At 0% growth, FY15 earnings a picture of disaster

Nazim Khanmoneycontrol.com

The culmination of the process of professional equity research revolves around making projections of companies' future financials, and basing predictions of stock prices upon it.

With fourth-quarter earnings finally coming to a close last week, the full year picture for corporate earnings has emerged not just below estimates but has rather been a complete washout.

When companies declare their quarterly numbers, analysts love to say: earnings missed estimates. In FY15's case, given the complete disconnect between projections and reality, it would be fair to say: estimates missed earnings.

An analysis by Deepak Shenoy at Capital Mind shows corporate profits for the 30 Sensex companies fell a full 12 percent, from fiscal year 2013-14 to 2014-15.

As late as November last year, brokerages were pitching for profit growth of about 14 percent for these companies.

Even if one accounts for extra-ordinary components from financials of the two of the year’s biggest losers, Tata Steel and Vedanta (formerly Sesa Sterlite), earnings grew a paltry 0.3 percent during the year -- a far cry from the 10 percent many were working with as late as the end of the third quarter (in February).

Having been bitten bitterly, analysts now appear to have decided to err on the side of caution.

While most firms were working with a similar growth target for FY16 – about 15 percent – analysts of late say they expect earnings recovery to be delayed by at least two quarters, which may cause forecasts to be ratcheted down significantly.

The complete overestimation of the previous fiscal’s earnings growth also underscores the perils of relying on market forecasts based on projections.

With profit growth being flat for the year, the market will look more expensive on a forward price-to-earnings basis.

With FY15 Sensex earnings per share at the same level as last year (about Rs 1,340), a 10 percent growth assumption for FY16 (Rs 1,474) will make the market valued at an above-average 18.5 times earnings, and may lead investors to question whether they want to pay such premium valuations.

The recent market volatility, attributed partially to the earnings slump, bears this out.