News: Benign P/E of Nifty yet to price in India Inc’s lockdown woes-05-05-2020
Updated On: May 05, 2020
Benign P/E of Nifty yet to price in India Inc’s lockdown woes
Equities had bottomed out at 7-8 times of forward earnings during the crisis in 2008.
ET Intelligence Group: If the current stock valuations look alluring to you, then hold on. The benchmark Nifty 50 index trades at 15 times its one-year forward earnings, in line with the longterm average, according to the data from Bloomberg. But, it does not reflect the true picture since the rate of fall in the analysts’ earnings per share (EPS) estimates has so far been quite slow.
The 12-month forward EPS has been pruned by just 11 per cent to Rs 600 per share since the beginning of the year despite rising probability of contraction in the country’s gross domestic product (GDP). Therefore, the risk of accentuated earnings downgrade is elevated. Indian equities had bottomed out at 7-8 times of forward earnings during the financial crisis in 2008.
The current downward revision in the corporate earnings has been largely in the energy and metal sectors. The banking and finance companies, which have a large cumulative weight in the Nifty 50, reported moderate trimming in earnings estimates despite having a high risk exposure to any fall in economic growth. This makes the sector more vulnerable to sharp EPS cuts in the coming months.
The current downward revision in the corporate earnings has been largely in the energy and metal sectors. The banking and finance companies, which have a large cumulative weight in the Nifty 50, reported moderate trimming in earnings estimates despite having a high risk exposure to any fall in economic growth. This makes the sector more vulnerable to sharp EPS cuts in the coming months.
Moreover, in the case of automobiles, analysts expect 10-15 per cent volume growth for the current fiscal. This may be a tall order since the first quarter volumes are likely to fall given the extension of the lockdown period in the country. The internal sales projections of a few auto ancillary companies show that they anticipate 40-50 per cent reduction in revenues for FY21.
In a sharp contrast to the grim situation, the consensus earnings estimates still price in 15 per cent growth in corporate earnings for FY21. Goldman Sachs believes that the level of the forward EPS may not recover to its January 2020-level until early 2022. This means earnings growth of the Nifty 50 index may elude investors for least two years.
With the impact of around Rs 9-15 lakh crore on the economy due to the lockdown, the probability of a fall in the country’s GDP for the first time in four decades has increased. In addition, the return on equity of the Nifty 50 companies is expected to drop to the lowest in 15 years. This will further weigh on the ascribed price-earnings (P/E) multiple.
