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Not so great expectations

Not so great expectations

Corporate earnings are likely to fall this year. Money Today studies the top companies and sectors to examine their performance over the next few quarters.


Here is a ready reckoner of the revised EPS estimates of the 93 companies that we examined. Brokerages believe that 2009 shall be very challenging for most companies.

Perhaps the only good thing for stock investors this year is that it will end soon. By far, 2008 has been the most turbulent year for the stock markets in recent times. The Sensex has lost almost 60% from an all-time high of 21,206 that it touched on 10 January. The BSE benchmark, which commanded a valuation of 25.5 times its earnings in January, is now available at less than half that price.

The question topmost on everybody’s mind is, what is likely to happen next year? How will their equity investments fare? One of the best (though not fool-proof) ways to predict future stock prices is to evaluate the earnings downgrades of the companies as estimated by various analysts. We considered a subset of 93 actively tracked stocks to give you an indication of how they are likely to move in the next 6-12 months. Out of these, the EPS estimates of more than two-thirds, or 63 companies, have been downgraded by research analysts.

Why should we consider earnings at all? According to Vivek Ranjan Mishra, equity strategist, HSBC, 73% of growth in the Sensex’s journey from 781 points in 1990 to 20,000 in 2008 was led by EPS growth. But this equation has now changed. “EPS growth now accounts for 62% of index growth, PE expansion for 20%, and the combined effect of PE expansion and PE growth for 18%. In the past 10 years, however, re-rating has been a more significant driver of returns,” notes Mishra.


The price to earnings (PE) multiple of the Sensex is currently at 11.2 times, the lowest since December 1996. So, what happened in 2008 to take the benchmark index to a 12-year low in terms of valuations? The answer lies in earnings expectations. Corporate India is finding it hard to sustain the phenomenal growth in earnings registered in the past three years. The 30 companies in the Sensex have registered an average earnings growth of 30% a year in the past three years. However, in 2008-9 the companies listed on the Sensex are expected to register only half of that EPS growth. If the worst expected EPS growth is 8.6%, Anand Rathi’s estimates of 14.1% YoY growth is the most optimistic of the lot.

The Indian economy as a whole is headed for a slowdown. This has made research houses scale down their estimates of corporate profits. The steep decline in earnings estimates, one of the worst in recent years, has spooked the markets. “This is the first significant downgrade in our estimates over the past few years. It factors in the revised estimates for companies after the second quarter results of 2009-10,” says Rajat Rajgarhia, head of research, Motilal Oswal.

Rajgarhia has downgraded the Sensex EPS estimates for 2008-9 by 11% and for 2009-10 by 16%. “Our current Sensex EPS estimates imply a growth of 8.6% in 2008-9 and a growth of 16.9% in 2009-10. Excluding the new businesses contribution from Reliance Industries, the growth in the 2009-10 Sensex EPS would be just 6%,” he adds. The key contributors to the downgrade in 2008-9 are two Tata group titans. The EPS estimates of Tata Steel and Tata Motors have been downgraded by over 50%. For 2009-10, Hindalco and Sterlite Industries join them to lead the downward revision of growth expectations.

A comparison of the top two contenders in four sectors.

Infosys vs TCS

• Infosys’ cash and equivalents of Rs 7,821 crore higher than TCS’s Rs 4,314 crore; 63% of TCS’s cash and equivalents in risky mutual funds.

• Infosys focuses on higher-value-added services and commands premium valuations during economic downturns.

• TCS has the highest exposure to the now troubled BFSI segment.


• SBI’s gross NPAs down from 2.9% in Q2 2007-8 to 2.5% in Q2 2008-9; ICICI Bank’s gross NPAs rose from 3.2% to 4.6% during the same period.

• SBI’s net interest margin at 3.16% in Q2 2008-9, compared with ICICI Bank’s 2.3%.

