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Last Updated : Mar 26, 2020 01:27 PM IST | Source: Moneycontrol.com

Autos, financials among 7 sectors could see over 20% earnings downgrade: Jefferies

Sectors like F&B, hotels, tourism, and retail trade (~12% of India's GDP) sees a decline in the activity, said a Jefferies report.

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The rise of COVID-19 cases in India and across the world has clouded the economic outlook of the country.

The government response has been swift and relatively strong. The 21-Days lockdown is likely to impact various sectors of the economy significantly.

India has suspended travel (inbound and outbound) and has taken social distancing measures countrywide. These steps will impact the economy significantly especially sectors like F&B, hotels, tourism, and retail trade (~12% of India's GDP).

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“Several sectors are building in over 20 percent earning cuts,” Jefferies said in a report. “Our comparison of Nifty 100 stocks' current consensus-based valuations (1 year forward PE or PB as appropriate) shows that several sectors such as autos, energy, financials, industrial, materials & metals, tech, and utilities are now already building a potential c.25-45% earnings downgrade,” said the report.

The consumer sector is still trading above-average valuations with several stocks at a premium of greater than 20 percent on long-term averages.

The recent market decline has taken Nifty PE to 13.3x 1-year forward consensus earnings which is 15 percent below its last 10-year PE multiple.

“In other words, the market is already pricing in a 15 percent earnings cut. While the Nifty had bottomed at much lower PEs (8x) during the GFC or global financial crisis of 2008, we note that the cut to consensus earnings then was 22%,” the note added.

Other market bottoms (Euro-2011, Taper-2013, Yuan devalue-2016, Demonetisation-2017) in the last decade had averaged 13.2x PE.

Jefferies Nifty-100 stock analysis suggests that approximately 18 percent of stocks (with long enough trading histories) are already trading below their GFC valuations.

About 84 percent of the stocks are below 5-year and 78 percent are trading below their 10-year average valuations. “Given that disease spread is yet to peak, it is tough to take a call on the extent of earnings cuts right now. Nonetheless, we screen Nifty 100 stocks where valuations are building in c.20%+ earnings cut and RoEs are also 20%+,” said the note.

Stocks that are trading below GFC lows within Nifty-100 include names like SBI, GAIL, ONGC, NTPC, BoB, and PNB trade below GFC lows.

Among private companies, Adani Ports, ITC, Tata Motors, SHTF, DLF, and Zee Entertainment tops the list of stocks that are trading below the GFC lows.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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First Published on Mar 26, 2020 01:27 pm
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