May earnings downgrades in India are highest in Asia

ET Intelligence Group: For Indian equity investors expecting an increase in earnings across the investment spectrum, the wait could get a bit longer. The cycle of earnings downgrades doesn’t seem to have ended yet, with May standing out for the ferocity with which analysts slashed growth estimates in the month.

The projected earnings per share (EPS) for 2018 of the MSCI India Index — a dollar-denominated benchmark used by global fund managers to evaluate their investments in Mumbai stocks — has been trimmed by 2.6 per cent in May. After a brief pause in September and November, the projected EPS earnings have been pared for the sixth month in a row. According to Credit Suisse, the earnings downgrade of India in May is the highest in Asia (excluding Japan).

The downgrades have followed a sharp increase in provisioning estimates in the banking sector, with 42 per cent of the BSE-100 companies posting profits lower than Street estimates: Higher fuel prices have also meant lower consumer discretionary expenses in India.


Surprisingly, the downgrades have accelerated after estimates of -0.9 per cent, -0.6 per cent, and -0.9 per cent in February, March and April.

This year will mark the fourth consecutive calendar-year in which EPS projections have been slashed.

A tangible and sustained recovery in EPS growth in the banking sector is crucial to arrest earnings downgrades, with about half the incremental profit growth of Nifty companies being dependent on the banking sector.

The price-earnings (PE) multiples assigned broadly to a country’s stock are linked to EPS growth. Higher earnings growth typically accompanies premium P/E multiples, while the reverse is true if earnings fail to pick up. Mumbai stocks appear relatively pricey: The MSCI India Index is trading at a 42 per cent premium to the MSCI EM Index, compared with a long-term average of 34 per cent.

The projected EPS is computed by collation of the earnings estimates of companies that are part of the index. An EPS downgrade means that analysts are lowering their earnings growth forecasts for companies constituting the benchmarks. EPS of the MSCI Index for 2018 and 2019 are penciled in to rise 22 per cent and 19 per cent respectively, according to Bloomberg.