Post Sept-08, the bottom up earnings growth expectations of SENSEX companies has fallen sharply to 2.9% in FY10 [originally 12.2%]. Earnings growth is falling but primarily in FY10E, with apparent resilience in 2HY09E. The key earnings swing is Tata Steel, where Citi is well below consensus estimates on the street.
For FY10E, there were 12 downgrades to every upgrade, post the September quarter.
The big earnings cuts are in the metals/commodity spaces, while earnings growth remains concentrated in energy businesses (55%+ of Sensex). There will be beneficiaries of lower commodity prices and interest rates; but given demand, pricing and asset quality overhang, analysts appear fair in not factoring them.
Industrial Production growth is a fairly good lead indicator, and when it falls, earnings growth usually falls more. With IP growth at 4.8% and Citi’s expectations at 12%, the numbers,
bottom up and updated as they are, could well change. And when IP growth touched a low of 2.6% in 2002, earnings growth touched its nadir at -14% in 2001.