D-Street’s dream run may be building on sloppy earnings estimates, warn analysts

NEW DELHI: The gradual lifting of the lockdown in the economy may have helped the domestic stock market form a near-term bottom and rally over 30 per cent from March lows, but analysts say Dalal Street will need a reality check on consensus earnings estimates for FY21.

For the market to sustain this rally, Dalal Street needs to come to terms with the pandemic reality as current earnings estimates remain unreasonable, they said.

What’s in the price?
Rating agency Moody’s believes Indian economy may contract 4 per cent in FY21. Two other rating agencies S&P and Fitch expect the economy to shrink 5 per cent this financial year.


India Inc’s earnings estimates, too, have seen a steep cut of 21 per cent since the beginning of the year, but analysts say they insufficiently price in the pain expected in the first two quarters of the year.

Despite a 21 per cent cut in earnings estimates from peak levels, the FY21 EPS estimate for Nifty stands at Rs 527, which bakes in a 3.5 per cent growth over the FY20 estimate of Rs 509.

“Going into the 2008 crisis, FY09 estimates for Nifty 50 stood at Rs 319 against Rs 323 for FY08, largely flat. However, the actual earnings ended up 15 per cent lower (from Rs 284 to Rs 242),” Elara Capital recalls.

“Taking a cue from 2008, we therefore expect further contraction in FY21EPS, which have not been priced in at current levels,” the brokerage said.

NSE barometer Nifty has rallied 34 per cent from its March 24 low of 7,511, while BSE Sensex has climbed 33 per cent from its March 24 low point of 25,638.

High-frequency indicators
As easing of the lockdown started, Kotak Institutional Equities decoded a few high-frequency indicators that suggested a mixed picture for the economy.

For instance, domestic flights restarted in India from May 25. On June 2, operations were 25 per cent of pre-Covid level in terms of number of flights and 20 per cent in terms of passengers carried. But road traffic, say, in Bengaluru, was close to 50 per cent of pre-Covid levels while New Delhi traffic was inching towards normal levels.

Daily average of number of e-waybills generated between May 25 and 31 stood at 75 per cent of the daily average for FY2020. Even as import duty collection and the number of e-waybills generated continued to move towards pre-Covid levels, the electricity consumption gap between CY2019 and CY2020 widened.

“Vehicle registration data improved, but is still much below FY2020 average. The number of daily new virus confirmed cases continues to rise, but recoveries now account for close to 50 per cent of total confirmed cases,” it said.

Lastly, unemployment levels remain high, but dropped compared with May 24 estimates, as per CMIE survey.

Key risks
Analysts said India had the most stringent lockdown with the least number of cases.

While India managed to lower the rate of virus infections, they still have touched the 2,00,000 mark. It is expected that cases may peak only by July-end.

Nomura India noted that the higher number of virus infections in key industrialised states and urban consumption centres creates a headwind to the economic growth revival.

“With the private sector’s lower propensity to spend and invest, and the financial sector’s sustained risk aversion, the onus is now on the government to kickstart growth,” it said.

The financial package announced thus far has been aimed at survival and prevention of major dislocation, Nomura said, adding that absence of a meaningful growth stimulus and visibility of private sector participation over the medium term will keep investors concerned on macro parameters and medium-term growth prospects.

The Japanese brokerage sees 17 per cent potential downside to earnings estimates for FY21 and 9 per cent for FY22.

“Was it a better policy? Economically, No! Medically, we will only know in hindsight!,” said Edelweiss Professional Investor Research.