Is India Inc facing earnings downgrade in coming quarters?

Indian companies could be looking at an earnings downgrade in the coming quarters as rising interest rates and slowing economic growth weighs, according to several analysts.

Analysts reckon that the impact of an upsurge in inflation would be acutely visible on corporate earnings, which could see a recessionary phase in the months to come. 

What reasons do analysts have for thinking earnings growth will go south?

For one, they say 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. 

The Economic Times cited an analyst as saying that an earnings downgrade is the biggest fear in the market right now as the rest have already been discounted by the market at this juncture.

Another analyst, Ajay Bagga, an independent market expert, said an earnings recession could be in the offing, with the downslide expected to bottom out by September-October, although it could also stretch into February 2023. 

Could stock markets again enter into bear territory?

Yes. 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% from its October high, nearing the 20% loss that denotes a bear market.

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, the report cited earlier 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.

How does the picture look globally?

According to Goldman Sachs strategist Ben Snider, cited by ET, 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".

But are all analysts pessimistic about the earnings scenario?

Not really. The fundamentals of India remain strong and in the next quarter also, results will be strong for oil companies, including Reliance, ONGC and Oil India, 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% kind of growth if not better in the next 12-18 months, said another analyst. 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.