Sensex 15000 ?

Over the past 2 years, we have sounded like a broken record with our theme that earnings is likely to be downgraded. Unfortunately, we were right, with FY13 Sensex EPS likely to come in below Rs1200, nearly 10% lower
than the bottomup number a year ago. Sadly, we continue with the same theme – we 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.
The other good news is that, for long-term investors, we are probably close to the bottom of the earnings cycle, though FY14 is unlikely to be the year of recovery.
What will drive FY14 EPS downgrades?
We think 2 factors will lead to downgrades in FY14:
1. Concentration risk: 2 sectors (financials and energy) account for half of the profit growth in FY14. Similarly, 5 stocks (ONGC, ICICI Bank, HDFC Bank,State Bank, Tata Steel) account for nearly half of the profit growth.
2. Delay in recovery: Analysts are, as in FY13, being too optimistic about a recovery in the economy on the back of a sustained fall in interest rates. So far, rate cuts have been slow and we think sales growth in FY14 will continue to be weak. Hence, the expected recovery in margins may disappoint.
Which sectors will lead earnings downgrades?
The majority of the downgrades over the past year has come from cyclical sectors like autos, metals, telecom and industrials. On the other hand, financials, pharma and consumers have seen some upgrades. Among the companies that led to the bulk of the downgrades in both FY13/14 are Tata Motors, Tata Steel and Bharti.
For FY14, analysts are building an increase in sales growth as well as margins in energy, metals and some of the auto companies. We think these sectors are likely vulnerable to downgrades.
Long term: are we close to bottom of the cycle earnings?
While FY14 is unlikely to see a recovery in earnings, we expect some mean reversion over the next few years. Just to put this in perspective, 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: 

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