Q3 earn­ings may be sub­dued

Banks and com­modi­ties are likely to be the only large sec­tors that will re­port profit growth, ow­ing to base ef­fects

Mint Asia ST - - News - BNY ASRIN S ULTANA

Septem­ber quar­ter earn­ings of In­dian com­pa­nies are ex­pected to be sub­dued be­cause of is­sues re­lated to im­ple­men­ta­tion of the goods and ser­vices tax (GST), an­a­lysts say.

Banks and com­modi­ties are likely to be the only large sec­tors to re­port profit growth ow­ing to base ef­fects, they said. Man­age­ment com­men­tary on re­stock­ing af­ter the im­ple­men­ta­tion of GST on 1 July and bank­ing sec­tor pro­vi­sions (loan loss pro­vi­sions made by banks) will be key things in­vestors will keep an eye on in the Septem­ber quar­ter earn­ings, which com­pa­nies were ex­pected to start re­port­ing this week.

Edel­weiss Se­cu­ri­ties Ltd ex­pects Nifty com­pa­nies to re­port rev­enue, earn­ings be­fore in­ter­est, tax, de­pre­ci­a­tion, and amor­ti­za­tion (Ebitda) and profit growth of 13%, 8% and 8%, re­spec­tively, in the three months ended Septem­ber from a year ear­lier, im­ply­ing 1% earn­ings per share (EPS) growth in the first half of FY18.

“The fact that earn­ings are not im­prov­ing de­spite ebbing dis­rup­tions and early fes­tive sea­son is a tad dis­ap­point­ing and is cer­tainly lag­ging mar­ket ex­pec­ta­tions of 10% Nifty EPS growth in FY18. The weak­ness is fairly broad based and is a func­tion of weak de­mand as well a rise in in­put costs. This lack­lus­tre per­for­mance is a lit­tle dis­ap­point­ing. Ide­ally, by this time, earn­ings should have ben­e­fited from pent up de­mand in the econ­omy. The im­pact of GST seems to be weigh­ing much longer than an­tic­i­pated,” it said in a re­port on 6 Oc­to­ber. The bro­ker­age has es­ti­mated Nifty EPS based on FY18 and FY19 earn­ings at Rs500 and Rs614, re­spec­tively and ex­pects the sec­ond half of this fis­cal year to be bet­ter. “How­ever, the sub­dued first half show does pose a risk to our 13% FY18 Nifty EPS es­ti­mate,” it added. Edel­weiss said bar­ring au­to­mo­biles, com­mod­ity com­pa­nies and pri­vate sec­tor banks, growth is likely to be in mid-tolow sin­gle dig­its.

Mor­gan Stan­ley also be­lieves earn­ings growth in the Septem­ber quar­ter could be spotty for do­mes­tic sec­tors given the im­pact of Gst-re­lated is­sues. “De­mand, in our view, is see­ing signs of re­cov­ery. Im­proved ex­ports and sta­ble com­mod­ity prices may re­sult in bet­ter per­for­mance for global or glob­ally linked busi­nesses. Quar­ter-on-quar­ter earn­ings are likely to be bet­ter, al­beit earn­ings re­vi­sions breadth has re­mained neg­a­tive, sug- gest­ing that sell-side es­ti­mates have been too high,” Rid­ham De­sai and Sheela Rathi, eq­uity strate­gists at Mor­gan Stan­ley, wrote in a note to clients on 2 Oc­to­ber.

Ac­cord­ing to UBS, earn­ings could dis­ap­point fur­ther. It be­lieves risk-re­ward is un­favourable with mar­kets at peak val­u­a­tions and con­tin­ued low earn­ings growth. Though In­dian mar­kets have out­per­formed peers this year, el­e­vated val­u­a­tions, weak econ­omy and elu­sive earn­ings growth have started to worry for­eign in­vestors which led to a sell-off by for­eign in­sti­tu­tional in­vestors (FIIS) in Au­gust and Septem­ber.

In the Septem­ber quar­ter, FIIS sold a net Rs3.31 tril­lion worth of In­dian eq­ui­ties, while con­tin­u­ous buy­ing by do­mes­tic in­vestors (pumped Rs2.13 tril­lion in the same pe­riod) has kept the rally in In­dian mar­kets in­tact. This year, Sen­sex gained 19.5%, Nifty jumped 21.9% while MSCI In­dia was up 20.8%, MSCI World surged 10.8% and MSCI EM soared 23.2%.

How­ever, con­tin­ued earn­ings down­grades are rais­ing ques­tions on stretched val­u­a­tions as In­dia is among the most ex­pen­sive mar­kets. Price-to-earn­ings (PE) ra­tio of Sen­sex and Nifty is at 18.10 and 17.73 re­spec­tively based on FY18 earn­ings while that of MSCI In­dia is at 17.57, MSCI EM is at 12.74 and MSCI World is at 16.70. Ac­cord­ing to Bloomberg, since be­gin­ning of FY18, Sen­sex’s ex­pected earn­ings for the cur­rent fis­cal and the next have been slashed by 9.4% and 4.6%, re­spec­tively.

“In­dia is an un­der­weight due to its val­u­a­tions and weak earn­ings out­look, while the un­in­tended im­pact of the GST re­form com­ing through as higher in­fla­tion should not be ig­nored,” DBS Bank Ltd said in a re­port on 7 Septem­ber.

Ko­tak In­sti­tu­tional Eq­ui­ties ex­pects net in­come of the Sen­sex com­pa­nies to de­cline 4% while that of Nifty to in­crease 8.4% yearon-year, led by strong earn­ings growth in down­stream com­pa­nies (oil re­fin­ers). Brent crude gained 14.5% in the Septem­ber quar­ter. It es­ti­mates EPS of Sen­sex com­pa­nies at Rs1,439 for FY18 and Rs1,812 for FY19 and for Nifty com­pa­nies it’s Rs468 and Rs582 for FY18 and FY19, re­spec­tively.

It said in a re­port on 5 Oc­to­ber that the strong growth in the con­sumer sec­tor will be led by re-stock­ing post Gst-im­ple­men­ta­tion and early and strong fes­ti­val sea­son, while higher re­fin­ing mar­gins will drive en­ergy firms’ growth in the sec­ond quar­ter. Pres­sure on US rev­enues due to lack of mean­ing­ful ap­provals from the coun­try’s drug reg­u­la­tor may im­pact earn­ings of drug mak­ers.

Some an­a­lysts ex­pect earn­ings re­cov­ery by the sec­ond half of this fis­cal. Vinod Nair, head of re­search at Geo­jit Fi­nan­cial Ser­vices, ex­pects strong re­vival in earn­ings by the third or fourth quar­ter of this year.

“Ben­e­fit of re­duced in­ter­est rates for the econ­omy will be seen in next two or three quar­ters. Eco­nomic ac­tiv­ity has picked up, but the pace is slow,” he added.

Ac­cord­ing to Deepak Jasani, head of re­tail re­search at HDFC Se­cu­ri­ties Ltd, GST is­sues are be­ing ad­dressed by the govern­ment and hence Gst-re­lated hic­cups may be over­come from the fourth quar­ter on­wards.


On the radar: Man­age­ment com­men­tary on re­stock­ing af­ter the im­ple­men­ta­tion of GST on 1 July and bank­ing sec­tor pro­vi­sions (loan loss pro­vi­sions made by banks) will be key things in­vestors will keep an eye on in the Septem­ber quar­ter earn­ings.

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