Despite an improvement in profitability of Nifty companies to low double-digits in the March quarter, it has stayed below the analysts' expectations.
Domestic cyclicals, primarily financials, led the earnings growth for the second consecutive quarter, contributing almost the entire earnings delta. However, it still fell short of expectations.
Muted demand, ongoing liquidity crisis in the NBFC sector and concerns over the global trade war were some of the factors that capped the upside. After the Q4 show, most brokerage firms have downgraded their EPS (earnings per share) estimates for FY20 for Nifty.
Elara Capital downgraded Nifty EPS for FY20 to Rs 612 and FY21 to Rs 735 (1.4 percent) from the past quarter, primarily led by energy, materials, and telecom.
At the current levels, FY20 EPS reflects 25 percent growth over FY19, hinging largely on earnings expansion in banks, cement, telecom and healthcare.
Edelweiss Research in a note said that despite a 5 percent cut in FY20E Nifty EPS, Street estimates are still quite high—27 percent growth for FY20 and 18 percent for FY21.
Many companies have also seen an upward revision of their EPS estimates. Elara Capital in a note highlighted 17 BSE100 stocks that saw EPS upgrades in the three out of four quarters. They include HCL Tech, DLF, Tech Mahindra, ITC, HPCL, BPCL, Wipro, Adani Ports, DRL, Bajaj Finance, Coal India and M&M, among others.
But, comparatively, more companies have seen an EPS downgrade than an upgrade. Earnings downgrades outweighed upgrades by a factor of around 1.7x in Q4, according to a Motilal Oswal report.
As many as 12 Nifty companies saw an upgrade of more than 3 percent in FY20 EPS, while 14 Nifty companies saw an EPS downgrade of more than 3 percent.
“Yes, earnings acceleration are often starting points for above-average returns for a stock. It is said that a trend is likely to continue than reverse. Since the last few quarters, companies had reported earnings growth resulting into upgrades and prima facie it seems to be a good starting point for both traders and investors to look at these stocks,” Umesh Mehta, Head of Research, SAMCO Securities told Moneycontrol.
“Nonetheless, all the filters of sustainable, durable and visible growth have to be applied before investors can jump in on these companies. From a trader’s perspective, they can go long and can have the benefit of good momentum if the earnings growth sustains,” he said.
Other parameters to track apart from EPS:
Growth in EPS is one important factor that one should consider before pressing the buy button. But, there are other important parameters which one should consider such as return ratios, management efficiency, sustainable growth over long term, valuation and high barriers to entry, among others.
The stability of policy reforms initiated by the government in recent past is likely to keep the Indian market afloat and fiscal stimulus plan to revive the economy is expected to boost overall consumption economy in long term.
“With the growth in earnings likely to remain strong in the coming period, there is also a need to evaluate on other parameters before making an investment decision. One of the significant parameters is valuation metric like PE or PEG which will eliminate the risk of investing at a higher price as compared to their likelihood of earnings growth,” Dinesh Rohira, CEO & Founder, 5nance.com told Moneycontrol.
“The price should be at justifiable level backed by its strong earnings growth to get decent returns in long term. Other parallel parameter includes analyzing ROCE, cash-flow, EBITA margin, leverage ratio, and cash-flow position among others,” he said.
The basic requisite for every investor is to understand the business model of the company along with sector dynamic to stay updated.
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First Published: IST