Double-digit profit growth for Nifty firms
NET PROFIT LIKELY TO GROW BY 10.8% 18 NIFTY FIRMS TO POST DECLINE IN NET SALES COMMODITY FIRMS TO SEE ROBUST GROWTH
Corporate earnings for the October-December 2016 quarter are likely to be polarised as commodity producers will benefit from rising prices, while demonetisation will hurt consumption companies.
The combined net profit of Nifty 50 companies is estimated to grow at the fastest pace in two years. However, the number of index companies expected to report a year-onyear (y-o-y) decline in revenue and net profit will also be the highest in six quarters.
Net profit growth will be largely due to a robust showing by commodity and energy producers, on the back of a global recovery in commodity prices in the quarter. In comparison, several manufacturers and consumer goods companies are likely to report a decline in revenue and lower profit due to the economic disruption from demonetisation.
Brokerages expect banks to lead the profit chart due to gains from a rally in bond prices after note ban.
Eighteen Nifty companies are expected to report y-o-y decline in net sales, while 17 are expected to report a fall in net profit in the third quarter (Q3).
The combined net profit of the Nifty 50 companies is estimated to grow by 10.8 per cent y-o-y during Q3, against a 6.8 per cent decline in the corresponding quarter a year ago, and a 1.1 per cent decline in the preceding quarter. Combined net sales are estimated to grow by five per cent y-oy, compared with a 2.7 per cent decline a year ago and a 5.5 per cent growth in the second quarter (Q2) of FY17 (see chart).
The analysis is based on earnings estimates by equity brokerages, including Kotak Securities, Edelweiss Securities, Antique Stock Broking, IDFC Securities, PhilipCapital, Motilal Oswal Securities and ICICI Securities. For banks and nonbanking financial firms, net sales are gross revenue net of interest expenses. For others, it is the total income from sales of goods and services (net of indirect taxes). Profits are reported net and may include exceptional gain or loss as estimated by brokerages. However, brokerages might be underestimating the disruption from demonetisation. For example, the earnings estimates for banks don’t include fee income, where the note-ban pain is likely to be the most. Besides, actual corporate earnings have been worse than Street estimates in the earlier two quarters. For example, the combined net profit figure declined by 1.1 per cent during the Q2, against Street estimate of 3.1 per cent y-o-y growth.
“We expect the top line and net profit of our coverage universe (excluding oil marketing companies) to be at a three-year high despite demonetisation. This is mainly due to low base of commodity sectors and public sector banks. These two are likely to account for 95 per cent of incremental profit growth in Q3. Excluding commodities and banks, profit growth is likely to slow to two per cent (against a steady 10 per cent growth in the past two years) due to demonetisation,” says Prateek Parekh of Edelweiss Securities, in his estimates report.
There is a similar commentary from Kotak Institutional Equities. “Earnings of several sectors will be impacted by the government’s demonetisation measure. However, for our coverage universe, we expect a strong 23 per cent net income growth, due to the low or negative net profits of many prominent companies in Q3 of last financial year. Excluding the banking, energy, industrials and metals and mining sectors, where several stocks had low or negative base, net income of our universe could decline by 3.9 per cent,” says Sanjeev Prasad, senior executive director and co-head, Kotak Institutional Equities.
Among individual companies, aluminium and copper producer Hindalco Industries is likely to top the charts with 800 per cent y-o-y growth in standalone net profit, thanks to gains from higher metal prices. It will be followed by State Bank of India and Bharat Petroleum Corporation, with their net profit likely to rise 125 per cent and 67 per cent yo-y, respectively. Automakers Eicher Motors and Maruti Suzuki are likely to be among the top performers, with high double-digit growth in earnings.
At the other end of the spectrum, mobile operator Idea Cellular is likely to be the biggest laggard. It is expected to report a loss in Q3, against a profit in the December 2015 quarter, with a 2.5 per cent decline in revenue due to the disruption caused by demonetisation and competitive pressure from Reliance Jio. It is likely to be followed by power generation equipment maker Bharat Heavy Electricals and Axis Bank, among others.
In the consumption space, most of the index companies such as Hindustan Unilever, Hero MotoCorp, ITC and Bajaj Auto are likely to report a y-oy decline in net profit due to demand contraction. Cement majors UltraTech Cement and ACC are also likely to report a decline in net sales and profit.