Nifty 50 Cos’ Earnings Likely to Rebound in March Quarter
Stable commodity prices, lower base effect in certain sectors to aid earnings
ET Intelligence Group
Mumbai: Sales of Nifty 50 companies will show improvement in the March 2016 quarter for the first time in five quarters while net profit will grow in double digit after a gap of six quarters, according to the ET Intelligence Group’s quarterly estimates.
The 50 large and frequently traded companies are expected to grow aggregate revenue by 2.7% and net profit by 10.4% year-on-year for the March 2016 quarter. In the March quarter of the last fiscal, revenue had fallen by 4.6% and net profit had skidded by 16%. This poor performance will serve as a low base while calculating year-on-year growth for March 2016 quarter. “The March quarter is expected to start showing a gradual improvement in earnings,” said Vaibhav Agrawal, VP & Head of Research, Angel Broking.
Profit growth to be in double digits after a gap of six quarters
Previous year’s low base & benign input prices to drive growth
Select Auto, IT, pharma, FMCG companies to perform well
“The year-on-year earnings growth is expected to be better compared to the last four quarters on the back of stabilisation in commodity prices, lower base effect in certain sectors and gradual pickup in the consumption cycle,” said Agrawal.
In addition, net profit may get a boost from expected sharp improvement in select companies in automobiles sector including Eicher Motors, Hero Motocorp and Tata Motors, software exporters such as TCS and Tech Mahindra, power company Tata Power, and pharma majors Lupin and Sun Pharmaceuticals Industries. The operating margin of the sample is expected to stay above 20% for the fourth consecutive quarter following benign input costs. “While commodity focused sectors (especially metals and oil & gas) would continue to bear the brunt of muted realisations, lower commodity prices would largely have a positive effect on the operating margins of Corporate India,” said Pankaj Pandey, research head, ICICI Direct.
Though the declining phase of earnings seems to have reached a bottom, signs of a fast recovery are not yet visible. Core sectors such as capital goods, metals, and power continue to suffer from low demand.
Therefore, growth is expected to be more gradual from here on than what was expected by industry trackers a year ago. The monsoon pattern will also play an important role in deciding whether rural demand will pick up this fiscal after two consecutive drought years.
“The trend (in corporate earnings) is likely to see modest improvement as we move into the June and September quarters of FY17. This could get better with time if we get normal rainfall,” said Sonam Udasi, fund manager, TATA Asset Management.
The earnings growth of the two-wheeler companies is likely to be better than fourwheelers in the March quarter due to margin expansion and higher volume growth. Hero MotoCorp, India’s largest two-wheeler maker, is likely to post high double-digit growth on account of 9% increase in sales volumes. On the other hand, India’ largest car maker Maruti Suzuki is likely to report muted growth despite incremental volumes from new launches due to elevated discount per vehicle.
Banks are likely to show further stress due to rising provisioning requirements. Public sector banks in the Nifty 50 including Bank of Baroda and State Bank of India are likely to show a sharp fall in net profit.
Cement companies will benefit from better realisation due to increase in prices. This and lower raw material cost are expected to boost operating profit per tonne of these companies by over 30% year-on-year.
The overhang of delay in execution cycle and increasing competitive intensity continue to mar the earnings of the capital goods companies. There has been some pickup in order inflow in the power equipment segment. Among the heavyweights, Larsen & Toubro (L&T) may report a deceleration in revenue growth whereas BHEL’s revenue may drop from the year ago level.
Sectors including metals and mining and oil and gas are likely to report subdued numbers considering year-on-year fall in commodity prices.
“We expect healthcare and automobile players to do well. Consumer goods companies are also expected to show resilience. Metals, oil and gas, and power companies however may continue to be under pressure,” said Udasi of Tata Asset Management.