Bharti vs Reliance Communications

• Bharti has low debt-equity ratio and is expected to witness positive free cash flows in 2008-9.

• Bharti’s ARPU of Rs 335 and MoU of 534 minutes in Q2 2008-9 is higher than Reliance’s Rs 271 and 423, respectively.

• Both Bharti and Reliance have capital-intensive plans that will hit their bottom lines.

Hero Honda vs Bajaj Auto

• In the sub-125cc segment, Hero Honda enjoys a 75-80% market share; Bajaj’s overall share dropped due to near-stagnant volumes in executive and premium segments.

• Bajaj’s outlook for H2 2008-9 may worsen due to severe tightening in financing and depressed consumer sentiments.


The telecom sector is the least affected by the downgrade, thanks largely to the pace at which this industry is adding wireless subscribers. From a mere 3.5 crore mobile subscribers in 2003-4, they have risen to 25.6 crore in 2007-8. With an estimated 80 crore Indians not owning any telephone connection, the next wave of growth is expected to come from rural areas, where a majority of the country lives. According to Anand Rathi, wireless subscribers in India are expected to more than double to 54.8 crore by 2010-11. While new entrants can put pressure on the profitability of existing players such as Bharti Airtel and Idea Cellular, it is also challenging for them to build costly telecom networks.

Indian banks, on an average, reported a 27% year-on-year growth in net profits in the second quarter of 2008-9. The growth driver was the 39% jump in net interest income. The measures to ease liquidity are expected to further boost profitability because Indian banks will have more money to lend. The only concern is that the slowing economy might increase delinquencies from the retail segment. Barring some private sector banks, none of the large banks has witnessed significant downgrades.

While most other sectors are in a huddle, the FMCG companies are having a good time. Nestle, Godrej Consumer Products, Marico and Asian Paints saw sales growth of 22-30% in the second quarter, while ITC, Hindustan Unilever and Dabur grew by 16-19%. Historically, consumer goods like groceries and processed foods are the last to be affected by a slowdown and most analysts feel that the consumer demand for FMCG products will be sustained. This, despite the fact that companies across the board hiked product prices by 10-12% earlier this year, when commodity prices were peaking. Now that the commodity prices have come down significantly, FMCG companies will see their input costs fall and profits shoot up.


While falling commodity prices boosted the profitability of the FMCG sector, they brought no cheer to the companies that manufacture them. Cement and metal companies, which rode the tide of rising demand for their products last year, are now in a precarious situation, where the demand for their goods is fast evaporating. Ditto for real estate. With the broader economy in the midst of a slow down, and the average cost of owning a house going up, analysts are unanimous that the real estate market will experience a prolonged slump over the next two years.


Based on the earnings expectations of brokerages and research houses, it seems that SBI, Bharti and Bhel are the best stocks to buy in 2009. None of these companies are expected to witness a significant impact on their earnings. They are market leaders in their sectors and most broking houses are positive about their earnings momentum.

For instance, Bhel’s order backlog of Rs 1,04,000 crore means robust earnings visibility. It has very little debt and with a cash equivalent of Rs 8,390 crore, can tide over the current liquidity crisis.

The earnings estimates of these market leaders have witnessed the least downgrading.
Bharti Airtel 27,02537,05444,9896,7008,5989,78942.139.338
Bhel 19,36625,34930,6092,6413,5734,59417.416.918.5
SBI *26,41930,77834,8606,7298,1028,1022.82.82.6
*SBI sales and EBIT margins are total income and net interest margins


The earnings of these three companies have been downgraded the most by analysts.
Sesa Goa 3,8226,4075,3331,5222,5401,58960.352.537.3
Tata Steel 1,31,5351,52,8811,25,34312,3497,9174,27513.511.610.4
Unitech 4,2804,8815,2801,6691,5351,28855.349.841.0

Published on: Dec 11, 2008, 11:23 AM IST
Posted by: AtMigration, Dec 11, 2008, 11:23 AM IST