New tax regime, strong rupee seen affecting June-quarter earnings
June quarter earnings growth of Indian companies is likely to slow because of uncertainty surrounding the implementation of goods and services tax (GST) and the impact of a stronger home currency on exporters.
The Indian rupee has strengthened 5.16% against the dollar since January and may hurt the exports realisation of Indian companies. The implementation of GST has also caused major disruption in many sectors.
As the July 1 implementation of GST approached, there were reports of liquidation of inventory by dealers and supply-chain disruptions in various sectors, developments that may hurt earnings and revenue growth of companies. GST, one of the biggest tax reforms since independence, subsumes more than a dozen state and central levies into one tax, economically unifying 29 states for the first time.
The slower earnings growth may dent the markets rally. The BSE’s benchmark Sensex and National Stock Exchange’s Nifty have gained 17.8% and 18.1%, respectively, year-to-date.
Deutsche Bank expects June quarter earnings to decline 6% from a year earlier for Nifty companies. “The 6% forecast decline in earnings may be exaggerated by the large annual inventory adjustments at oil marketing companies (OMCs) due to sharp decline in global oil prices. Excluding energy, Nifty earnings are expected to rise by 4% yearon-year (YoY),” Abhay Laijawala, head of research at Deutsche Bank, wrote in a July 5 report.
The report also said that the annual growth momentum appears muted and macro indicators suggest a sequential stabilisation in growth momentum.
“The demand environment seems to have normalised further, post demonetisation drag seen in December quarter last year. Domestic liquidity and the interest rate environment have turned growth supportive. The base effect for year-on-year earnings growth comparisons is likely to stay adverse for another quarter, which increases the risk to existing YoY consensus earnings forecasts of 22% for FY18,” it said.
According to ICICI Securities Ltd, June-quarter earnings and possibly the next quarter is likely to be a non-event as the economy gears up for GST challenge. It said that GST uncertainty headwinds, which is largely a one-off event, could be seen even during Q2FY17 and doesn’t change the structural story of strong domestic consumption led growth and is expected to be a key long-term driver of the economy and earnings growth.
Morgan Stanley expects de-stocking and price discounts ahead of GST rollout, lagged impact of higher commodity prices leading to higher costs, inventory losses due to lower oil prices for state-run oil companies and revenue weakness for technology due to rupee appreciation to impact quarterly earnings.
Edelweiss Securities Ltd said that management commentary post the quarterly earnings is likely to remain muted due to GST and lingering effects of demonetisation but there could be some optimism in housing finance, cement and auto firms.. “While we do expect rest of the year to be better, likely subdued Q1 show will weigh on our 20% earnings growth forecast for FY18. Our FY17, FY18, FY19 Nifty earnings per share (EPS) forecasts are ₹450, ₹540 and ₹640, respectively,” it said in a July 5 report. It added earnings downgrades are likely given that full year EPS growth estimates still imply 18-20% growth in FY18.