Stocks that may fall short of earnings estimates

After the strong rebound last year, many stocks saw sharp upward revision in earnings estimates. Even as frontline index valuations baked in earnings growth of 25% plus this year, several stocks are penciled in for much higher. But what happens if these anticipated earnings don’t come through?Faster than expected demand recovery and a low base has enabled India Inc to put on a robust show in the January-March quarter. Profits for the 27 Nifty50 index companies that have declared their fourth quarter results have grown 50% from a year ago. However, this performance covers a phase of relative lull on the pandemic front. With the second wave-led clampdown starting to hurt economic activity only towards the end of the quarter, the Q4 earnings sidestepped its impact.However, in the wake of the unfolding second wave, a hit on corporate earnings is now a very real possibility. A resurgent pandemic comes against a backdrop of still uneven and incomplete recovery. Further, it has now spilled over into small towns and villages—that were largely untouched during the first wave. Robust demand in rural areas was a pillar of strength for corporates then. If rural consumption buckles under the weight of the pandemic, there may be little solace. “The second wave has muddied sentiments and impaired 2021-22 earnings visibility. While the market is looking beyond the short-term impact, if the pandemic doesn’t subside soon, there would be downside risks,” says Gautam Duggad, head of institutional research at Motilal Oswal Securities.These risks are more pronounced given that valuations were guiding for strong earnings momentum to continue into the new financial year. Sharp upward revision in earnings estimates by analysts put a hefty burden on India Inc’s shoulders. More than half of the BSE200 universe is expected to show upward of 30% jump in earnings in current financial year, data from Bloomberg shows. Seventy seven firms are fancied to clock over 50% growth while 39 companies are chalked in for doubling earnings . These lofty numbers now face a stress test. Any signs of growth faltering will fetch a re-rating.Some stocks may fall short of earnings growth estimates 82655895PE is price to earnings, PEG is price to earnings growth, CMP is current market price. Data as on 10 May 2021 | Compiled by ETIG Database | Source: BloombergOperator of DMart stores, Avenue Supermarts, is at a crossroads. While its March quarter earnings was healthy, the management has indicated trouble ahead. The second wave is proving more painful than the first for the retailer with nearly 80% of stores currently operating for less than four hours per day or remain shut. Further, an optimistic stocking plan postunlock has led to a pile-up of inventory. This can be an overhang on its margins and spells bad news given that analysts are expecting 55% earnings growth for 2021-22. Its price appreciation since last year captures these meaty expectations but may not be tuned to emerging realities. “While DMart remains best-placed within the peer set to carve out a recovery, it’s still not out of the woods as the anchor variable —footfall— remains sub-optimal,” says analysts at HDFC Securities, who have a Sell rating and tapered down profit estimates for the coming year.Berger Paints and Page Industries are other prominent names that have seen stock prices jump smartly in tandem with hike in earnings upgrades. However, valuations leave little room for disappointment. According to analysts, Thermax appears most vulnerable to a re-rating. The underperformance of its overseas subsidiaries and rise in commodity prices could have some impact on Thermax’s profitability going forward, believe analysts at Geojit. But after recent uptick in stock prices amid lofty earnings expectations, brokerages see up to 30% downside in its price. Pipe maker Astral has enjoyed a stellar run on the bourses, rising 177% since March 2020 lows. Strong financial performance in recent quarters has to sustain to live up to its projected 73% earnings growth for the current year and a dizzying PE multiple of 127 times. Meanwhile, off-road tyre manufacturer Balkrishna Industries too treads on thin ice with margins being squeezed amid a steep rise in prices of key inputs.To be sure, the rapid acceleration in the second wave has already led to a bout of earnings downgrades. However, this revision is limited to a select few names. Since 31 March, only 15 stocks have seen more than 5% cut in one-year forward earnings. Indian Hotels, Trent and Interglobe Aviation have seen the sharpest downgrades among the basket of BSE200 stocks. Interestingly, these same stocks had earlier seen earnings upgrades as the first wave fizzled out. However, barring a few names, the market is not paying heed to the recent cut in earnings estimates. Both Interglobe Aviation and Indian Hotels have seen stock price climb up mildly since 31 March, amid cut in earnings estimates. GAIL and Oil India have also seen uptick in price despite fetching earnings downgrades in this period. Syngene International and Info Edge are among other names to have ignored the cut in anticipated earnings.

from Economic Times https://ift.tt/3uX9pfc