Earnings optimism returns after sharp downgrade post-Covid

Earning optimism is on the rise post the sharp downgrades amid the pandemic earlier in the year.

An ICICI Securities report noted that Covid resulted in the steepest downgrade to forward earnings since the great financial crisis (GFC) of 2018 and now the prospects for earnings going ahead have improved.

Q2FY21 validated this phenomenon as beats outpaced misses due to low expectations, cost-saving initiatives, rural demand, benign input prices and pockets of pent-up demand due to festive season, it said.

“However, earnings optimism is again rising to unsustainable levels as the expected CAGR of the NIFTY50 EPS over FY20-FY23E based on consensus numbers is 22 per cent, which will be the highest three-year CAGR in earnings since the GFC of 2008,” it said.

The report noted that nominal GDP is broadly expected to be flat or marginally lower in FY22 compared to the FY20 base, which would mean zero to negative GDP growth over FY20-FY22.

As per the report, given the high output gap seen in the pre-Covid period (FY20 GDP growth of 4.2 per cent), it is unlikely that FY23 will see a sudden return to potential real GDP growth of eight per cent.

“In the above context, earnings growth prospect of 10-15 per cent is more likely which increases the prospects of downgrades going ahead.”

It said that expected high growth over FY22E-FY23E has higher uncertainty, driven by cyclicals and recovery industries as 64 per cent of the change in Nifty50 earnings over FY20- FY23E is dependent on 14 stocks from sectors with a history of volatile earnings.

It also said that policy measures by the government towards attracting investments in agriculture, manufacturing, labour law reforms, lower corporate tax rates, digitization among others will be beneficial in creating demand over the medium to long term.