Equity Strategy: Earnings Downgrades and Valuation Opportunities

08 APRIL 2020

  • While about half of the economic activity had been stalled in the initial days of the lockdown, government functions and businesses providing essential services seem to be better adapting to the conditions now. Citi analysts expect gradual relaxation of restrictions post 14th April.
  • Citi analysts expect to see sharp downgrades to FY21 consensus earnings estimates in the coming weeks and believe that it may be a year of flat earnings growth. They expect Nifty earnings to grow 15-20% YoY in FY22 driven by low base and economic recovery.
  • Source: Citi Velocity
  • Citi analysts expect 20-30% cut in the FY21 earnings growth estimate for consumer discretionary. Manufacturing, labor and the supply chain challenges may weigh on earnings growth for consumer staples as well, partly offset by lower cost of raw/packaging materials and improved cost efficiency.
  • Expecting long-term benefits for e-retail, packaged foods, personal wash and hygiene products, Citi analysts see the current crisis drive market share gain for large players over smaller ones in the consumer space.
  • Citi analysts expect fuel demand to be among the first to recover following eventual easing of restrictions. Given steep correction in prices, Citi analysts believe Oil Marketing Companies (OMCs), benefiting from supernormal marketing margins, may present valuation based opportunities.
  • Citi analysts expect large Indian IT companies to see flat YoY earnings growth in 4Q20 in constant currency terms. While INR depreciation may provide ~80-90bps tailwind to quarter-on-quarter growth, impact of Covid-19 and low oil prices may affect topline. Citi analysts expect software service exports to remain flattish or decline slightly YoY in FY21.
  • While most valuation comparisons seem to be favorable, near-term equity market volatility cannot be ruled out. Citi analysts expect that Nifty may trough at around 7,600 levels and believe that further dips may present long term opportunities in liquid large caps.

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