Is Dalal Street headed for an earnings recession? Analysts decode

Stock prices are slaves to earnings in the long term, and earnings for India Inc, at least in the near term, could be volatile as chances are good that the full impact of recent surge in inflation would be seen on corporate results in the June quarter numbers. This has raised the possibility of earnings downgrades ahead.

Analysts said operating margins for select pockets may come under pressure, as not all companies would be able to pass on the entire cost burden to consumers. Then, there is competition and also certain policies aimed at restricting inflation, which may hurt certain sectors in the short term, they said.

Rahul Shah of

said earnings downgrade is the biggest fear in the market right now as the rest have already been discounted by the market at this juncture.

“We are expecting an earnings recession now. Hopefully, we will bottom out by September-October, if not, then it goes to February,” independent market expert Ajay Bagga told ET NOW.

With the market mood already fragile, many on the Street are anxious that a weak June quarter show may send Indian stocks into the bear grip. Sensex has fallen around 17 per cent from its October high, nearing the 20 per cent loss that denotes a bear market.

Deepak Jasani of

Securities said following the recent correction, select stocks have become attractive. “However, we do not know whether there could be an earnings downgrade going forward. The technical reason of supply from FPIs could act as a deterrent to aggressive bottom fishing,” he said in an ETMarkets Midyear Survey.

A few brokerages have already started trimming their earnings estimates for FY23, as higher raw material costs and the central bank’s rate hike spree are not conducive to a strong growth environment.

According to a report by ET bureau, downgrades in earnings estimates by analysts at leading brokerages have outnumbered upgrades in the past four weeks. Out of the companies in the Nifty 200 index, 30 have seen earnings downgrades for FY23 in the past four weeks, while 19 have witnessed upgrades. (Read: Pace of earnings downgrades picks up with cost inflation, demand slowdown

Goldman Sachs strategist Ben Snider said that globally, the consensus profit margin estimates have more room to contract. The global market is still not “fully reflecting” the downside risk to estimates, which are “too optimistic”, Snider said.

In a strategy note, Kotak Institutional Equities said there were net downgrades to earnings estimates in June, marking the seventh consecutive month where estimates have been cut.

However, the consensus ‘rating’ for the average stock, say in the Nifty50 index, continues to remain extremely high. The difference in the valuation between the most expensive and the least expensive stocks in the BSE-200 index is now at its highest level since 2014 the brokerage noted.

Still, not everyone is as pessimistic.

The fundamentals of India remain strong and in the next quarter also, results will be strong for oil companies, including

, and OIL, said Deepak Shenoy of Capital Mind, adding that these will create a much higher earnings base for the Nifty50.

“The Nifty earnings themselves will look good. However, consumer discretionary and parts of consumer staples, including the FMCG arms would notice some depression in margins and volume growth,” he said.

Corporate earnings will show 13-14 per cent kind of growth if not better in the next 12-18 months, said Pankaj Pandey of

This analyst expects the Nifty50 to give double-digit returns in the next 1-1.5 years and has a target of 18,700 on the Nifty for the next year. He believes the Indian markets are doing fine, but the global sentiments are getting sold domestically, which is why we see gloom in the markets.

India Inc’s June quarter earnings season is set to begin next week.

India Inc is facing several headwinds like rising wages, higher commodity and input costs, a stronger dollar and softer demand, in turn impacting profit margins.

The stock market, for the last few months, is facing various pressure points from rate hikes, FII outflows, geopolitical worries and commodity price inflation.

Evidently, corporate India has not remained unscathed.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

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