June quarter corporate results a dash of cold water, but party continues

Overall the corporate financial results for the June quarter have been, in one word, dismal. Everybody agrees the run-up to the goods and services tax (GST) should be blamed for the debacle. Through the course of the results season, analysts continued to revise downwards their earnings estimates for companies.

This could be due to several reasons: a) the extent of disruption caused by the introduction of GST was more than what was anticipated; b) analysts now expect the impact of GST to last longer; or c) there are other factors that have led to a downward revision in earnings.

There’s no denying, though, that analysts have become more pessimistic about corporate earnings. That is hardly surprising, considering that the government’s Economic Survey too has been anything but optimistic about growth.

If you wanted a snapshot of the Indian markets, look no further than the accompanying chart. It shows analysts’ average earnings per share (EPS) of the Nifty companies (one- and two-year forward earnings) contrasted with the movement of the price-earnings (P-E) ratio (one- and two-year forward P-Es), all re-based to 100 as on 1 July, before the corporate results started trickling in.

The chart shows the slow and steady fall in analysts’ EPS estimates for the Nifty companies and the sharp rise in the P-E multiples as the market continued to soar like Icarus, until the recent minor correction.

Simply and succinctly put, while corporate earnings continue to be relentlessly revised down, bold and fearless investors continue to bid up stocks.

Says a recent strategy report from Kotak Institutional Equities, “We now expect FY2018 net profits of the Nifty-50 Index to grow 1.5%, following the earnings downgrades in several sectors such as banks, metals and mining and pharmaceuticals, through the 1QFY18 results season. We do not rule out further downgrades if the economy fails to recover quickly from the temporary disruption arising from demonetization and implementation of GST.”

But who’s listening? All that is water off a duck’s back, as brokerage firms try to reel in a few more punters.

As the title of a recent report from Edelweiss Securities Ltd put it: High Valuations? Get over it! That about sums up the attitude of the herd of enthusiastic dip-buyers who stampeded into the equity markets on Wednesday.