FY22 earnings can see a downgrade, experts expect Nifty EPS at around Rs 700

The COVID-induced pain will be reflected in the Q1FY22 corporate earnings, however, due to low base, year-on-year the numbers may still be better, analysts say.

The second COVID-19 wave has dealt a blow to the economy, with several rating agencies and brokerage firms, including Moody’s, S&P, Nomura and Goldman Sachs, trimming their FY22 growth forecast for India.

The COVID-induced pain will be reflected in the Q1FY22 corporate earnings of the Indian Inc, however, due to low base, year-on-year the numbers may still be better, analysts say.

“Going forward, the June quarter will surely see the impact on earnings on a sequential basis. However, on a year-on-year basis, earnings growth will still be material because we had complete lockdown in Q1FY21 and we have a favourable base effect,” Rusmik Oza, Executive Vice President, Head of Fundamental Research at Kotak Securities said.

Oza said the last two quarters saw consistent earnings upgrades which would come to halt and earnings downgrades may be seen after June quarter results.

"Our Nifty EPS estimates for FY22 and FY23 are Rs 710 and Rs 807, respectively. Our EPS estimates have remained near current estimates for quite some time. We saw a big push in earnings estimates after Q3 results but after that, we have not seen many jumps in future earnings estimates post Q4 results," said Oza.

Ashis Biswas, Head of Technical Research at CapitalVia Global Research said in FY21, the overall net profit of the listed corporations increased by 57.6 percent to Rs 5.31 lakh crore. As a result, the corporate profit share of India's GDP reached a 10-year high of 2.63 percent. In FY20, the ratio had hit a new low of 1.6 percent.

Since 2015, Nifty EPS has been in the range of Rs 390-450 until the start of 2020 before the pandemic hit the benchmark indices. Due to the outbreak, EPS fell to Rs 343 in October 2020 but within six months, it had broken the recent high of Rs 450 and even passed Rs 500 at the start of FY22.

"Nifty EPS is estimated at Rs 650 and Rs 760 for FY22  and FY23, respectively. Based on this, the estimate in Nifty EPS growth of 30 percent in FY22 and 17 percent in FY23. The bull case scenario requires an economic resurgence, continuous global liquidity, a low-interest-rate environment, and containment of the COVID-19 epidemic," said Biswas.

Reports have indicated that the second wave of COVID impacted demand for most of Q1FY22 and also rising commodity prices could put pressure on margins.

"These two factors could lead to some downgrades in earnings estimates maybe after June quarter results. The impact will be more visible in the hardcore manufacturing sector and less in export-driven sectors," Oza said.

Besides, unlike last year, this time rural areas have been hit hard by COVID-19, which will impact consumption in these areas.

Nitin Shahi, Executive Director, FINDOC, believes earnings may be better after the first quarter after the outbreak comes under control and economic growth picks pace.

"If we see the current earnings and the growth prospects envisaged, it seems we are currently trading at an EPS of around Rs 532-533. For FY22, the EPS should be around Rs 650-665," Shahi said.

A third coronavirus wave can dent hopes of improved earnings. If the situation does not come under control along expected lines, it may trigger more earnings downgrade.

A lot will depend on the government's vaccination exercise and unlocking measures.

Hemant Kanawala, Senior EVP & Head–Equity, at Kotak Mahindra Life Insurance Company said Nifty EPS for FY22 and FY23 may be around Rs 700 and Rs 800, respectively.

"FY22 earnings can potentially see a downgrade due to lockdown announced by various states in the current quarter. This may be partly compensated by strong prices for industrial commodities like metals and petrochemicals," Kanawala said.