No steep fall in earnings growth

While perceived risks to earnings such as the rise in interest costs and inflation are denting confidence suggesting a slump ahead, the earnings growth wouldn't drastically fall and would remain well above 15% for the next fiscal, market observers said.

While there are risks of some earnings downgrades, the market is "overly pessimistic" , according to Citigroup analysts. "Though we could see some margin pressures, the severity of earnings downgrades may not be large," said A Balasubramaniam , CEO, Birla Sun Life Mutual Fund.

"There is a bit of over-reaction but given the concerns (on higher costs) it is not completely unjustified," he said. Sensex has lost about 14% so far in the year, the second worst performance among major markets, on the back of heightened concerns over rising costs. The MSCI emerging markets index declined only by 2.1% and the world index is up 5.3% in 2011. The markets are now at 15-16 times their estimated earnings for fiscal 2012.

The markets were trading above fair valuations but with the recent correction they are now "getting closer to the value zone" , said Manish Kumar, head of investments, ICICI Prudential Life Insurance. "We were expecting a gradual adjustment . But the pace at which the markets have corrected has taken us by surprise."

The earnings revision index suggests that at the broader level the downward trend in the earnings cycle has begun. However , the pressure seems a lot less for the large-cap companies, said observers. Energy, information technology and banks, which account for 56% of the index's market cap, do not seem particularly vulnerable in the current environment, analysts said. They are the biggest drivers of profit growth and are estimated to constitute 54% of earnings growth in fiscal 2012.

"The current market conditions present a good opportunity to buy some decent Indian stocks," the Citigroup analysts said in a note. The composition of sensex with 50% plus representation from energy, commodities and banks means limited risk, they said. Moreover, the top-3 stocks on the benchmark index account for 22% of the growth, and risks to these earnings look low. Despite risks in sectors such as industrial goods and property, their impact on earnings growth would be limited as they constitute only 12% of profits, observers said.

"While earnings downgrades have edged up in the recent past, there has been a relative balance between upgrades and downgrades, and the number of upgrades remains relatively sizeable even now," Citigroup analysts including Aditya Narain said. FIIs, who pumped a record $29.3 billion into the Indian markets last year, are booking profits as their portfolio is not delivering the expected returns, observers said.

Source: http://timesofindia.indiatimes.com/business/india-business/No-steep-fall-in-earnings-growth/articleshow/7480213.cms