Factors that will boost Sensex EPS growth at 16.3% in FY15

Earnings optimism is back. With earnings growth returning to double-digit levels since the second quarter, analysts are revising upwards their estimates for the coming financial year.

The rupee’s adjustment at lower levels against the dollar since June last year has come as a boon for export-oriented companies and many expect this improvement to sustain.

The post-tax profit of Nifty 50 companies has grown by 14 per cent in the December quarter, the highest in six quarters.

Sequentially, the number of Nifty stocks with consensus EPS (earnings per share) upgrades for FY14 has improved marginally from 22 to 24. For the BSE 100 stocks, the number of upgrades has increased from 41 to 42 companies at the end of the third quarter.

The Flying Dutchman of HSBC Global says earnings expectations remain lofty with consensus is expecting MSCI India’s earnings to grow by 18.2 per cent in 2014, backed by 10.7 per cent sales growth and margin expansion.

However, this could be a tad optimistic, as long-term growth can be elusive.

Consensus earnings per share estimate for Sensex companies have been raised by 1.6 per cent for FY15. Motilal Oswal expects earnings per share of Sensex companies to expand by 16.3 per cent to Rs 1,542 in FY15.

The Street expects the Sensex to deliver an earnings per share (EPS) growth of 12 per cent in FY14 (Rs 1,326 a share).

This will also help stock picking easier for fund managers, as sectors and companies.

For instance, after the third quarter, companies that have seen the highest revisions in earnings estimates include Dr. Reddy’s (increased by six per cent), L&T (increased by five per cent),

Wipro (increased by five per cent), TCS (increased by five per cent), and Infosys (increased by five per cent).

On the other hand, earnings estimates have been cut for Bharti (cut by 11 per cent), Hindalco (cut by eight per cent), Hero MotoCorp (by seven per cent), Coal India (cut by seven per cent), and Tata Steel (cut by six per cent).

Most of the upgrades are still driven by the large-cap export oriented companies.

The net upgrade ratio for the mid-caps has been inferior to large-caps. According to one domestic brokerage, among the 214 mid-cap stocks, the number of stocks with upgrades decreased from 91 to 80.

The revival in earnings is neither broad-based nor structural.