Pace of earnings downgrades picks up with cost inflation, demand slowdown

Mumbai: Analysts are slashing profit estimates of companies as the impact of the sharp run-up in raw material costs and demand slowdown in rural India are expected to reflect on earnings over the next couple of quarters. Downgrades in earnings estimates by analysts at leading brokerages have outnumbered upgrades in the past four weeks. Out of the companies in the Nifty 200 index, 30 have seen earnings downgrades for FY23 in the past four weeks, while 19 have witnessed upgrades.

Those downgraded by analysts include JSW Steel, Apollo Hospitals, Ramco Cement, Metropolis Healthcare, Ipca Laboratories, Piramal Enterprises, Lupin, ACC, and Tech Mahindra among others.
"Earnings downgrades are snowballing in line with the downfall of the economic forecast due to elevated commodity prices and aggressive monetary policy," said Vinod Nair, head of research, Geojit Financial Services. "High inflation has started to pinch as disposable income is dropping, impacting demand, especially for discretionary products and services. Due to continuous price hikes, many sectors face volume and demand pressure."

Among sectors, oil & gas, healthcare, PSU banks, and consumer durables have seen the biggest earnings downgrades. Earnings per share estimates for the Nifty in FY23 have seen an increase of 0.12% to ₹882. In FY22, the Nifty delivered an EPS of ₹733, a growth of 35.2% year-on-year, the highest since FY04.

Motilal Oswal Financial Services said metals, cement, specialty chemicals, consumer durables, oil & gas, and healthcare reported gross margin declines between 240 and 1,030 basis points in the March quarter due to cost pressures.