After many months of citing a pick-up in business fundamentals and forecasting strong earnings growth, brokerages are now clipping their earnings estimates for the year.

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In what was the talk of the market on Monday, leading brokerage CLSA in a note said it had cut its earnings estimates by 5.5 percent for the year to just 10.5 percent, though it maintained robust expectations of 26 percent for the next fiscal (ending March, 2020).

The cut in earnings is in sync with how other brokerages are reacting to the second quarter earnings numbers declared so far. And while CLSA says that of the earnings declared so far, for their universe of 100 companies, 42 percent have beaten expectations, they foresee growth slowing.

Most brokerages cite slowdown in auto sales, the NBFC crisis liquidity issues and uncertain oil prices as key concerns, they also point to lower than expected margin improvements as a factor behind their earnings downgrades.

But let us look at the corporate performance picture without clouding it with any preconceived expectations. Data on income and profit growth for non-bank Nifty (NSE-50 index) companies shows that while income growth started to pick up in fiscal 2017, it got stymied by demonetisation. Growth has improved since in fiscal 2018 to 14 percent and still further to over 26 percent so far in the half year for the 37 companies that have reported results. This clearly reflects a strengthening of the underlying fundamentals, though given the recent headwinds—crude shock, trade tangles, regulatory tussles (RBI vs finance ministry), NBFC risks, new insurance norms for autos and upcoming elections—it might help to wait for another quarter or two to assess the sustainability.

If the underlying fundamentals remain mostly unhinged by the headwinds, earnings growth should remain strong. It might therefore be prudent to temper growth expectations, but not get weighed down by companies missing earnings forecasts.

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First Published:Nov 12, 2018 2:06 PM IST