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Brokerages hand out earning downgrades for quality stocks: Time for investors to exit?

Earnings upgrades were mainly seen in IT and Pharma, helped by the rupee depreciation, while major downgrades were in auto, telecom, cement, and select financials.
Nov 21, 2018 / 10:12 AM IST
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Did the stocks that are part of your portfolio get downgraded recently? Well, you are not alone as experts downgraded FY19 & FY20 earnings per share (EPS) for many quality stocks.

If we look at India’s top 200 companies in the S&P BSE 200 index, as many as 68 percent saw an earnings downgrade, while only 29 percent of them saw an earnings upgrade for FY19, said a report.

Earnings upgrades were mainly seen in IT and pharma helped by the rupee depreciation, while major downgrades were in auto, telecom, cement and select financials.

The slowdown in festive demand, rise in crude oil prices dented sentiment in auto space, while for telecom, rise in competition from Reliance Jio weighed on ARPUs, suggest experts.

For cement, rising cost pressure — primarily power and fuel costs — and freight costs impacted profitability as companies were unable to pass on these costs in a seasonally weak quarter, they said.


The September corporate earnings season was broadly in line with expectations, but the earnings narrative will likely be different in 2HFY19 as growth drivers will change, Motilal Oswal said in a report.

Global cyclicals will make way for domestic cyclicals with financials taking over from metals. The brokerage firm cuts FY19/20 Nifty EPS estimates by 4.4/2.9% to Rs 515/655.

It expects Nifty EPS to grow 13.1 percent in FY19 and 27.1 percent in FY20. Top EPS downgrades from the MOSL universe were for stocks like Tata Motors, UltraTech Cement, IndusInd Bank and Cipla.


Another domestic brokerage firm, SBIcap Securities is of the view that FY19 earnings growth will be in double digits due to the skewed earnings growth. Following the quarterly results, the brokerage firm revised downward its Nifty earnings estimate for FY19 by 2.8 percent compared to Bloomberg consensus downgrade of 4.7 percent.

According to SBIcap Securities, top 10 stocks that saw EPS downgrades are Bharti Airtel, InterGlobe Aviation, Tata Motors, Dalmia Bharat, PNB, HPCL, Godrej Properties, Canara Bank, BPCL and Cipla.


What should investors do?

There is no need to panic or sell out just because the stock which you hold got downgraded post Q2 results, suggest experts. The better option would be to hold on to it for some more quarters, suggest experts.

Second quarter earnings season has just concluded and many companies’ earnings were below street estimates which led to downgrades in earnings estimate for FY19. The decision to sell based on earnings downgrade should not be taken in isolation and investors should also study other valuation parameters such as PE, PEG, EV/EBITDA etc. among others.

“Performance was below par due to various factors which include higher crude prices, depreciating the currency and rising cost of funds for NBFC’s. Prices in many companies have corrected more than justified and hence offer an opportunity to buy,” Atish Matlawala, Sr Analyst, SSJ Finance & Securities told Moneycontrol.

“Our advice will be to buy selected stocks like HDFC, Titan Industries, and Eicher motors as we believe things to improve for these companies going ahead. Investors should not look at downgrades in isolation, they should look at valuations like PE, PEG, EV/EBITDA etc and also take a call on macros like crude, currency, GDP, etc.,” he said.

We believe Q2FY19 result on an overall basis was below expectations mainly because of crude and currency. We expect both of these to stabilise at lower levels in the next few months and earning momentum to gather pace.

Disclaimer: Reliance Industries Ltd. is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd.
Kshitij Anand is the Editor Markets at Moneycontrol.
first published: Nov 21, 2018 10:12 am

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