Earnings in December quarter may show first signs of revival

MUMBAI: The first signs of a rebound in corporate earnings growth will likely be visible in the December quarter due to the favourable effect of a low base a year ago and higher consumer spending in the festive season, analysts say.

The earnings will also indicate whether the disruption caused by the implementation of the goods and services tax (GST) on 1 July has receded.

The 8 November 2016 invalidation of high-value bank notes squeezed consumption in the third quarter of 2016-17, hitting sales and profits of companies.

In the three months ended December 2016, aggregate sales of Sensex companies grew by 3.8%, Ebitda by 7.7% and net profit by 1%.

For Nifty companies, sales, Ebitda and net profit grew 4.9%, 9.6% and 10.3%, respectively. Ebitda—or earnings before interest, taxes, depreciation and amortization—is a measure of operating profitability.

A boost to consumer demand from festivals should also help firms post higher sales and profit growth, analysts said. The rupee’s appreciation may, however, hurt earnings of exporters, and higher commodity prices may take a toll on the margins of packaged consumer goods makers.

According to Edelweiss Securities Ltd, a recovery in earnings will gain momentum on the back of the low base effect and the fading impact of GST-related disruptions.

Edelweiss estimates Nifty companies to report revenue, Ebitda and net profit growth of 20%, 12% and 12% year-on-year, respectively, in the quarter from a year ago, implying 4% earnings per share (EPS) growth in the first nine months of fiscal 2018.

“While earnings growth is improving, Q4FY18 asking rate (to meet full-year forecasts) is still high, implying potential downgrade risk. For FY19, Nifty growth is forecast to be 22-25%,” the research firm wrote in a note on 5 January.

Kotak Institutional Equities Research sees net income of Sensex companies growing 15.2% year-on-year and 9.2% quarteron-quarter. It estimates EPS of Sensex companies at Rs1,480 for fiscal 2018 and Rs1,825 for fiscal 2019.

“Metals, non-banking financial companies, oil and gas, autos, cement and consumer companies are likely to lead earnings growth while telecom, IT (information technology) and pharma may drag,” said Gautam Duggad, head of research at Motilal Oswal Institutional Equities. “We expect 14% and 18% revenue and earnings growth in Q3FY18 for Sensex firms and 15%/22% revenue and earnings growth in FY19.”

Analysts are concerned about the impact of rising oil and commodity prices that could hurt the margins of consumer companies. Rupee appreciation could take its toll on export-oriented sectors. Brent crude prices jumped 16.21%, the rupee gained 2.2% and the Bloomberg commodity index rallied 4.39% in the three months ended December. Elevated bond yields, which will dent treasury income, and higher bad-loan provisions may hurt banks, said Dhiraj Sachdev, vice-president and senior fund manager at HSBC Asset Management. “Earnings growth is likely to be over 20% in FY19 for broader indices. GST fallout on growth in first half will sustain downgrades for FY18 earnings estimated at the beginning of the year. However, this should recede with possible upgrades on cyclical recovery in FY19,” Sachdev added.