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How earnings estimates progress over time..

Posted by fairval on April 13, 2013

The following chart from a BofA Merrill report (hope it is legible) shows how Sensex earning estimates have changed with time. The most interesting number there is the FY13 earnings estimate. Brokers normally project 2 years out, so Mar’13 number starts appearing from Mar’11 in the chart below (see the 2nd last column)

Progression of Sensex Earnings Estimates

In Mar’11, the market estimate (or maybe it is Merrill estimate) was Rs 1510 for Sensex eps. By now, it has come down to Rs 1175 or by about 22%.  Another way to say it is, assuming market PE was constant, expectation of market returns over the 2 year period have come down by 22%. That is, as may be apparent, is a rather large number.

Note also the Mar’14 eps estimate at this point. As per the above table it is Rs 1370; the underlying growth then is 16.6%. This is extremely optimistic.

What does this mean?

  • Earnings estimate even 1 year out are meaningless. Till Q1 results come out, more like Q2 (of any year in general), market has no clue about the likely earnings at the end of the year, let alone 2 years out.
  • This is not to condemn the tribe of equity analysts, all this seems to mean is – it is simply very difficult to predict anything 12 months in advance. Particularly for large companies with complex operations which make up the Sensex.
  • The Mar’14 estimate, which shows over 16% growth, is again likely to come down, even the Merrill report says it will come down to below Rs 1300
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