Q2 re­sults shine on lower base ef­fect

Do­mes­tic com­pa­nies had re­ported dis­mal num­bers in Q1 as there was a big­ger than an­tic­i­pated de-growth in earn­ings

Financial Chronicle - - DEEP DIVE - ASHWIN J PUNNEN Mum­bai

“We ex­pect net in­come of the BSE-30 In­dex to de­cline 4% YoY while that of the Nifty-50 In­dex to in­crease 8.4% YoY, led by strong earn­ings growth in the down­stream com­pa­nies." — Ko­tak Se­cu­ri­ties

Even as GST con­tin­ues to drag earn­ings growth in the sec­ond quar­ter, there could be some pos­i­tive sur­prises in cer­tain pock­ets like auto, ce­ment, and me­tals and min­ing in the up­com­ing earn­ings sea­son.

Ac­cord­ing to an­a­lysts, Q2 re­sults are ex­pected to be bet­ter than Q1FY18 given the sharp lower base ef­fect. Do­mes­tic com­pa­nies re­ported dis­mal num­bers in Q1 as there was a big­ger than an­tic­i­pated de-growth in earn­ings. This was im­mi­nent as the start to the fi­nan­cial year was with a dis­rup­tive Q1 given de-stock­ing be­fore the im­ple­men­ta­tion of GST and the after ef­fect of de­mon­eti­sa­tion. Sen­sex and Nifty PAT growth for Q1 was -6.5 per cent and -9.0 per cent re­spec­tively com­pared to -1 per cent and -5.5 per cent an­tic­i­pated.

From the mar­ket per­spec­tive, the last quar­ter was a strong quar­ter for Indian and global indices, with both BSE midcap and small­cap indices reg­is­ter­ing 5 per cent re­turn with the huge do­mes­tic liq­uid­ity find­ing its way into the eq­uity mar­ket lead­ing to mul­ti­ple ex­pan­sions across sec­tors and ideas.

“De-stock­ing is largely com­pleted and eco­nomic ac­tiv­i­ties have started to pick-up as the pro­ce­dure of GST is se­cur­ing day by day. So on a QoQ ba­sis, we can ex­pect about 5 per cent to 7 per cent growth in PAT for main indices. On the eco­nomic fac­tors, pos­i­tive signs in­clude uptick in WPI in­fla­tion, PMI and IIP from the re­cent lows.

So, or­gan­ised sec­tors are likely to be bet­ter off but the broad econ­omy is still un­der stress of slow­down in exports and un­or­gan­ised sec­tors, which will con­tinue to im­pact the growth of the econ­omy over the next one-to-two quar­ters. Hence, on a year-on-year (YoY) ba­sis, earn­ings growth will be sub­dued and risk for fur­ther down­grade in earn­ings is still on,” said Vinod Nair, head of re­search, Geo­jit Fi­nan­cial Ser­vices.

PAT GROWTH

In spite of the slow­down, the mar­ket ex­pects 3 per cent and 9 per cent YoY growth in PAT for Sen­sex and Nifty re­spec­tively. Since the start of FY18 mar­ket has done about 5 per cent to 7 per cent cut in earn­ings fore­cast, Nair said.

Among the sec­tors, ce­ment is ex­pected to re­port dou­ble digit vol­ume growth, which cou­pled with stable pric­ing will lead to healthy earn­ings growth amongst the larger play­ers.

How­ever, the phar­ma­ceu­ti­cal sec­tor is likely to re­port sub­dued num­bers due to GST im­ple­men­ta­tion and pric­ing pres­sure in the US generic mar­ket. Sim­i­larly, GST is ex­pected to im­pact both broad­cast­ers and print play­ers as FMCG, re­tail and real es­tate com­pa­nies cut ad­ver­tis­ing spends.

Even the bank­ing sec­tor is ex­pected to re­port mod­est growth in both NII (net in­ter­est in­come) / PAT (profit after tax) fol­low­ing weak loan growth, NIM (net in­ter­est mar­gin) com­pres­sion, lower other in­come (both fees and trea­sury gains) and ac­cel­er­ated pro­vi­sion­ing.

Out­look on the me­tals and min­ing uni­verse to con­tinue to re­main pos­i­tive on the back of uptick in vol­umes, re­al­i­sa­tions and lower raw ma­te­rial costs. The bank­ing sec­tor is likely to re­port mod­est growth in both NII / PAT fol­low­ing weak loan growth, NIM com­pres­sion, lower other in­come (both fees and trea­sury gains) and ac­cel­er­ated pro­vi­sion­ing.

The mar­ket is still hope­ful as­sum­ing that a large por­tion of the detri­men­tal do­mes­tic fac­tors are dis­counted and earn­ings will re­vive soon. Other than core in­dus­tries, some sec­tors which are sup­port­ing the mar­ket are fi­nance, me­tals, min­ing, in­fra, de­fence and chem­i­cal. The mar­ket ex­pects im­proved fi­nan­cial for banks given the re­struc­tur­ing from NPA (non per­form­ing as­sets) prob­lems, re­duced in­ter­est cost and im­prove­ment in con­sumer fi­nanc­ing. At the same time, gov­ern­ment spend­ing and change in pol­icy pro­ce­dure is ben­e­fit­ing in­fra and de­fence sec­tors. And as the global econ­omy has im­proved in US, Europe and China, sec­tors like me­tals and min­ing and chem­i­cal are do­ing well due to in­crease in com­mod­ity prices and pro­cure­ment within and out­side In­dia. While, the worst per­form­ing sec­tors for Q2 will be health­care, tele­com, real

es­tate, ce­ment and IT.

DOWN­GRADES

“Against the back­drop of a slew of down­grades led by muted guid­ance for rev­enue and prof­itabil­ity due to slow­down in their busi­ness model, after a long-time the IT sec­tor is show­ing early signs of re­duc­tion in the ex­tent of earn­ings down­grade. Though in­dus­try is likely to re­main muted for FY18, earn­ings are ex­pected to grow by 11 per cent YoY in FY19. Out­lin­ing the in­dus­try’s an­nual guid­ance in June this year, Nass­com had said the Indian IT exports would grow by 7-8 per cent this fis­cal, same as the pre­vi­ous fis­cal, while the do­mes­tic In­fotech in­dus­try would ex­pand at 1011 per cent, Nair of Geo­jit said.

For Q2, the mar­ket ex­pects rev­enue to grow by 4 per cent. How­ever, PAT growth is ex­pected to re­main muted on a YoY ba­sis. Mar­gin is ex­pected to re­duce by 40bps on a YoY ba­sis. His­tor­i­cally, the av­er­age PE of IT in­dex dur­ing the last fiveyrs was 16x while cur­rently it is trad­ing at 15x in which TCS and In­fosys are val­ued at 16x and 15x re­spec­tively.

“We ex­pect net in­come of the BSE30 In­dex to de­cline 4 per cent YoY while that of the Nifty-50 In­dex to in­crease 8.4 per cent YoY, led by strong earn­ings growth in the down­stream com­pa­nies. We es­ti­mate EPS of BSE30 In­dex at Rs1,439 for FY2018E and Rs1,812 for FY2019E. Our EPS es­ti­mates for Nifty-50 In­dex for FY2018E and FY2019E are Rs468 and Rs582,” Ko­tak Se­cu­ri­ties said.

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