FY18 Earnings: A Tale Of Two Halves
This financial year started off with expectations of uncertainty and muted earnings in the first half, and a hockey-stick earnings recovery in the second. Will this be the case this time around, finally, or will we be disappointed yet again? I use the term ‘finally’ because we have been hearing about this elusive earnings recovery for a long time now. BloombergQuint has looked at what the eventual earnings picture looked like at the end of the last three quarters. And the picture is not too pleasant. The share of companies that have reported a sub-estimates quarter is the highest in at least four quarters.
Most of the analyst reports that were released at the start of the year forecast 18 percent growth in 2017-18 and about 20 percent in 2018-19. These forecasts remind me of the Charles Dickens book, Great Expectations. But before people believe that 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. State Bank of India has shown credit growth of 1.5 percent in the April-June quarter, and while you would argue that this will pick up, can it really pick up to a level where we can believe that banks are lending to an improvement in economic activity?
Remember, a credit growth revival would ideally precede any positive GDP growth data release.
Even though its relative predictability is muted because of borrowings happening through commercial paper and other instruments instead of bank credit, it still can be a big indicator. Hence, if the underlying economic growth is not going to be as high as anticipated earlier, would there be earnings growth that can beat the current estimates? I doubt that. I would believe come the second half of FY18, a lot of analysts would reduce their FY18 EPS estimates sharply, if not before that. By what number, I do not know, but what I can say is that the markets are unlikely to be terribly disappointed by these downgrades because the markets would have factored in those lower numbers and started looking forward to the following financial year.
Keep in mind, India is currently a much-loved market. It does enjoy the credit of strong performance (up over 20 percent year-to-date) and the potential for earnings growth (elusive as it may have remained until now).
At some point, the markets need earnings to fire up.
The Nifty EPS estimates are likely to hover around the 475-490 mark for FY18 and around the 550 mark 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.
Source: bloombergquint
