Corporate earnings have the most significant impact on the equity markets than any other single factor. While historical earnings are critical, earnings expectations have a significant impact on stock valuations as well as the returns in the short to medium term.
The announcement of localized lockdowns by various states and the rising Covid19 cases will have an impact on corporate earnings in the medium term. Sectors that will be impacted less by lockdowns will see resilience in earnings and more allocation by both retail as well as institutional investors.
The lockdown measures announced by the Maharashtra government are stringent and will have an impact on the economy. Maharashtra contributes 14% of the country’s GDP and the activity level across the state has reduced significantly. This will have a bearing on quite a few sectors, including financial services, consumption, autos, tourism, travel, and others.
While the number of cases has started to stabilise in Maharashtra, the cases across India have started to rise significantly.
However, it is to be noted that the absolute number of active cases in Maharashtra still continues to be very high.
Delhi is seeing the biggest spike in cases and the state has announced a complete lockdown for the next six days. Other states have also announced similar measures. The impact of these measures will have an impact on corporate earnings. The current expectations of corporate earnings are quite bullish with 30% growth in Nifty50 earnings for FY22 and 16% for FY23. With the lockdown and the rising inflation, these numbers now appear to be highly optimistic.
The benchmark Nifty50 index is heavily dominated by the BFSI sector (36% of FY21 NIFTY50 earnings), which is a leverage play on the economy and will be impacted by the disruptions significantly. These disruptions, and more importantly, the length and scale of these disruptions will be critical. At this juncture, it seems quite likely that the Covid-19 curve will take time to flatten and such disruptions could continue well into May.
A 10% cut in earnings estimates for the banking sector seems quite likely on account of the disruptions. SMEs and MSMEs will be significantly impacted during this period and will lead to higher banking provisions.
The corporate segment for the banks has continued to perform well and it will be less impacted, providing some support to earnings. Apart from BFSI, a significant impact on discretionary consumption will be seen in the consumption sector. The auto segment has significant operating leverage, which will be impacted by lower plant utilisation and sales during the quarter. The two-wheeler segment has started to see some challenges in inventory and FY22 could be a tepid year for the segment unless the government changes the GST structure.
IT, pharma, metals, consumer staples and export-oriented plays are well placed for now, as the global demand scenario has improved. The cement sector should manage the impact of lockdown and is more likely to come out strong. Putting all these factors together, a 6-10% cut in FY22 Nifty earnings could be on the cards with BFSI, auto and the small-ticket discretionary consumption bearing the brunt of the impact.
With a 6-10% impact, FY22 Nifty50 EPS will be in the Rs 620-650 range, which is not that bad. Large ticket discretionary consumption will see demand come back in the form of pent-up demand as logistical challenges only lead to postponement and not permanent delays.
The scenario building up is concerning, which will have an impact on the economy as well as corporate earnings, but adversity also throws up opportunities. The pharmaceutical sector could see an improvement in earnings and the manufacturing sectors could lead to a rise in profits because of supply side pressures in the future.
This market will provide a good opportunity to add long-term structural plays, where the demand scenario is improving on a long-term basis. Thus, even as there are challenges galore but the opportunities will also be significant. This is time to be cautiously optimistic, to be in the market and not out of it.
