovery in the commodity cycle. Also, in the case of automobiles, even though volume growth is expected to pick up in FY17, I am not very sanguine about some of the margin assumptions that have been built in by the street. Over the last four quarters we have seen a significant improvement in the margins of automobile companies due to lower input prices.

But if you see in the case of some companies, Maruti, for example, analysts have assumed 16-17 per cent EBITDA margin for the next two-three years — historically it has been more in the range of 10-13 per cent. So how do you take a call that these high margins will sustain?

When I put all that together, I see another quarter or two of earnings downgrades. Until and unless we see some recovery in the investment cycle, stabilisation of earnings numbers and further progress on reforms, it is hard to make a case for the market going up. Also, keep in mind the fact that US Fed rate hike will probably happen in December; some of it is probably factored in but it could still result in a moderate negative impact on emerging markets.

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