When the coronavirus first hit early in January, stocks were soaring to all-time highs as people were expecting markets to continue show earnings growth. Stock markets had earlier factored in the Nifty earnings growth to be around 15-20% in FY21, while other optimistic analysts even forecasted 27% rise in net profits.
But all that has changed now.
Analysts are scaling down earnings estimates for FY20 and FY21. Though the coronavirus led to a shutdown across India only in the last week of March, earnings for the fourth quarter was expected to be slower. Economic growth had begun to slow in the December quarter which was expected to spill over in January. Hence, slower earnings growth has not come as a big surprise.
NOT MUCH EARNINGS UPSIDE
But what is surprising is that for FY21 most analysts are factoring in zero or near zero earnings growth. For FY20, the Nifty 50 could report earnings of about Rs 500-510. Some other brokerages have an even bleaker outlook. For instance, brokerage house Motilal Oswal Financial Services expects the Nifty 50 earnings to be around Rs 485, while it factors in a growth of just a mere 3% for FY21. Even then, a large dose of earnings growth will come from the banking sector.
“Our Nifty EPS estimates have been revised downwards by 8% toINR485 for FY20 (prior: INR527).IOC, ONGC, BPCL and Tata Motors accounted for the bulk of the downgrade.nWe are now building in EPS growth of just 3% for the Nifty in FY21. Ex-Financials, Nifty profits are expected to decline 4%,” a Motilal Oswal Financials Services report has forecasted.
Others such as Kotak Securities are marginally more sanguine with FY20 earnings expected to be in the range of about Rs 510 for Nifty 50. Some of the thrust in FY21 will continue and as such covid-19 recovery would be seen in the second half. Hence, Kotak also expects earnings to be around Rs 543 in FY21, but that could be subject to downward risks over time.
“We currently expect net profits of the Nifty-50 Index to grow 6.5% in FY2021 but we expect further downgrades in earnings of banks and oil, gas and consumable fuels sectors,” a report from Kotak Securities elucidated.
Even then, even assuming about Rs 500 as earnings for FY20, the Nifty 50 seems to be valued at 18 times price-earnings multiple. Historically, the Nifty 50’s price-earnings (PE) multiple is about 17 times earnings, so the current valuation looks a bit stretched. However, given the liquidity conditions globally, the current valuations could still be justified.
Looking one-year head, assuming there are no downgrades and companies and economies bounce back better from the covid-19 crisis, the Nifty 50 is valued at a PE of 17 times earnings. That’s still near the fairly valued zones, and perhaps even an inch or two on the stiffer side.
BUT DON’T OBSESS WITH EARNINGS
Of course, but these are stranger times, and so give the slosh of liquidity floating around in the global markets an exception or two can be made for the valuations. Analysts at Kotak also note that the markets are not just looking at one-year forward earnings.
“Nonetheless, we do not see any reason to over-obsess with FY2021E earnings if our base case investment view of normalization in economic activity by end-FY2021 was to hold true,” said the Kotak report. “As we have argued before, the fair value of a stock does not depend much on near-term earnings even if stock prices reflect near-term earnings changes. That’s what makes investing so much fun, as an aside,” the report elaborated.
Yes, of course, this idiosyncratic behaviour of the stock market also gives investors the adrenaline rush.
