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.

R. Sree Ram | Print Edition: December 25, 2008


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.

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