Indian Profit Estimates to Drop Another 25%, Credit Suisse Says

Feb. 19 (Bloomberg) -- Indian earnings estimates for the next fiscal year may be cut another 25 percent, led by revisions for banks, as the economy weakens, Credit Suisse Group said.

Analysts will probably double the one-quarter reduction in forecasts since November for the year starting April 1, as profit growth at banks, brokerages and developers falters, Credit Suisse analysts Nilesh Jasani and Arya Sen wrote in a report. Predictions for companies on the Bombay Stock Exchange Sensitive Index this fiscal year have been lowered by 15 percent.

The Sensex has dropped 6.6 percent this year, extending 2008’s record 52 percent slump, as the global recession and financial crisis weighed on the outlook for corporate earnings. Investors should avoid financial companies, making up 32 percent of profits after tax in India, because current predictions for their earnings are too optimistic, Credit Suisse said.

“We remain underweight on the sector and expect it to be the main contributor to depressed 2010 earnings,” the analysts said. “For financials’ profits to grow at over 30 percent year- on-year, while the rest of the corporate world is witnessing a contraction of the same magnitude, is unsustainable.”

Financial companies’ earnings, which grew about 30 percent in the third quarter from a year earlier, will falter as the central bank cuts interest rates, demand for loans slows and provisions increase, the report said.

The benchmark index yesterday fell 0.2 percent to 9,015.18, a three-week low. The measure is valued at about 9.3 times reported earnings, down from a high of as much as 28 times in January last year. The gauge is trading at 10.4 times next year’s profit estimates.

Election Outcome

Valuations are unlikely to get cheaper and the index will fluctuate at around Credit Suisse’s target of 9,000 on speculation of a “sharp” rebound in earnings in 2011, the analysts said. The outcome of India’s elections this year will also determine the performance of the market, they added.

“Essentially, we deem a sharp decline in 2010 earnings-per- share forecast as inevitable but not an attendant fall in equity indices,” the report said.

State Bank of India, the nation’s largest, said on Jan. 24 profit for the three months ended Dec. 31 rose 37 percent from a year earlier as companies borrowed more and investments in bonds gained. HDFC Bank Ltd., the third-largest by market value, last month posted a 45 percent increase in its third-quarter profit.

Credit Suisse has an “underperform” recommendation on State Bank of India and a “neutral” rating on HDFC. They also advised investors to be “underweight” in brokerages and property companies.