Earnings Disappoint, Yield Gap Improves amid Sharp Correction

06 AUGUST 2019

With 42 out of BSE-100 companies having reported their 1QFY20 earnings so far, a year-on-year (YoY) decline of 3% in Profit after Tax (PAT) comes as a disappointment. Citi analysts had expected a conservative +1% YoY growth in earnings for these companies.

  • Topline growth of 8% YoY was slightly ahead of expectations, however, EBIDTA/PAT growth trends were weak
  • Earnings growth for Cement sector beat expectations, while that for Financials and Consumer Staples are largely in line with estimates
  • Earnings growth for Consumer Discretionary, Metals and Industrials came in lower than estimates

Index stocks, however, are trending relatively better: Nifty earnings have grown 6% YoY so far, while Sensex earnings grew 5% YoY. Expecting further earnings downgrades, Citi analysts now estimate Nifty earnings to grow 19% YoY in FY20 (lower than the prior estimate of 21% YoY growth).

While markets have corrected by ~7% over the past month, 1-year forward P/E valuation is still 1sd over mean. However, compared to other Emerging Markets, Indian markets are now trading at a 40% premium, close to the long-term average.

Source: Bloomberg, Citi Research

The 10yr G-sec yields have corrected by ~100bps since the start of the calendar year and as a result of the ongoing correction in equity markets, Earnings Yield Gap (10yr bond yields - Earnings/Price) appears to have improved.

Source: Bloomberg, Citi Research

While FIIs pulled out ~USD 2bn in July19, domestic flows remained resilient. Citi analysts see tentative signs of stability in the form of strong bank credit growth, a revival in electricity demand and IIP growth, and expect economic activity to pick-up in 2HFY20. Low interest rates and depressed commodity prices may also help lower input costs. However, given continued liquidity tightness for NBFCs, in the backdrop of an economic slowdown, Citi analysts expect markets to remain under pressure in the near-term. They lower their Sensex target to 39,500 for March 2020 (from 41,000 earlier).

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