February 2015

Bearish Estimates

Our first hand analysis of Q3 earnings for 2015-16 was disappointing. We have seen inventory loss across companies due to a sharp fall in oil and commodity prices. The aggregate disappointing earnings have made analysts sharply cut earnings estimates for the coming quarters. The consensus on the street is that we will see a 10% EPS growth in 2015-16. Also analysts have given muted guidance on topline growth and are projecting that it may take longer than we think for growth to pick up.

In our opinion EPS estimates will surprise most of the analysts in coming quarters. Our analysis shows that all the good companies have completely written off inventory loss. This may have impacted their current quarter earnings but the following quarters will show improvement in margins due to lower inventory cost. In our opinion actual EPS growth for 2015 -16 will positively surprise most of the analysts which will also lead to gradual upgrade cycle.

We feel that with our current position we are rightly placed to capture any positive surprise. Most of the companies we hold have managed their inventories really well and will be the first to benefit from lower inventory cost in coming quarters. We expect analysts to start their positive outlook on our holdings going forward. For example – most analysts had issued a sell call on Asian Paints because of the high valuations. The steep fall in oil prices made everyone change their outlook from sell to hold with some even giving a buy target on Asian Paints. The stock has already moved up more than 30% in the last three months. We expect a similar change in outlook for our holdings in quarters to come.

Regards,

Vinod Jain