BoFA Merrill Downgrades FY 2014 Sensex Earnings Estimates

It is important that we always tick to the fundamentals of Investing – Earnings. Markets tend to rise / overshoot based on surplus liquidity in other parts of world chasing growth stocks. Now what happens when their is no Growth ? Investors Chase Value. In this backdrop and the severe paralysis on the Reforms front by a massively corrupt UPA Government squandering tax payers money on social causes for vote bank, Indian companies are expected to grow lower than expectations in FY 2014.

FY 2014 Earnings Expectations of SENSEX
The earnings Expectations of Sensex for FY 2014 from various Research entities in Jan / Feb 2013 is as follows,
Angel Broking – 1385
BoFA Merrill – 1360
BNP Paribas- 1341
Citigroup – 1368
CLSA – 1345
Deutsche Bank – 1421
Edelweiss – 1400
Goldman Sachs – 1367
HSBC – 1390
IDFC – 1336
Nomura – 1420
StanChart – 1364

Now even if we have assumed Rs 1350 as the FY 14 expectations on SENSEX, it is 14% higher to Rs 1180 expected realization for FY 2013. Now the big question is can SENSEX earnings really grow at 14% without any interest rate cut, CAPEX having not happened in the last couple of years, etc ?

Merrill expects expect FY14 Sensex EPS to be downgraded below Rs1300, for growth of under 10%, vs. current bottom-up growth of 17%. For the bulls, the only good news is that we think FY14 EPS growth, at 8-9%, will be higher than the 5% we will get for FY13. Also FY2014 is unlikely to be the year of recovery.

And What is the Data Source for Downgrade ?
Look for continuous downgrade of FY 2013 EPS in the above chart QoQ.

The weakest spell of EPS growth over a 5-year period was between FY97 to FY01, when EPS grew 5%. However, over next 7 years, EPS growth averaged 22%. The 5-year period to FY13 has averaged 8.8% EPS growth. It is worth remembering that FY13 EPS growth will be the sixth-slowest in the past 20 years.

Autos, Metals & Mining, Telecom & Industrials drove downgrades in Sensex FY14 in last 12mths. ONGC, ICICI Bank, HDFC Bank, SBI and Tata Steel account for >50% of FY14E EPS. Expecting the same, we recommended investment in HDFC Bank a week ago on Twitter

Investors with Appetite for RISK can BUY Diversified LARGE CAPS with SENSEX Downside Capped @ 18200. We BUY HDFC Bank + DIVERSIFIED Funds

— Dalal Street Busines (@dalalstreet) March 26, 2013

We’ll cover HDFC Bank Separately. For now stick to Diversified Equity Funds with Rupee Cost Averaging Methodology (SIPs) or if you have the patience then go for Large Cap Stocks. Questions or Comments ?