Nifty EPS estimates for FY23, FY24 see minor cuts; more possible

The consensus earnings estimate for Nifty companies for the ongoing (FY23) and next financial (FY24) have seen minor downward revisions

The benchmark indices gained for the fourth consecutive session on Monday amidst buying interest in index heavyweights and hopes that the pace of monetary tightening may slow down. The benchmark Sensex gained 545 points, or 0.95 per cent to close at 58,115, highest close since April 13. 

The Nifty rose 182 points, or 1.06 per cent, to finish at 17,340,  highest lelvel since April 21. From the June lows, both indices have now bounced more than 13 per cent.

“Nifty consensus earnings for FY23/24 have seen an earnings downgrade of 3.3 per cent/1.4 per cent since the late March 2022 peak. Nine Nifty stocks with high global earnings (IT, metals, Tata Motors) contributed about 60 per cent of Nifty earnings cuts. Earnings in the domestic sectors were more resilient with cuts at 0.7 per cent, so far,” said analysts at Jefferies in a note.

Nifty earnings per share (EPS) are now pegged to grow 14 per cent YoY in FY23 to Rs 857 and by another 14 per cent to Rs 978 in FY24, according to Bloomberg data. 

These EPS estimates are a key to arriving at Nifty valuations and determining how the market is trading vis-à-vis its historical averages. 

Currently, the Nifty50, which has last closed at 17,158, trades at about 20 times and 17.5 times its FY23 and FY24 earnings estimates, respectively. If earnings growth surprises on the upside, it will help the market sustain.

However, given the headwinds, analysts fear there could be further cuts in Nifty EPS.

“The Street is yet to cut Nifty EPS meaningfully (revisions flat month-on-month), despite several emerging risks: Slowing growth (both global & domestic), adverse policy interventions, forex depreciation, rising rates, etc,” said BofA Securities in a note on July 22.

Nifty EPS cut may have been sharper if not for the encouraging results by non-financial companies during the recently concluded June 2022 quarter (Q1FY23).

“Another key highlight of Q1FY23 results, so far, has been the better-than-expected top-line growth (+30 per cent YoY for non-financials), driven by not just a favourable base effect but also better-than-expected volumes, as well as price realisation. The sharp drop in commodity prices seen across the board in Q2FY23, so far, could tilt the scale towards improving profitability for non-financial companies, if the robust demand pattern persists and input costs slump.  However, depreciation of INR could offset some of the benefits of the drop in commodity prices,” said a note by ICICI Securities. 

According to forecasts by BofA Securities, Brent crude is expected to average $105 per barrel during the second half of CY22.

“We see likely transmission of Rs 10-12 per litre to pump price for the current crude price. 

This is likely to weigh on sectors like cement, paints, and FMCG. For consumer firms, crude oil-linked costs (including packaging) form up to 17 per cent of sales. The rising crude oil prices could hence pose margin pressure in a weak volume environment,” the brokerage said. 

It recently slashed its Nifty50 target to 14,500.

Source: Bloomberg