BoFA sees 40% cut in earnings estimates

BoFA sees 40% cut in earnings estimates

The Street’s optimistic earnings growth estimates for FY24 and FY25, of 17% and 16% respectively, for the Nifty set of companies could be cut by 40%, Bank of America (BofA) Securities said on Thursday citing, among other factors, a recession in the US. The brokerage noted there were already signs of earnings weakening in the wake of the global slowdown.

BofA strategists added that a delayed recovery in rural India could also hurt earnings as could the potential peaking of demand in urban India. They also observed that the volatility in prices of commodities posed a risk to a revival in margins.

In fact, even when banks and financials are included, net profits were flat for a sample of 330 companies. While operating margins expanded by 80 bps y-o-y for the sample, high interest and depreciation charges dampened profit growth. This, despite the fact that banks have turned in very good numbers.

“We expect continued cuts to consensus FY24/25 earnings growth. We see no upside to our Nifty year-end target of 18,000 and would look to book profits,” BofA strategists wrote. They advised investors to buy Indian stocks on potential market dips or at a level of 16,000 for the Nifty, pointing out domestic flows remain strong while macro conditions stay resilient.

So far, Q4FY23 earnings have been largely disappointing with few surprises. At ACC, for instance, the Ebitda per tonne fell 32% y-o-y as realisations remained weak, while for Ambuja Cements they were down 7.8% y-o-y. Steelmakers like Tata Steel saw net profits plunge by 85% y-o-y. The firm’s Ebitda margins contracted sharply by 11 percentage points y-o-y driving down the Ebitda by 54% y-o-y.

Several companies have benefited from lower raw material costs; at Jyothy Labs, for instance, gross margins expanded 430 bps y-o-y, while Ebitda margins went up by 435 bps y-o-y. However, analysts point out that once the base effect — of lower input costs — fades, earnings growth will depend on the performance of the topline. Some FMCG players have taken price increases to grow their revenues and volume growth has been tepid. Volumes at HUL, for example, grew just 4% y-o-y during the quarter as rural demand remained dull.

However, urban demand does not seem to have been broad-based. Retailers like Avenue Supermart have been unable to grow their sales as expected. At Voltas, revenues rose by just 11% y-o-y and Ebitda margins contracted by 240 bps y-o-y leaving the Ebitda lower by 16.4% y-o-y. Analysts noted the outlook remains challenging for air conditioner sales in a competitive market.

Analysts also point out that lacklustre rural demand combined with tepid urban demand would keep a lid on prices. At UltraTech, for instance, realisations were weak in Q4FY23, rising just 3.2% y-o-y and falling by 2.3% sequentially. The Ebitda per tonne fell 7.6% y-o-y.