The pressure on Corporate India’s earnings due to rising input costs was clearly visible in the Q4 performance. The pressure on earnings due to supply-side risks and inflation remains largely known and included in earnings projections, but new risks to earnings stem from rising interest rates which can add to demand-side pressures and can cause further degradation. ,
Central banks around the world are raising interest rates to control inflation, creating fear of growth slowdown and recession in world economies. Analysts believe that this could lead to further downside.
According to data compiled by Mint Research Bureau from Trendline, 351 stocks have been downgraded by the brokerage, while between May 10 and June 18, only 190 stocks have seen some upgrades.
Aishwarya Dadhich, fund manager, Ambit Asset Management, said the demand-side risk is real. Dadhich said a sharp increase in interest rates amid high inflation is bound to have an adverse impact on demand growth. Dadhich said that in the US, the consumer confidence index hit a decade low in May, indicating that demand will remain low.
According to experts, the likelihood of the US facing a recession has increased as rising inflation is affecting domestic finances, adversely affecting growth.
“Further declines on earnings are possible, particularly in the metals, information technology, non-banking financial companies, oil marketing companies, construction materials and consumer discretionary sectors, as markets begin pricing in a high probability of a recession in the US. Higher energy prices,” said Nishit Master, portfolio manager, Axis Securities.
The expected slowdown in the US and EU could increase demand-side risks, particularly in metals and consumer products that are exported like textiles, in addition to a slowdown in IT spending, Master said.
Analysts say the full impact of the hike in commodity prices will be visible in the coming quarters and could further impact earnings growth.
“Nifty EPS is expected to grow at 17% in FY13 and 15% in FY24. Nifty EPS is expected to see a further cut of 3% to 4% after Q1FY23 and Q2FY23 results,” Dadhich said.
Analysts said other factors such as further depreciation of the rupee against the dollar, higher crude oil prices, higher-than-expected inflation, faster rate hike and more downside are likely.
Mitul Shah, head of research, Reliance Securities, said currency movement, commodity inflation and the monsoon outlook, which is a major trigger for the rural economy, should be closely monitored to revise our estimates if needed.
However, analysts said that despite several adverse conditions including rising rates, India is still in a better position than developed economies like the US.
Shah said India’s earnings growth is still high and will continue to be higher than that of the US and other developed markets. India is in a better position than many economies and is likely to avoid the impasse because of its resilience to withstand multiple shocks due to strong macro fundamentals, Shah said.
Master said Indian corporations are accustomed to high inflation and are therefore well prepared to take remedial measures against high costs. One major reason is that the Indian economy is still domestic-centric, unlike China, Japan or South Korea, which are primarily export-driven economies that will be hit by the US slowdown.