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
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.