Moneycontrol
Apr 02, 2013 09:57 PM IST | Source: Moneycontrol.com

Brace for Sensex EPS downgrade this year: Merrill Lynch

Brokerage house Bank of America Merrill Lynch expects more earnings downgrades this financial year, because of the slowing economy and weak demand.

Brace for Sensex EPS downgrade this year: Merrill Lynch

Moneycontrol Bureau


Brokerage house Bank of America Merrill Lynch expects more earnings downgrades this financial year, because of the slowing economy and weak demand.


"We expect FY14 Sensex EPS to be downgraded below Rs 1300, for growth of under 10 percent," said the Merrill Lynch note to clients.


"For the bulls, the only good news is that we think FY14 EPS growth, at 8-9%, will be higher than the 5% we will get for FY13. The other good news is that, for long-term investors, we are probably close to the bottom of the earnings cycle, though FY14 is unlikely to be the year of recovery," the note added.


The brokerage sees oil & gas, metal and auto sectors as being vulnerable to earnings downgrades.


According to Merrill analysts Jyotivardhan Jaipuria and Anand Kumar, concentration risk (two sectors accounting for 50 percent of profit growth), weak demand and high cost of capital will be the factors weighing on earnings.


"Financials & Energy account for 50 percent of FY14E EPS growth. Sensex EPS growth could disappoint if these 2 sectors see downgrades," the Merrill note says.

"Analysts are, as in FY13, being too optimistic about a recovery in the economy on the back of a sustained fall in interest rates. So far, rate cuts have been slow and we think sales growth in FY14 will continue to be weak," the Merrill note says.

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