About half of the companies in the Nifty 50 index have reported earnings, and most of them have fallen short of analysts’ expectations. Indications are that coming quarters may see even more earnings downgrades. Some of the pain ahead is already visible in Q4 figures as higher provisions and lower sales dragged profits.
While revenues of the 26 Nifty companies that have reported earnings grew 1.9%, net profits fell 13.8% year-on-year in aggregate, according to analysts at Motilal Oswal Financial Services. Revenue was expected to grow about 2.3%, and net profit by 8.9%, showing severe bottom-line contraction in Q4. Of the 26 Nifty companies, only six surpassed expectations while 14 lagged analysts’ projections.
One worry for the market is that the pandemic is making it difficult for companies to provide “guidance" for FY21, even as business headwinds intensify. “Q4 FY20 earnings season has brought to the fore the challenging terrain ahead with multiple headwinds and moving parts. The adverse economic impact of COVID-19 is expected to wipe out FY21 earnings growth. The two months of economic lockdown has taken a toll on corporate balance sheets even as underlying demand has suffered," said analysts at Motilal Oswal Financial Services in a note to clients.
The banking sector was expected to do the heavy lifting, but provisions for bad loans have been substantial, pulling down overall profitability. Concerns about loan growth and asset quality persist. In pharma, revenue and profitability have been flat in Q4. While pre-buying was seen in chronic therapies, a slowdown in acute therapies was due to the lockdown and to slower patient growth at clinics.
While expectations were higher in consumer and telecoms stocks, some of the companies in these sectors also lagged. Surprisingly, sectors such as automobiles, cement and utilities have been a step ahead of market expectation; although demand forecasts for FY21 are poor.
Technology was the only sector where the results were somewhat in sync with market expectations. Besides, most management commentary on outlook and deal-wins provides some assurance that technology companies could continue to pull through in the coming quarters.
Due to adverse market conditions, the impact on overall downgrades for the year could be higher. “The earnings upgrade/downgrade ratio for FY21 is significantly skewed in favour of downgrades so far, with 47 MOFSL universe firms seeing downgrades of over 3%, and 10 upgrades of more than 3%. 29 companies in our coverage universe have seen FY21E earnings downgrade of more than 10%," noted analysts at Motilal Oswal.
As such, with the growth outlook tilted to the downside, the markets may see limited upsides, as balance sheets are likely to be stretched and volatility in the Q1 numbers will be high.
