It’s raining earnings downgrades but these stocks offer some respite

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The steep increase in prices of raw materials such as crude oil and metals following the Russia-Ukraine conflict has exposed many Indian companies to severe margin pressure, an analysis by domestic brokerage house IIFL Securities Ltd showed that. This is anticipated to lead to an increased risk of earnings downgrades.

“What began as an earnings sensitivity analysis has now started appearing more like an earnings downgrade expectation, because the values we assumed for the purpose of sensitivity for key variables − Brent crude (US$110), LME Metals Index (5000), US$/INR (78) and interest rates (100 basis points higher) − have begun looking like the more-likely levels that will sustain in FY23,” IIFL said in a report on 23 March. One basis point is one hundredeth of a percentage point.

Investors should note that many companies across the board rely on crude-based derivatives as inputs. For some companies, plastic products which are byproducts of crude, hurt their packing costs. These include cement, tyres, fast moving consumer goods and paint makers, among others.

For the purpose of this analysis, IIFL has identified stocks price behaviour starting 23 February, when news flow on the war started impacting the markets. Results showed that CEAT Ltd, Apollo Tyres Ltd, MRF Ltd, Indian Oil, Kansai Nerolac, Paints Ltd, Hindustan Petroleum Corporation Ltd, Bharat Petroleum Corporation Ltd, Century Plyboards India Ltd, Havells India Ltd, Nykaa (FSN E-commerce Ventures Ltd), Berger Paints (I) Ltd, Cipla Ltd and CRISIL Ltd are the stocks where risks of a earnings downgrade is emerging.

On the other hand, there are some stocks at odds with the broking frim’s expectation of earnings vulnerability. Coforge Ltd, Quess Corp Ltd, Britannia Industries Ltd, L&T Infotech, Tanla Platforms Ltd, Mphasis Ltd, Hindustan Unilever Ltd, Bharat Forge Ltd and PNC Infratech Ltdare the stocks where there are upgrade opportunities, added the IIFL report.

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