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Last Updated : Nov 26, 2018 02:39 PM IST | Source:

Earnings estimates show Nifty could touch 12K by FY20; 15 stocks to watch

The S&P BSE Sensex lost over 1200 points while for the Nifty the cut was a little over 400 points or 3.7 percent since September 28.

Kshitij Anand @kshanand
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The September quarter results from India Inc. failed to generate enthusiasm among the investor community. The earnings, being a mixed bag, led to sharp cuts in individual stocks, while for benchmark indices, the cut was a little over 3 percent since September 28.

The S&P BSE Sensex lost over 1,200 points while for the Nifty the cut was a little over 400 points, or 3.7 percent, since September 28.

Most of the Nifty50 companies announced strong sales growth, but margin pressure was evident for the broader universe, especially in auto, energy and telecom universe, and earnings breadth seemed to be deteriorating.

Experts feel that there is a possibility that we might have started the journey of achieving higher earnings growth in the rest of FY19 as some of the headwinds which we saw in previous quarters are fading away.

“Going forward, with worst of the asset quality concerns behind us in the banking space, pick up in industrial activity as well as robust consumer sentiment, we expect Nifty earnings to stage an impressive CAGR of 18.5% over FY18-20E,” Pankaj Pandey, Head-Research, told Moneycontrol.

“We assign a P/E multiple of 19.0x to FY20E Nifty EPS of Rs 636, and arrive at a Nifty target of 12,100,” he said.

Nifty target of 12,100 would translate into an upside of about 10% from current levels.

Among Nifty50 companies, 13 stocks saw an earnings beat, while 20 stocks saw an earnings miss. The beat ratio (net earnings surprise divided by the total number of stocks) deteriorated from –2% to -14%, largely due to downgrades in auto and financials, Elara Capital said in a report.

The brokerage firm also downgraded Nifty 50 EPS for FY19 to 532(4.9%) and FY20 to 658 (4.6%) from the last quarter, primarily due to consumer discretionary, healthcare and NBFC.

Elara Capital also lists out 15 stocks which saw EPS downgrades in last four quarters. The list include names like Grasim Industries, Lupin, NTPC, Power Finance Corporation, PNB, Sun Pharma, Bharti Airtel, Cipla, Bank of Baroda, Federal Bank, and Tata Motors.


However, experts advise investors not to see downgrades in isolation and use other parameters to make a buy or sell call. While there could be some upside left for benchmark indices, the stock specific movement will continue.

“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.,” Atish Matlawala, Sr Analyst, SSJ Finance & Securities told Moneycontrol.

“We believe Q2FY19 result on overall basis were below expectations mainly because of crude and currency. We expect both of these to stabilize at lower levels in next few months and earning momentum to gather pace,” he said.

Data suggests that within the S&P BSE200 index, 29 percent of the companies saw an earnings upgrade for FY19 while 68 percent saw an earnings downgrade. But, Nifty has seen a steady rise despite muted earnings growth in the last 5-6 years.

For the September quarter, 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.

“Since the beginning of FY19, the 1-year rolled forward EPS for the NIFTY50 has moved up by a mere 2 percent due to earnings downgrade. Despite weak earnings growth for the past six years (5% CAGR), the NIFTY50 index has risen at a CAGR of 13 percent due to expanding valuation multiples for stocks,” ICICI Securities said in a note.

“However, over the past one year, the environment for rising equity valuations is deteriorating with global liquidity getting tighter, higher bond yields, macro headwinds, and prospects of slowing global growth from FY20 onwards,” it said.

The brokerage firm expects incremental downgrades to our base NIFTY50 earnings estimate thereby resulting in a CAGR of 15.5 percent during FY19-21 and cut our target multiple to 17.1x (+ 0.4 s.d.) to arrive at our Dec’19 target of 11,800.
First Published on Nov 26, 2018 02:22 pm
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